Bachelor Thesis, 2017
38 Pages, Grade: 9 Punkte
Historical Development of Tax Confidentiality
Legal Framework of Tax Confidentiality
§ 30 (1) and § 30 (3) AO - The Scope of Tax Confidentiality
§ 30 (2) AO - Breach of Duty
§ 30 (4) AO - Exceptions to Tax Confidentiality
§ 30 (5) AO - Disclosure in case of Intentional False Statements
§ 40 AO - Actions contrary to the Law
Consequences of a Violation of § 30
II United States of America
Historical development of Tax confidentiality
Legal Framework of Tax Confidentiality
Freedom of Information Act and Internal Revenue Code
§ 6103 (a) and § 6103 (b) IRC - Definitions
§ 6103 (c) IRC - Disclosure of Returns and Return information to designee of Taxpayer
§ 6103 (h) (4) IRC - Disclosure in juridical and administrative proceedings
§ 6103 (m) - Disclosure of Taxpayer Identity Information
§ 6110 IRS - Public Inspection of Written Documents
Historical Development of Tax Confidentiality
Confidentiality as a right - Status in Constitution
Legal Framework of Tax Confidentiality
Possible Exceptions to Tax Confidentiality
Violation of Tax Confidentiality
Taxpayers are obliged to file their annual returns which the state needs to fund its expenses for society. By doing so, sensitive and personal information are disclosed to the respective tax administration. Inevitably, the issue of disclosing relevant information arises as well as the question of how to treat the information without harming the basic rights of an individual taxpayer. This thesis contributes to the issue of disclosing tax related information by focusing on tax confidentiality, its development and status, the current legal framework, and the rationale behind the approaches of tax confidentiality, undertaken by different legal systems. More specific, this thesis incorporates a comparison between the jurisdictions of Germany and the United States, examining their national legislative rules on tax confidentiality. By elaborating upon the similarities, differences, and the rationale of tax confidentiality in both systems, the thesis will uncover the fact, that both, Germany and the U.S. have a high level of confidentiality. There exist, however, interesting differences related to the level of confidentiality, and this thesis will conclude that the German system has a higher level of confidentiality, for instance in relation to the exceptions to tax confidentiality.
Keywords: Tax confidentiality; tax compliance; tax transparency; rationale; taxpayer privacy.
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The collection and access of required tax information, as operated by the tax administration, must be ensued without compromising basic taxpayers’ rights.1 Especially, since financial and sensitive information of an individual are involved, the protection of information should have a strong manifestation in every legal jurisdiction.2 This thesis contributes to the issue of how states cope with the problem of disclosing tax related information, by focusing on tax confidentiality.
The terms ‘tax information’, ‘tax transparency’ and ‘tax confidentiality’ are crucial concepts, which are used throughout this thesis. For the sake of clarification, hereinafter, their notions will be examined.
Tax information in general contains the income of a taxpayer. Besides this, however, tax information, encloses other details about personal circumstances, for instance expenses, personal belongings, savings, disability, and health status. 3 Inevitably, the publication of tax information does not only lead to a disclosure of income, but also of personal details of the individual taxpayer. This can comprise the taxpayer’s private sphere.4 The scope of tax information varies, depending on the legal system.
Both, tax transparency and tax confidentiality, relate to the right of the public to access the information that is held by tax authorities.5 More specific, the former implies the right to access information that is found in a public administration.6 A government, operating under a high level of transparency keeps all its information available for the public and offers insights into the process of tax assessment. In contrast, a government, which is considered to act confidentially, has a lower level of transparency.7 Tax confidentiality, on the contrary, means that tax authorities do not disclose information to the public and in principle regard the information to be secret.8 In other words, it refers to the restricted access of sensitive information by the public.9 It is important to note, that tax confidentiality is not considered to be a generally protected human right.10 Nevertheless, it is an important value and most countries follow the approach of requiring tax authorities to keep taxpayers’ information secret.11 Moreover, the majority of states penalize tax officials that reveal confidential information. 12 It is essential to clarify, by what means different jurisdictions handle the issues that could result in a possible violation of the private sphere of taxpayers. This thesis aims at providing an insight on the approaches established in the legal systems of Germany and the United States (hereinafter U.S.). Its intention is to capture a full picture of the means taken by these jurisdictions, including their background and their rationale for their particular approach. There are significant discrepancies from a national law comparative perspective, which are not detectable at a first glance. The comparison revolves around the following question:
How are tax related information of an individual taxpayer protected by confidentiality, and what is the rationale behind it?
By answering this question, similarities and differences between the jurisdiction of Germany and the U.S. will be clarified and a basis will be created for comparative conclusions. This thesis goes beyond a descriptive approach, in that it will analyse the systems, and clarify the rationales behind the current approaches taken by both, the German and U.S. jurisdiction. The legal systems of Germany and U.S. were selected for the comparison due to the assumption that both have a high level of tax confidentiality. The intention is to explore the differences that cannot be recognised at first and to find out the reasons behind these approaches.
Part I will start with the examination of tax confidentiality under the German legal system. It will elaborate upon the historical development of confidentiality, followed by an explanation of the current tax law provisions in the Fiscal Code of Germany. The approach taken by the U.S. regarding tax related information, will be examined in Part II, starting with a brief presentation of the historical evolution of tax confidentiality. Afterwards, the focus will be placed on the relevant provisions of the Freedom of Information Act13 and the Internal Revenue Code.14 Subsequently, Part III will compare the approaches enacted by Germany and the U.S. and Part IV will explain the rationale of tax confidentiality in both countries. Finally, a conclusion will be drawn related to similarities and differences between the German and U.S. approach of tax confidentiality, which will provide an illustration of an overall opinion about the issue and the answer to the research question.
Under German law, the term tax confidentiality, namely ‘ Steuergeheimnis ’ , was established in 1933.15 Its fundamental aspects , per se, were codified already 160 years ago. Dating back to 1851, the Prussian Income Tax Code was established, implying the provision on tax confidentiality in Section 32 of the Act.16 Moreover, tax confidentiality was already protected by criminal law, which entails that a violation of confidentiality would result in juridical, criminal proceedings.17 In the years preceding World War I, the legislative instruments that were enacted, followed the approach on tax confidentiality taken by the Prussian Law.18 Tax confidentiality was implemented, inter alia, in the Income Tax Act of 1906 and in the ‘ Reichsgabenabordnung ’ of 1919, which remained applicable for 60 years. 19 In this Act, tax confidentiality was stipulated in § 10. The court established in the ‘ Popitz Erlass ’ of 09.11.1923, how tax confidentiality was applied.20 Under the regime of the national socialists, from 1933 till 1945, the importance of the protection of tax confidentiality was emphasized.21 Notwithstanding, the practical approach of tax confidentiality did not appear to be the same as the theoretical approach. Lists of taxpayers, who filed their return late, were published. Besides that, tax confidentiality was often abused within situations in which the state acted according to its own interests.22 After 1945 and with the end of World War II, one of the goals of the new government was to re- create tax confidentiality and to ensure that the abuse of tax confidentiality would not occur again.23 The legislator codified exceptions that officially stated the circumstances allowing for a disclosure.24 As a result of this arrangement, the legislator expressed that in order to disclose information and in order to justify a breach of tax confidentiality, a legal decree was required.25 The enactment, thereafter, namely the codification of the Fiscal Code of Germany of 1977, contained tax confidentiality in § 30. 26 Even though, several amendments have been made since 1977, the Code remains, until today, the applicable law in relation to tax confidentiality. 27
One can depict that the development of tax confidentiality in Germany has been characterized by a continuous improvement of the concept itself.28 The following part will clarify the specific legislation, lex specialis, illustrating a more detailed approach of tax confidentiality in tax related laws of Germany.
Development of Tax Confidentiality
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The rules governing tax confidentiality in the German legal system are manifested in the Fiscal Code, called Abgabenordnung (hereinafter AO), which was enacted by the German ‘ Bundestag ’ and published in 1977.29 Since then, several smaller amendments were made to some of its provisions. The focus of this analysis will be placed on the last version of the AO, as published in 2017.
The AO contains rules for tax procedures, ranging from tax assessment, collection, and the enforcement of taxes to remedies and penalties in the case of tax infringements.30 The provisions, relevant for the thesis topic are §§ 90, 93, 97, 30, and 40 AO.
Taxpayers are obliged to support the tax authorities in the tax assessment procedure by sending full statements of their tax affairs and personal circumstances to the administration. This obligation is stated in § 90 AO. Considering the cooperation with tax authorities for the collection of information, tax cooperation can be regarded as the counterpart of tax confidentiality.31 Other forms of cooperation are found in § 93 AO, which explains the consultation of the taxpayer, in case of a significant departure from the facts stated in the tax return to the detriment of the taxpayer.32 Moreover, § 97 prescribes that taxpayers are obliged, upon request by the tax authority, to provide relevant documents to the tax authority for the tax assessment.33 Chapter four of the Fiscal Code offers the provisions on tax confidentiality. More specific, § 30, is of important relevance for the issue at stake as it provides the conditions for tax confidentiality.
§30 (1) AO stipulates the obligation of public officials to observe tax confidentiality.34 Derived from this section, it can be discerned that the scope of the obligation covers public officials. Taking a look at § 30 (3) (1), the notion of public officials is examined by referring to the definition of Criminal Code, §11
(1) (4) StGb.35 In addition to this section, the definition of public officials can also be found in §7 of the AO, which entails that a person, under the special obligation to civil services, is considered a public official.36 Furthermore, §30 (3) refers to persons with an equivalent status to public officials, namely officially consulted experts37 and holders of church offices as well as other religious communities being public law entities.38
§30 (2) elaborates on the breach of the duty to observe tax confidentiality and in which moment it constitutes a violation.39 This section states that the obligation of tax confidentiality is breached if circumstances of a third person, ‘ Verh ä ltnisse eines Dritten ’ , are disclosed without authorisation. Those information have been received during official responsibilities, namely in administrative procedures, criminal proceedings or through the notification of another authority.40 The meaning of ‘circumstances of a third person’ is neither defined in the provision, nor in a different provision of the Fiscal Act. The term ‘circumstances of third persons’ does not cover tax related data solely but also the tax base of any particular person and information about general financial and personal circumstances. 41 Furthermore, these circumstances include all personal, financial, economic, and tax information that have become known to the tax authority.42 Another violation of the obligation of confidentiality is established when a corporate or commercial secret is disclosed without authorisation43 or in the case of data, protected under the tax confidentiality section, being electronically retrieved unofficially.44
§30 (4) entails four possible exceptions to the general rule of tax confidentiality that justify a disclosure of tax related information. 45 In order to reach justification, however, the provision must explicitly state a permission for the disclosure of the information.46 In case the information serves the implementation of the information in administrative, criminal or tax proceedings, the first exception to tax confidentiality applies.47. The second exception to the rule of tax confidentiality applies, if a law exists that permits the disclosure of tax information. For instance, tax information is allowed to be disclosed for tax statistic purposes, as stated in the law for tax statistics of 1966.48 Another exception to confidentiality exists when the taxpayer has given his consent that the information can be published.49 This means that a taxpayer has the opportunity to waive his right of confidentiality.50 There is no protection for a taxpayer, who does not want to own such a protection, as decided by the Financial Court.51 Consent can be given orally, written, personally or through a representative person.52 The fourth exception allows disclosure of information if it is serves the implementation of criminal proceedings for a crime, that is not a tax crime. 53 However, disclosure is only permitted, if the information have not been offered by the taxpayer, as obligation of his cooperation duty for the tax assessment.54 Moreover, only information that was retrieved in criminal proceedings or administrative tax procedures is allowed to be used.55 Furthermore, in case the taxpayer waived his right to withhold information, a disclosure is allowed.56 The provision refers to situations, in which the taxpayer has been informed about his rights and the current investigations.57
§30 (4) (5) prescribes that in case there is a compelling public interest, like wilful crimes and serious offences against life and limb, the disclosure of information may be allowed.58 A list of serious offences can be found in §138 of the Criminal Code. This provision lists the examples of offences against life and limb or the state, for instance the preparation of a war of aggression, counterfeiting money or securities, economic crimes and murder under specific aggravating circumstances.59
§ 30 (5) illustrates that intentional, false statements of an individual may be disclosed to the law enforcement authorities.60 In other words, if the taxpayer declares untruthful statements, the protection of confidentiality is automatically lost.61 Moreover, the disclosure will not redact the identity of the taxpayer, implying that the name will be published as well.62 This rule was established for law enforcement authorities to investigate manipulations, which otherwise would fall under the tax confidentiality provision.63
§ 40 AO - Actions Contrary to the Law
Another interesting provision is § 40 AO, which states that it shall be immaterial for taxation when a taxable action violates a statutory regulation or is contrary to public policy.64 Hereby, the law emphasizes that even though the taxable object comes from an illegal source the taxpayer is supposed to disclose this information and the state keeps it confidential. In other words, the focus of this provision lies on the taxation of taxable objects, no matter what source they stem from. In case of an illegal source, for instance money gained from drug dealing, it is taxable and should be disclosed to the tax authorities, in order for the state to assess a complete taxation.
1 Kristoffersson et al. 2013 (p.1), p. 1.
2 United Nations Conference on Trade and Development 2016, p. iii.
3 Würtz 1999 (p.1), p. 8 .; I.R.C. § 6103 (b) (2).
4 Blank 2012, p. 267.
5 Hambre 2015, p. 166.
6 Ernst & Young 2013, p. 7.
7 Russell 2015, p. 1.
8 Kristoffersson et al. 2013 (p.1), p. 3.
9 Kristoffersson et al. 2013 (p.1), p. 3.
10 Kristoffersson et al. 2013 (p.1), p. 5.
11 Kristoffersson et al. 2013 (p.1), p. 5.
12 V. Thuronyi 2016, p. 207.
13 U.S.C. § 552.
14 I.R.C. § 6103 & § 6110.
15 Koch & Wolter 1958 (p.1), p. 3.
16 Valta et al. 2013 (p. 443), p. 444.
17 Würtz 1999 , (p.1), p. 3.
18 Koch & Wolter 1958 (p.1), p. 3.
19 Ax et al. 2007 (p.1), p. 6.
20 Metzger & Weingarten 1989, (p.168), p. 169.
21 Koch & Wolter 1958 (p.1), p. 6.
22 Koch & Wolter 1958 (p.1), p. 5.
23 Koch & Wolter 1958 (p.1), p. 5.
24 Koch & Wolter 1958 (p.1), p. 6.
25 Koch & Wolter 1958 (p.1), p. 6.
25 Koch & Wolter 1958 (p.1), p. 9.
26 Ax et al. 2007 (p.100), p. 100.
27 Pfaff 1974 (p.1), p. 3.
28 Pfaff 1974 (p.1), p. 3.
29 Ax et al. 2007 (p.1), p. 6.
30 Federal Ministry of Justice 2016, p. 6.
31 Koch & Wolter 1958 (p.1), p. 6.
32 Petersen 2005, p. 104.
33 § 97 AO.
34 § 30 (1) AO.
35 § 30 (3) AO and §11 (1) (4) StGb.
36 § 7 AO.
37 § 30 (3) (2) AO.
38 § 30 (3) (3) AO.
39 § 30 (2) AO.
40 § 30 (2) (1) AO.
41 Ruegenberg 2001 (p.1), p. 28.
42 Pfaff 1974 (p.1), p. 26.
43 §30 (2) (2) AO.
44 §30 (2) (3) AO.
45 Würtz 1999 (p.1), p. 10.
46 Ax et al. 2007 (p.100), p. 104.
47 §30 (4) (1) AO.
48 § 9 (1) StStaG.
49 § 30 (4) (3) AO.
50 Pfaff 1974 (p.1), p. 47.
51 BFH, 25.04.1967, VII 151/60, § 3.
52 Würtz 1999 (p.1), p. 11.
53 § 30 (4) (4) AO.
54 Ax et al. 2007 (p.100), p. 107.
55 § 30 (4) (4) (a) AO.
56 § 30 (4) (4) (b) AO.
57 Ax et al. 2007 (p.100), p. 107.
58 § 30 (4) (5) (a) AO.
59 § 138 StGb.
60 § 30 (5) AO
61 Ax et al. 2007 (p.100), p. 108.
62 BFH, 08.02.1994, VII R 88/92, § 22 & § 23.
63 Würtz 1999 . p.14; § 355 StGb.
64 § 40 AO.
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