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Income tax – Timing of provisioning for tax arrears

If a tax audit results in additional taxes then the question that arises is whether the tax arrears have to be taken into account in the year to which they belong or only once the tax arrears have been determined.

The Münster tax court recently had to deal with just such a case. The claimant had been trading mobile phone accessories and mobile phones over the course of the relevant years of 2009 to 2011. A tax audit for the relevant years took place. The managing director had previously been the subject of a preliminary investigation of fiscal offences because there had been grounds for suspecting that he had participated in so-called ‘VAT carousel’ fraud; these suspicions had emerged as a consequence of the conviction of one of his business partners. The claimant had deducted the input tax from the invoices of the convicted business partner.

Within the framework of the tax audit, the amounts of input tax that had been deducted from the ‘VAT carousel’ was disregarded and a reduction in the profit was denied for 2010 and 2011. The disallowed input tax was only offset against taxable profits in the year when the correction had been made. However, the claimant applied to be allowed to reduce profits earlier by way of provisioning already for the years when the tax charges arose.

The Münster tax court dismissed the claim in its ruling from 20.8.2019 (case reference: 12 K 2903/15 G, F). Offsetting the disallowed amounts of input tax against taxable profits could not be considered in the relevant years of 2010 and 2011. The disallowed amounts of input tax could neither be included as business expenses nor as provisions for liabilities of uncertain timing or amount in 2010 and 2011. In these years there is no probability that a provision will be utilised and hence no need to create one. There was only a reasonable probability from May 2013 onwards, therefore, only once the external audit had begun. If provisions have to be created for the impending use by the taxpayer then these can only be offset against taxable profits on the balance sheet date when the offence is discovered or if its discovery is imminent.

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