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In its ruling of 16 July 1997 (EFG 1997, 1166), the Cologne Tax Court asks the European Court of Justice (ECJ) to decide whether it is permissible under the 4th EEC Accounting Directive of 25 July 1978 for a company to set up general percentage accruals for its guarantee obligations based on its experience in the past or based on common experience in its branch of business. The court states that it has "considerable doubts" whether the 4th Directive permits such accruals because of the principle of specific valuation established by Article 31 (1) (e) of the 4th Directive and transformed into German law in sec. 252 (1) no. 3 HGB, from which sec. 252 (2) HGB allows exceptions only in extraordinary circumstances.

The case involves a construction firm which set up an accrual equal to 2 % of its sales. The court could discern no special circumstances which would justify an exception. General percentage accruals were accepted under German accounting law prior to 1987 when the Accounting Directives Law took effect. The tax authorities were willing to accept a general accrual of 0.5 %.

Should the ECJ decide that general percentage accruals are permissible as a basic matter, the Tax Court asks for guidance as to how they should be calculated and who bears the burden of proof in case of doubt.

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