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German tax law - the judgement of the German Federal Financial Court - March 6th, 2003, XI R 12/02
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The law: Section 6 (para 1, no. 4, clause 2) of the German Income Tax Act (EStG) rules that the private use of a company car increases the taxable annual income by 12 % of the gross list price of the car (1 % each month). |
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Given that, e.g., the car costs - including extras and VAT - 100,000 EUR, the taxpayer's annual income will be increased by 12,000 EUR, i.e. his tax will be calculated from the sum of his actual income + 12,000 EUR. |
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The principle behind this follows the idea that the use of a company car is a payment in kind, too. |
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Additionally, under the German Turnover Tax Act (UStG), the undertaking has to pay 16 % VAT of the value of use of a company car - on condition that the firm deducted prior tax. |
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VAT has to be paid on the strength of the fact that the UStG aims at the taxation of private consumption - and the private use of a company car is classified private consumption. |
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The case (simplified): |
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An entrepreneur calculated his income on the basis of the net list price + VAT: net list price of 86,206.90 EUR |
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multiplied by 12 % |
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+ 16 % VAT |
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= 12,000 EUR added-on taxable income. |
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The tax office calculated: |
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gross list price of 100,000 EUR |
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multiplied by 12 % |
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+ 16 % VAT |
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= 13,920 EUR added-on taxable income. |
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The Federal Fiscal Court accepted the tax office's point of view and dismissed the taxpayer's action. |
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(http://www.bundesfinanzhof.de/www/entscheidungen/2003.7.16/11R1202.html) |
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Criticism: |
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1. The court argues the law only wants to equate entrepreneurs and ordinary private users. The latter have to pay VAT and therefore it is said to be justified to calculate the value of use to the entrepreneur including VAT. |
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The court's argument is irrelevant and can not explain why VAT has to be added to the amount of 12 % of the gross list price, i.e. the price already including VAT. |
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2. The addition of 16 % VAT to the 12 % of the gross list price, i.e. the price already including VAT, is justified neither by income tax law nor by turnover tax law: |
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a) TURNOVER TAX LAW: |
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It is the very principle of turnover tax law that there has not to be any double taxation with regard to VAT. This can be seen, especially in regard with the private use of goods belonging to a company, in section 10, para 4, clause 1, no. 2 UStG. The standard expressly mentions the previous prior tax refund ("Vorsteuerabzug"). |
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Only on condition that such refund has taken place, the private use of a company good is liable to VAT, because only then the - subsequent, i.e. not already done - taxation of the private use is necessary. |
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The principle of avoidance of double taxation is much too important to be left unconsidered even with respect to income tax law. |
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Moreover, the legal conception stated by the court, that the possible double taxation with regard to VAT could be left open, is not to be followed. Such - inadmissible - double taxation is the very basis of the court's view. On the one hand, basing the judgement on such a double taxation, i.e. to make it the gist of the matter, and, on the other hand, leave this problem open as if it would be of no concern at all, is highly contradictory and not to be accepted. |
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The decision is related to a discussion about whether the 12 %-rule under the EStG (see above) can be the tax base for the VAT in the case of section 10, para 4, clause 1, no. 2 UStG. |
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The corresponding question has to be answered in the positive - however, under one crucial condition: due to the fact that the 12 %-lump sum includes 16 % VAT, the VAT has to be deducted, before the lump sum can be applied. Instead of 12 % p.a., the tax base has to be an adjusted 10.34 % of the gross list price (i.e. 12 % of the net list price respectively). |
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This shows that it is wrong to add 16 % VAT to the 12 %-lump sum. There is no such obligation to pay. Consequently, no additional 16 % have to be added on the once calculated 12 %-lump sum. |
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("12 per cent is 12 per cent and, according to Cocker, not 13.92 %") |
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b) INCOME TAX LAW: |
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The EStG does not justify the point of view of the court, i.e. calculating 12 % plus 16 % of the 12 %, all told: an annual 13.92 % (a monthly 1.16 % respectively). |
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Section 6 (para 1, no. 4, clause 2) EStG does not back such a calculation. It says: 12 % of the gross list price. It does not say: 13.92 % of the gross list price. |
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It is correct that VAT, if it has to be paid by the firm, is a part of the payment in kind, which the private use means. However, the 12 % laid down in section 6 (para 1, no. 4, clause 2) EStG include this factor, because the 12 % are to be calculated based on the gross list price, so that the private user is already being taxed on the basis of the value plus the VAT. Adding an additional 16 % is a simple miscalculation, which doubles German VAT from 16 to a steep 32 % (which can not even be justified by the saying "iudex non calculat", because the saying only aims at fault-prone arithmetic operations in a judgement, not at the very rationale of the judicial decision). |
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iQ: in order to be on the safe side every user of a company car ought to ask for an actual calculation of the real annual costs of the specific car and ought to keep a logbook. Such a book allows to prove to the tax office that the real value* of the private use of a company car is by far lower than the 12 %-lump sum provided by the German tax law. A pen and a logbook (both not only cheap, but tax deductible, too) may help the user saving a multiple of their price in taxes. |
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(* i.e. overall costs [including fuel, insurance, oil, service, taxes etc.] plus annual depreciation [basically 20 % of the real price (see above) per year within five years after the purchase]) |
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The reason for the regularly lower actual costs is, on the one hand, that the basis for the calculation of the real costs is the real price of the car and not the (rather theoretical) list price. The real price is normally lower than the list price, because most company cars are being purchased on special conditions, i.e. with discounts of up to 30 % so that the annual depreciation, which is part of the necessarily taken into account costs, is rather low. On the other hand, most users of company cars do not use the cars privately to an extend that they reach the legally defined 12 %-threshold. If, e.g., the above-mentioned user drives 20.000 km p.a. on business and 5.000 km privately caused (including the way to his workplace!), the costs are the following: |
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20 % depreciation of the real price ((86,206 - 25%) x 20 % =) 13,792.96 EUR |
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+ service, insurance premium etc. 10,000 EUR |
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all told: 23,792,96 EUR = 0.95 EUR per km = 4,750 EUR + 16 % VAT (because it is private consumption, see above) |
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= 5,510 EUR. |
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This is less than half the lump sum (of 12,000 EUR). On the basis of an average income tax rate of 25 % that means to save 1,622.50 EUR in taxes. At the top rate of income tax of currently 48.5 % this comes down to saving 3,147.65 EUR. |
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As a result, one can not think of any arguments against becoming a "scrivener", indeed. |
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