A slew of tax avoidance scandals over the last year have seen German financial institutions in the headlines for all the wrong reasons. The government continues to harden its stance on tax avoidance, but regional responses differ. Regardless, local wealth managers need to ensure that they are whiter than white in tax matters, for both their and their clients’ sake, according to GlobalData Financial Services.

As our report Wealth in Germany: Sizing the Market Opportunity 2018 details, Germany continues to harden its stance towards tax avoidance and evasion.

A new tax avoidance bill (Steuerumgeheungsbekämfungsgesetz) prompted by the Panama Papers came into force in early 2018, requiring more stringent reporting on foreign holdings.

Meanwhile the new coalition government between the center-right Christian Democrats and the center-left Social Democrats has promised a major crackdown on tax evasion.

These developments come among a series of scandals, some of which highlight systemic issues among institutions themselves.

In 2017 news of illicit tax rebates on share trades emerged, which involved an international web of banks, broker-dealers, and lawyers; meanwhile 2018 started off with a series of raids on fake gold-dealing companies in a tax-dodge scandal dubbed ‘Goldfinger.’

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Then there is the high-profile case involving former secret agent Werner Mauss, who was found guilty in late 2017 of tax evasion. Mauss was investigated after one of his aliases was found on a compact disc containing details of UBS clients sold by a whistleblower, and his name also came up in connection with the Panama Papers.

Little wonder then, that German authorities are promising to play it tough; this no doubt contributes to our finding that over 85% of German wealth managers interviewed in our 2017 Global Wealth Managers Survey agreed that “local regulatory changes will be a big concern for wealth managers.”

Regional responses

Yet while the national approach is hardening, there are notable differences between the regional responses to tax avoidance.

North Rhine Westphalia’s finance minister Norbert Walter-Bojans has become a noted scourge of those evading tax.

The state has purchased numerous compact discs containing details of those holding offshore accounts, actively pursues institutions that repeatedly come up on the voluntary disclosure forms of those declaring offshore holdings, and is taking a hardline approach to those institutions involved in the illegal tax rebate scandal on share trades.

Other regions, such as Hesse, are less aggressive. Following the 2017 share trading scandal, for example, North Rhine Westphalia sought to back-date charges as far as possible for as many players as possible, while Hesse focused more on select cases which it felt it had greater chance of winning.

With the second wave of Common Reporting Standard adopters commencing with their first exchange in 2018, the Bundeszentralamt für Steuern (German Federal Central Tax Office) will be receiving data on more offshore accounts than ever before (including for the first time, Swiss, Singaporean, and Hong Kong-based accounts).

Getting tax affairs in order before this happens is therefore critical for wealth managers looking after German tax residents.

For wealth managers, the adoption of new rules and regulation naturally brings its headaches, but given the reputational battering these scandals bestow on the industry as a whole and the impact on clients of being non-compliant, now is the time to be whiter than white for all concerned.