University of Cologne Austrian Development Cooperation REPARIS Vienna Workshop March 2006 Tax versus Commercial Accounting in Germany WP/StB Prof. Dr. Norbert Herzig Director at the Chair of management administration and taxation University of Cologne

WP/StB Prof. Dr. Norbert Herzig2 Current specification of the conformity principle Overview: Third Book of the commercial code (HGB) contains generally accepted accounting principles (mostly regulated by law)  In line with 4. and 7. EC-Directive  Tax Accounting (§ 5 Abs. 1 EStG) sets link on these principles  conformity principle Initial Point: Simplification  Idea of the unitary balance sheet Later: equality assumption  fiscal authority as „sleeping shareholder“

University of Cologne WP/StB Prof. Dr. Norbert Herzig3 Current specification of the conformity principle Principles and Objectives: Objectives of Commercial Accounting:  information and payment measurement Principles of Commercial Accounting:  Principle of prudence (prevailing rule) calculating profits as cautiously as possible (nominal capital maintenance and protection of the creditors) Concretion:  Realization Principle (profits have to be confirmed by means of sales acts; connected with acquisition cost principle)  Imparity Principle (principle of loss anticipation, profits and losses not treated equally)  True and Fair View-Principle has supplementary function

University of Cologne WP/StB Prof. Dr. Norbert Herzig4 Current specification of the conformity principle Reverse conformity principle:  Options in determining profits have to be claimed in conformity with the commercial balance sheet (§ 5 Abs. 1 S. 2 EStG) Criticism at the (reverse) conformity principle:  tax accounting affects commercial accounting and distorts the objectives of the commercial balance sheet  Consistency with the 4. and 7. EC-Directive (true and fair view)  Conformity Principle as a torso: independent tax-clauses increase in complexity and importance (e.g. provisions for imminent losses)  jurisdiction emphasises discrete purpose of the tax balance sheet

University of Cologne WP/StB Prof. Dr. Norbert Herzig5 Increasing influence of the IAS/IFRS IAS/IFRS develop as a global standard for accounting  Primary function of the IAS/IFRS is Information  Paradigm shift:  up to now: protection of creditors in a HGB-Balance-sheet  new: information-oriented IAS/IFRS-Balance sheet Continuance and future definiton of commercial accounting (HGB) in Germany is contingent  „ Bilanzrechtsreformgesetz“  planned: „Bilanzrechtsmodernisierungsgesetz“ Problems:  Future of the conformity Principle?  connection of a tax accounting system?

University of Cologne WP/StB Prof. Dr. Norbert Herzig6 Impact of the IAS/IFRS on Tax Accounting 1.Link with HGB equity maintenance based accounting  For a transitional period feasible  Maintenance of the conformity principle Stability threatened  HGB-Accounting develops towards a greater information-only role (see planned „Bilanzrechtsmodernisierungsgesetz“)  Non-recognition of the capital-maintenance-principle in other member states of the EU No forward looking solution

University of Cologne WP/StB Prof. Dr. Norbert Herzig7 Impact of the IAS/IFRS on Tax Accounting 2.IAS/IFRS conformity principle model  link in tax law on IAS/IFRS  chance of a harmonization in the EU  Maintenance of the conformity principle in a new guise Problems:  Aspects of constitutional law (legitimation for fiscal intervention in private capital is questionable)  Verification through courts of law and repercussion on implementing of the IAS/IFRS (danger: conflict between worldwide uniformity of IAS/IFRS and the possible creation of German-, Austrian-, Italian- oder EC- GAAP)  Divergency in purpose

University of Cologne WP/StB Prof. Dr. Norbert Herzig8 Impact of the IAS/IFRS on Tax Accounting Divergency in purpose  IAS/IFRS are information-oriented, tax accounting is the accurate measurement of economic performance capability  Accounting is always a compromise between „relevance“ and „reliability“  IAS/IFRS: „relevance“  Tax accounting: „reliability“  Realisation principle important for taxation: determination of secure profits connected with the sales act  contrast: IAS/IFRS: Measurement mainly with Fair value  Imparity principle dependent from fiscal mode of loss-allocation No forward looking solution

University of Cologne WP/StB Prof. Dr. Norbert Herzig9 Impact of the IAS/IFRS on Tax Accounting 3. Independent tax accounting law Formal:  Independent definition of the fiscal base for taxation  No conformity principle Material:  IAS/IFRS are „starting point“ in accounting and taxation  Differences to this global standard need legitimation, e.g. different purpose of the accounting system Practical:  transferring data from the IAS/IFRS-Balance-Sheet (IAS/IFRS as a starting point)  independent tax accounting system

University of Cologne WP/StB Prof. Dr. Norbert Herzig10 Development in the European Union 2001/2003:  European commission‘s communication: „Towards in internal Market without tax obstacles. A Strategy for providing companies with a consolidated corporate tax base for their EU-wide activities“ 2004/2005:  Establishment of a Working group to define a Common Consolidated Tax Base (CCCTB) 2006 (Intermediary result of the CCCTB-WG):  Independent Tax Accounting system based on corporate-balance-sheets  IAS/IFRS are used as a starting point  No conformity principle is implemented

University of Cologne WP/StB Prof. Dr. Norbert Herzig11 Resume and forecast Parallel development of a (new) Tax accounting system in the European Union and Germany:  Independent (consolidated) tax accounting system  IAS/IFRS as a starting point  No conformity principle Function-specific accounting systems  No unitary balance sheet Germany forces development of a CCCTB:  see agreement of the coalition of CDU/CSU und SPD