The amount of a provision set aside under German commercial law still constitutes the upper limit for the tax accounts
Issue - Recultivation of mining sites
In the case in question, a GmbH [German private limited company] (the claimant G) created provisions, for 2010, for obligations associated with the recultivation of mining sites. More specifically, a provision in the amount of € 295,870 was set aside in the financial accounts in due consideration of both the cost increases up to the settlement date as well as a discount rate of 4.94%. For tax purposes the valuation was € 348,105, which included neither the future cost increases nor discounting to the present value. After the amount of provisions for tax purposes was reduced, in the course of an external audit, to the lower value in the financial accounts, G lodged an objection where it took the view that the higher level of provisions in the tax accounts could be applied since the German Accounting Law Modernisation Act (Bilanzrechtsmodernisierungsgesetz, Bil-MoG) had abandoned formal congruence that provided for a specific balance sheet valuation in the financial accounts being binding for the tax accounts.
The BFH decision confirmed the application of the “financial accounting leads tax” principle
In its ruling from 20.11.2019 (case reference: XI R 46/17), the Federal Fiscal Court confirmed the interpretation of the law according to which, in the tax accounts, the maximum amount of a provision that has to be recognised is the value permitted under German commercial law. This is based on the “financial accounting leads tax” principle according to which the recognition of business assets in the tax accounts has to conform to the value in the financial accounts unless tax requirements prevent this.
The tax requirements ensue from Section 6(1) no. 3a of the Income Tax Act (Einkommenssteuergesetz, EStG) where it says that when determining the “maximum” amount of provisions that can be recognised the following guidelines under points (a) to (f) shall be taken into account “in particular”. In the view of the BFH, the interpretation of this rule has to be made in accordance with the objectified legislative intent. Here, according to the wording, the interpretation has to be made on the basis of the history, the systematic context as well as the purpose of the norm.
Reasoning in detail
(1) Based on the wording in Section 6(1) no. 3a EStG - “maximum” and “in particular” - it would not appear that there should be no breach of the principle of congruence that would permit higher provisions in the tax accounts. Instead, the requirement permits a literal interpretation that covers an amount below that of the amount of the provision that arises in accordance with the points (a) to (f) that follow due to the measurement rules under German commercial or tax laws. By adding the words “in particular” the legislators directly expressed that there are other upper limits.
(2) Furthermore, it should also be taken into account that the explanatory memorandum that accompanied the draft law at that time stated that recognition in the financial accounts is applicable for the tax accounts if the provision in the financial accounts is validly lower than recognition in accordance with Section 6(1) no. 3a EStG. The judges further clarified that the introduction of BilMoG had indeed given rise to a degree of deviation in how profits were determined in the tax accounts (e.g. as a result of the discontinuation of formal congruence). In spite of this, the basic systematic logic between the financial accounts and the tax accounts had remained unchanged.
(3) Moreover, an interpretation in accordance with the ratio legis for the norm does not permit any other outcome. The purpose of the requirement in Section 6(1) no. 3a EStG is to achieve more realistic valuations of provisions. This objective is also satisfied by the reference to the “financial accounting leads tax” principle. Ultimately, even after the coming into force of the BilMoG, the value of a provision under German commercial law that is lower than the value of one under tax law is still based on a realistic measurement.