In its judgment of 23 March 2023, the Tax Court Hamburg commented on the scope of the obligation to submit emails
In brief
By judgment dated 23 March 2023 (2 K 172/19), the Tax Court (Finanzgericht) Hamburg determined to what extent a tax office may request the submission of emails within the scope of a tax audit.
The Tax Court ruled that the request for submission of an overall journal in the form of a list of all emails, including emails that are not relevant for tax purposes (and that are not internal correspondence), was unlawful. According to the view of the Tax Court, the tax offices is not limited to conducting interviews since emails have an increased evidentiary evidence.
With regard to the request for submission of emails, the Tax Court concludes that requesting all emails that qualify as commercial and business letters or that are otherwise relevant for taxation is generally lawful. However, it is for the taxpayer to make the qualification which emails qualify as commercial and business letters or are otherwise relevant for taxation (so-called right to make the initial qualification). Accordingly, a tax office cannot request all emails, but only such emails that the taxpayer qualifies as relevant for tax purposes.
Contents
Key impacts
- We expect that the tax administration will increasingly make use of the option to request submission of all tax-relevant emails within the scope of tax audits for the purpose of assessing and challenging the risk and functional profile of German group companies. At the latest upon the tax auditors’ request, the taxpayer will have to check its email communication and qualify the emails in terms of their relevance for tax purposes. As the subsequent exercise of the right to make the initial qualification can be very complicated as well as time-consuming and cost-intensive depending on the individual case, it is advisable to take preparatory measures now. However, as the judgment does not specify which emails are to be submitted in the individual case, it is to be expected that the tax auditors will not accept the scope of the submitted email communication as sufficient, which means that further disputes are inevitable.
- In view of the judgment, companies, such as, for example, German subsidiaries of international corporate groups, should consider establishing a system that either qualifies emails as relevant or not relevant for tax purposes already when they are sent or that ensures that the information on the company’s functional and risk profile the tax office expects to gather from the emails is sufficiently documented outside the email communication. We believe that the submission of all emails from all employees in the entire audit period should in any event be disproportionate if the company’s risk and functional profile can be gathered from an adequate transfer pricing documentation.
- The Tax Court Hamburg granted leave to file an appeal on points of law (“revision“) due to the matter being of fundamental significance. The appeal on points of law is already pending with the Federal Fiscal Court (Bundesfinanzhof; BFH) (XI R 15/23). It remains to be seen what position the BFH will take.
In more detail
Background
For several years, the tax offices have regularly requested the submission of all emails from all employees for the entire audit period within the scope of tax audits. In this respect however, the tax auditors’ focus is not only on the content of the messages. They rather intend to determine the communication structure and, thus, a network profile of affiliated enterprises based on the mere number of the emails. Based on this network profile, in turn, the tax administration wants to determine the risk and functional profile of the German group company to challenge the transfer pricing method. For that same purpose, when conducting tax audits, the tax offices also request the submission of an overall journal containing a list of all emails, thus including emails that are not relevant for tax purposes.
To substantiate their request for submission, the tax auditors invoke section 147(6) German General Tax Code (Abgabenordnung; AO) in conjunction with section 147(1) nos. 2, 3, and 5 AO. According to these provisions, received or sent commercial and business letters and other documents, as far as they are relevant for taxation, are to be retained. Where the documents are retained in electronic form, the tax office is entitled to access the data or, as applicable, to be provided with the data within the scope of a field audit. The tax auditors generally substantiate their request for submission by arguing that they want to audit the accounting or, as applicable, the group transfer prices. This is also the case in the matter discussed here.
No submission of an email journal
The Tax Court Hamburg ruled that the request for submission of an overall journal in the form of a list of all emails, including emails that are not relevant for tax purposes, was unlawful.
This is due to the fact that the taxpayer is not obliged to prepare such a journal within the scope of its documentation obligations. As a result, the taxpayer is neither obliged to maintain nor to submit such a journal. Moreover, in the form requested by the tax office, such a list would also include emails that are not relevant for tax purposes. Also for this reason, the request for submission of an overall journal is unlawful. After all, according to established case law, the taxpayer has the right to make the initial qualification regarding the submission of tax-relevant records.
The submission of all emails is lawful, but only if they are relevant for tax purposes
The Tax Court Hamburg further ruled that, in general, the request for submission of all emails of all employees in the entire audit period was lawful. However, such submission obligation only relates to those e-mails that qualify as commercial and business letters and/or are otherwise relevant for taxation. Which emails are relevant in this respect is primarily decided by the taxpayer who has the so-called right to make the initial qualification.
The term “commercial and business letter”
The term “commercial and business letter” is not defined by tax law. Section 257 German Commercial Code (Handelsgesetzbuch; HGB) defines commercial and business letters to comprise those documents that relate to a commercial transaction within the meaning of sections 343 et seqq. HGB. This is the case if they relate to the preparation, implementation or rescission of such commercial transaction. According to the Tax Court, this also includes directions issued within the scope of a commercial transaction or information provided. This means that if the German group company provides services according to the directions issued by a foreign group company and if such directions are issued by email, according to the Tax Court, such emails are part of the documents to which the retention and submission obligation within the meaning of section 147 AO applies.
Moreover, the Tax Court takes the view that actions for the purpose of performing a contract are also covered by the term “commercial and business letter”. In literature, this is disputed. However, in consideration of the broad definition of a commercial transaction, the Tax Court prefers the view that the term covers more than legal transactions or declarations of intent. For companies that provide their services mainly by email (e.g., consulting services), this means that a substantial part of the emails would qualify as commercial and business letters in the Tax Court’s view and, hence, the retention and submission obligation would apply to them.
Transfer prices must also be documented
According to the Tax Court, the obligation to keep other records that are relevant for taxation also applies to the documentation on group transfer prices. In the Tax Court’s view, section 147 AO also applies to records pursuant to section 90(3) AO in conjunction with the German Regulation Regarding the Kind, Content and Scope of Documentation within the meaning of Section 90(3) AO (Gewinnaufzeichnungsabgrenzungs-Verordnung; GAufzV). Pursuant to section 1(3) sentence 4 GAufzV, records must also be prepared on internal company data that permit a plausibility check on the transfer prices agreed to by the taxpayer, such as forecasting calculations and data on sales, profit, and cost planning. The Tax Court takes the view that, to the extent the email communication contains such data, a documentation obligation and, as a result, a submission obligation exists. The Tax Court also holds the view that emails can be suitable for understanding and reviewing the chosen transfer pricing method in the individual case, if they relate to the transfer pricing documentation prescribed under statutory law or if they are relevant for understanding the chosen transfer pricing method in the individual case. The Tax Court holds the view that, in particular in cases where the transfer pricing documentation itself does not comprise such data in a comprehensive scope, the tax administration may access the taxpayer’s emails.
Within the scope of the initial qualification, the taxpayer is still free to decide on its own which emails are required for reviewing the transfer pricing method chosen by it. However, further discussions with the tax office are inevitable if the submitted emails do not justify the increase of income envisaged by the tax office.
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