“Due to the Cum-Ex Deals We as Citizens Have Been Cheated Out of Billions – for Decades”

In 2015, Christoph Spengel, Professor for Business Administration and Taxation at the Business School, justified the illegality of the share transactions known as “Cum-Ex deals” in scientific papers. With them, he initiated the detection and prosecution of the illegal deals, which range in the billions. Why Cum-Ex transactions are nevertheless still possible, although the German tax authorities are losing billions in tax revenue, and why the investigation is proceeding only slowly, he explains in this interview.

Press release, 7 October 2020
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Professor Spengel, you were instrumental in uncovering the cum-ex and cum-cum deals. How did the illegal doings come to light?
Individual cases of Cum-Ex transactions were first taken up by tax authorities in 2010/2011. Right from the start, the sums involved were in the three-digit million range, which led to investigations by the public prosecutor's office and brought the cases to the attention among experts. As a result, a whole series of expert articles were written to establish the legality of these transactions. As it later turned out, the authors – among them also professors – had been paid for their papers. In 2015, I wrote a substantial tax law article that broke down the entire chain of argumentation. In April 2016, a committee of inquiry was set up in the Bundestag, which appointed me as an individual expert. The committee was then not only about a legal review of the issues, but also about looking into the matter: How did lobbying associations and tax authorities behave? How has the jurisdiction expressed itself? And who is ultimately to be held responsible? In January of this year, there was a legally binding decision in a Cum-Cum deal, which led to the fact that at the beginning of September I was again questioned as an expert – this time in the Finance Committee of the Bundestag.

In the media, the damage to the German fiscal budget is estimated at 10 billion euros. Does this figure correspond to your estimates?
Nobody knows exactly how high the tax loss is. However, I received data from the German stock exchange Deutsche Börse for the Bundestag's investigative committee for the years 2005 to 2011 and evaluated it with employees. Based on this data, we calculate with 7.2 billion euros in unjustifiably refunded taxes. However, that is the absolute lower limit – because the data was highly aggregated and is only available from 2005 onwards. For the Cum-Cum deals, I also expect a tax loss of 25 billion euros. All in all, we are thus talking about a minimum loss of more than 30 billion euros.

According to a FAZ article from 10 September 2020, only 1.1 billion euros had been reclaimed by the end of 2019. Do you expect that the entire damage will eventually be paid back?
Since it is possible to skim off assets from the parties involved under criminal law, it is quite possible to recover a great deal of money here. This is also because the public prosecutor's office has clear knowledge of the culprits from its investigations. Several banks are affected, including federal state banks. In order to restore as much as possible of the damage done with Cum-Cum deals, the tax authorities must become active and change tax statements in suspicious cases immediately and reverse tax refunds. Only in that way the limitation period can be stopped.

How long do the authorities theoretically have until a Cum-Ex case falls under the statute of limitations?
Until now, it has been open and controversial when tax offences fall under the statute of limitations under criminal law. However, a huge problem arises from the second Corona Tax Aid Act. In addition to the temporary reduction of the sales tax rate from 19 to 16 percent, it also includes a change to the statute of limitations for tax offences. According to this, the criminal statute of limitations here will be 25 years in the future – for all cases that had not yet fallen under the statute of limitations for tax purposes by 1 July 2020. However, most of the cum-ex deals took place between 2006 and 2009. If the tax statements had not been changed, they would now fall under the statute and could no longer be prosecuted. This would cost the German government billions.

In your current statement for the Bundestag's Finance Committee, you assume that Cum-Ex transactions are still possible and take place. What had to be changed on fiscal and legal level to prevent this in the future?
The fundamental problem is that we have a decentralized financial administration in Germany. Taxes are paid to the tax office, i.e. to a state authority. However, tax refunds are made by the Central Federal Tax Office in Bonn, a federal authority. To date, there are no figures on how much capital income tax is collected and how high the refunds are. A sensible digitalization of processes – i.e. the linking of tax withholding, payment, and certification – could not only close this knowledge gap, but also prevent multiple refunds. This also means that state and federal authorities must be linked to each other so that the entire process is handled by a single authority.

How could the transactions remain undiscovered for so long?
The sluggish processing is due on the one hand to the lack of resources of the law enforcement agencies. An investigative front and personnel support would be needed because the cases are both time-critical and very complex. We are dealing with highly intelligent culprits and it takes time to understand the cases. On the other hand, there are also many powerful agencies that have little interest in uncovering them in my opinion. During the financial crisis in 2008/2009, the German government spent over 60 billion euros on stabilizing the banking sector. The disclosure of the Cum-Ex and Cum-Cum transactions could bring some banks to their knees. Therefore, stonewalling is being done in many places.

Take the above-mentioned Corona Tax Aid Act. Such an amendment on the statute of limitations does not end up in the code of law by chance. A politician who votes on it usually doesn't understand it – but an expert knows what the change means: Everything that took place before 2010 is statute-barred for tax purposes and can therefore no longer be taken up under criminal law. I find this to be unbearable. It also affects us as citizens, who have been cheated out of billions by the Cum-Ex deals for decades. In my statement for the committee of inquiry, I therefore call on the legislator to reverse the change and create a clear criminal law regulation.

Further information:

What are Cum-Ex deals?
Cum-ex deals are stock transactions for which two tax statements are issued and claimed against the tax authorities for the same dividend. The parties involved share the profit, i.e. the tax refund for the capital income tax never paid. Claiming the wrongly issued tax certificate constitutes tax evasion.

What are Cum-Cum deals?
About two thirds of the shares on the German stock exchange belong to foreign investors. In Germany, a capital income tax of 25 percent is withheld on the dividend of these shares. This tax is definitive, i.e. it cannot be claimed in the tax return as is the case with Cum-Ex transactions. To avoid this tax, the shares are transferred to Germany as securities lending shortly before the dividend payment. The foreign investor does not have to pay the definitive tax as a result, the German ally receives a share of the capital yields tax. According to the law, this procedure is not legal if there are no economic reasons, i.e. if the sole purpose is to save taxes.

Links:
Link to the written statement by Professor Spengel in the Finance Committee of the German Bundestag on 9 September 2020: https://www.bwl.uni-mannheim.de/media/Lehrstuehle/bwl/Spengel/Dokumente/Medien/Beitraege/Stellungnahme_2020_Sept.pdf

Link to the public hearing on cum-ex and cum-cum transactions in the Finance Committee of the German Bundestag on 9 September 2020: https://www.youtube.com/watch?v=xHcGEsnogkI

Interview:
Dr. Maartje Koschorreck

Contact:
Professor Dr. Christoph Spengel
Professor for Business Administration and Taxation
University of Mannheim Mannheim
Phone: +49 621 181–1704
E-Mail: spengel uni-mannheim.de

Linda Schädler
Head of Communications
University of Mannheim
Phone: +49 621 181–1434
E-Mail: schaedler uni-mannheim.de