The state as a taxpayer: local authorities and churches are also struggling with increasing tax bureaucracy

Study by the Institute for the Public Sector on "Tax obligations of public sector organizations" shows:

• 95 percent of the organizations surveyed report increasing requirements in tax law over the last ten years
• For 77%, the implementation of the new VAT law is currently the biggest challenge
• Over 60 percent have set up at least one full-time position, but less than 25 percent have their own in-house tax advisor

It seems paradoxical, but the public sector not only finances itself primarily through tax revenue, but must also pay this type of tax itself. As a rule, this is the case when the state and church, in addition to their sovereign tasks, also become economically active with their public institutions and enter into competition with the private sector. The increasing complexity of tax law poses major challenges for the organizations concerned in this context. This is shown by a recent study by the Institute for the Public Sector sponsored by KPMG in Germany, for which over 150 managers were surveyed. According to the study, 95 percent of so-called legal entities under public law, i.e. municipalities, federal and state administrations, social insurance institutions, universities and churches, are experiencing a significant increase in requirements in relation to their tax obligations. They are struggling with more time-consuming and complex tasks and require considerable human resources and tax expertise to fulfill their obligations.

In particular, the new VAT law for the public sector is causing difficulties for organizations. Although the law came into force in 2015, it is not expected to become mandatory until the beginning of 2027 due to numerous transitional periods. With it, the legislator wants to strengthen competition between the state or churches and the private sector and at the same time comply with European legal standards. In the eyes of the public sector, however, VAT law is sometimes perceived as a real bureaucracy monster. For 77% of those surveyed, the introduction of the new VAT law represents the greatest challenge; of all tax obligations, it ties up the most personnel capacity and is seen by far as the greatest tax risk.

Incorrect tax returns can have serious fiscal, political and criminal consequences for management and tax staff. Although the majority of managers are aware of their tax liability risks, raising awareness at management level remains a challenge. Tax staff are only regularly involved in one in two organizations, and mandatory training is only provided in just over one in four. Tax risks are only systematically recorded in one in three organizations.

However, the study also reveals rays of hope: a third of the organizations surveyed already have a tax compliance management system (TCMS) in place, while 51% (and 71% of church organizations) are planning to introduce one. Over 80 percent of them have also set up dedicated tax staff positions or departments. However, less than 25 percent still have staff with the qualifications of a tax advisor.

Clemens Reisbeck

Deputy Head Corporate Communications
KPMG AG Wirtschaftsprüfungsgesellschaft

T +49 89 9282 1722
creisbeck@kpmg.com