External audit soon to be faster and more modern?

In its co­ali­tion agree­ment, the co­ali­tion go­vern­ment set its­elf the goal of mo­der­ni­zing and ac­ce­le­ra­ting ex­ter­nal au­dits. The cor­re­spon­ding le­gal chan­ges have now been in­tro­du­ced into the le­gis­la­tive pro­cess.

Com­pa­nies in Ger­many un­ani­mously com­plain that ex­ter­nal au­dits take too long and that there is a large time gap bet­ween the au­dit and the au­di­ted pe­riods. The long au­dit pe­riods not only lead to ex­ces­sive per­son­nel and re­source ex­pen­diture on the part of com­pa­nies and the tax aut­ho­ri­ties, but also re­pre­sent a lo­ca­tio­nal di­sad­van­tage for Ger­many in an in­ter­na­tio­nal com­pa­ri­son. De­layed ex­ter­nal au­dits re­sult in high in­te­rest char­ges in the event of back tax pay­ments. In ad­di­tion, le­gal cer­tainty re­gar­ding the au­di­ted mat­ters is only achie­ved af­ter a lon­ger pe­riod of time, which ma­kes busi­ness de­ci­si­ons more dif­fi­cult in the fu­ture.

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Prac­ti­tio­ners have been lon­ging for a mo­der­niza­tion of ex­ter­nal au­dits for some time now. Now the go­vern­ment draft of a law on the mo­der­niza­tion of tax pro­ce­du­ral law, known as the DAC 7 Im­ple­men­ta­tion Act for short, is avail­able. With re­gard to the re­gu­la­ti­ons for ex­ter­nal tax au­dits, the bill pri­ma­rily aims to start them ear­lier and com­plete them more quickly. The fo­cus is to be on coope­ra­tion bet­ween the tax aut­ho­ri­ties and com­pa­nies. For the most part, the re­gu­la­ti­ons are to be ap­plied for the first time for tax pe­riods for which an ex­ter­nal au­dit is star­ted af­ter De­cem­ber 31, 2024.

Faster to final tax assessment notices

If an ex­ter­nal au­dit is star­ted, the ex­piry of the as­sess­ment pe­riod is post­po­ned so that tax as­sess­ments can be amen­ded for lon­ger. As a key in­stru­ment for spee­ding up ex­ter­nal au­dits, the draft bill aims to li­mit this sus­pen­sion of ex­piry to five years.

The ex­tent to which the ma­xi­mum au­dit du­ra­tion will have an ef­fect in prac­tice re­mains to be seen, as ex­ter­nal au­dits have al­re­ady been com­ple­ted in less than five years, at least for small and me­dium-si­zed com­pa­nies.

The fo­cus of small and me­dium-si­zed com­pa­nies is ra­ther on brin­ging the ex­ter­nal au­dit clo­ser to the au­di­ted as­sess­ment years. The draft bill at­tempts to achieve this goal with a new re­gu­la­tion in pro­ce­du­ral law: For in­come tax and VAT, the au­dit or­der should in fu­ture be is­sued by the end of the ca­len­dar year fol­lo­wing the ca­len­dar year in which the re­spec­tive tax as­sess­ment be­came ef­fec­tive. If the tax aut­ho­rity is­sues the au­dit or­der at a la­ter date, the pe­riod of sus­pen­sion will be shor­tened.

Cri­ti­cism: Over­all, howe­ver, the le­gis­la­tor con­ti­nues to ad­here to the con­cept of down­stream ex­ter­nal au­dits ba­sed on a com­plete and fi­nal tax re­turn. Howe­ver, the idea of a so-cal­led ac­com­pany­ing au­dit, as al­re­ady prac­ticed in Aus­tria, is not ta­ken up. From a prac­tical per­spec­tive, howe­ver, such an ap­proach could si­gni­fi­cantly re­duce the time and re­sour­ces re­qui­red to pro­cess com­plex is­sues for com­pa­nies, as their tax as­sess­ment would be cla­ri­fied with the tax aut­ho­ri­ties in ad­vance - wi­thout ha­ving to use the for­ma­li­zed pro­ce­dure of bin­ding in­for­ma­tion - be­fore the is­sues are in­clu­ded in a tax re­turn. On the part of the tax aut­ho­ri­ties, the sub­se­quent au­dit ef­fort would be li­mited to the tech­ni­cally cor­rect im­ple­men­ta­tion in the tax re­turns.

Improving communication and cooperation

In or­der to speed up ex­ter­nal au­dits, the le­gis­la­tor also in­tends to im­prove com­mu­ni­ca­tion and coope­ra­tion bet­ween the tax aut­ho­ri­ties and com­pa­nies.

Ac­cor­ding to the pro­vi­si­ons of the draft bill, a bin­ding agree­ment can be re­ached bet­ween the two par­ties to hold re­gu­lar dis­cus­sions on the is­sues iden­ti­fied and the po­ten­tial tax im­pli­ca­ti­ons du­ring the course of the ex­ter­nal au­dit.

For the first time, the draft bill also gi­ves the par­ties the op­por­tu­nity to agree on frame­work con­di­ti­ons for the tax­payer's coope­ra­tion. For ex­am­ple, an au­dit plan can be de­fi­ned, au­dit areas can be nar­ro­wed down or dead­lines for re­spon­ding to au­di­tor in­qui­ries can be agreed.

Howe­ver, if a com­pany does not make use of the pos­si­bi­lity of agre­eing on frame­work con­di­ti­ons, the draft law pro­vi­des for the in­tro­duc­tion of a so-cal­led qua­li­fied re­quest for coope­ra­tion as a new in­stru­ment for en­for­cing the tax­payer's ob­li­ga­tion to coope­rate. If the com­pany does not com­ply with the re­quest to pro­vide in­for­ma­tion and do­cu­ments wi­thin one month, a coope­ra­tion de­lay fee of EUR 100 is to be im­po­sed for each ca­len­dar day of the de­lay in coope­ra­tion. In ad­di­tion, the sus­pen­sion of ex­piry in the ex­ter­nal au­dit is ex­ten­ded by at least one year.

A fur­ther in­no­va­tion pro­vi­des for the tax aut­ho­ri­ties to be gi­ven the op­tion of re­ques­ting ac­coun­ting do­cu­ments as soon as the au­dit or­der is is­sued in or­der to iden­tify key au­dit areas on the ba­sis of the do­cu­ments. In re­turn, the au­di­ted com­pany should - but un­for­tuna­tely does not have to - be in­for­med of these au­dit prio­ri­ties, alt­hough this does not lead to a re­stric­tion of the ex­ter­nal au­dit to cer­tain mat­ters.

Digitalization of the external audit

Ac­ce­le­ra­tion and col­la­bo­ra­tion wi­thin the ex­ter­nal au­dit is to be sup­por­ted by the use of di­gi­tal op­ti­ons. To this end, elec­tro­nic com­mu­ni­ca­tion is to be sim­pli­fied; for ex­am­ple, the fi­nal mee­ting is to be held di­gi­tally in fu­ture and it will be pos­si­ble to sub­mit the au­dit re­port in elec­tro­nic form. Howe­ver, it is so­lely at the dis­cre­tion of the tax aut­ho­ri­ties whe­ther this is used. Tax­pay­ers are not gi­ven the op­por­tu­nity to make a bin­ding re­quest for elec­tro­nic form, so it is ques­tio­nable to what ex­tent di­gi­tal com­mu­ni­ca­tion op­ti­ons will be used across the board.

As part of the ex­ter­nal au­dit, the tax aut­ho­ri­ties have been al­lo­wed to ac­cess all do­cu­ments sub­ject to re­cord-kee­ping and re­ten­tion re­qui­re­ments that were crea­ted using a data pro­ces­sing sys­tem and stored elec­tro­ni­cally since 2001. In prac­tice, data ac­cess for me­dium-si­zed com­pa­nies has so far been lar­gely li­mited to so-cal­led Z3 data ac­cess, i.e. the ex­change of ma­chine-re­ada­ble data car­riers. In view of ad­van­cing di­gi­ta­liza­tion, data ac­cess in prac­tice is al­re­ady of­ten car­ried out by ma­king data avail­able via on­line sto­rage or cloud ser­vices. This rea­lity is now to be ta­ken into ac­count by cla­ri­fy­ing the law and enab­ling the fle­xi­ble ex­change of data.

In ad­di­tion, the BMF is to be aut­ho­ri­zed to de­ter­mine uni­form di­gi­tal in­ter­faces and data set de­scrip­ti­ons for the stan­dar­di­zed ex­port of data. This in­tro­du­ces a de facto ob­li­ga­tion to use the in­ter­faces, as other­wise there is a risk of di­sad­van­ta­ges.

Cri­ti­cism: From a prac­tical point of view, ef­forts should be made to en­sure a uni­form data pro­vi­sion and data trans­fer chan­nel th­roug­hout Ger­many and plat­forms should be made avail­able that also of­fer the pos­si­bi­lity of or­ga­ni­zing col­la­bo­ra­tive work, for ex­am­ple in the form of work­flows for pro­ces­sing au­di­tor in­qui­ries and the as­so­cia­ted dead­line mo­ni­to­ring.

Increasing importance of tax compliance management systems

If com­pa­nies im­ple­ment in­ter­nal con­trol sys­tems or tax com­pli­ance ma­nage­ment sys­tems, their pro­ce­du­ral con­side­ra­tion is cur­rently li­mited to the cri­mi­nal exo­ne­ra­tion of those re­spon­si­ble for any tax law vio­la­ti­ons. At the same time, the tax com­pli­ance ma­nage­ment sys­tem can al­re­ady be the sub­ject of an ex­ter­nal au­dit un­der the cur­rent le­gal si­tua­tion and au­dit prio­ri­ties can be for­med on this ba­sis.

As part of the tes­ting of al­ter­na­tive au­dit me­thods in the pe­riod from 2023 to 2027, the le­gal ef­fect of a tax com­pli­ance ma­nage­ment sys­tem is to be si­gni­fi­cantly ex­pan­ded. If the ef­fec­tiv­en­ess of such a sys­tem is con­fir­med du­ring an ex­ter­nal au­dit, the tax aut­ho­ri­ties now have the op­tion of pro­mi­sing the tax­payer an ap­pro­priate re­stric­tion of in­ves­ti­ga­tive mea­su­res for a sub­se­quent ex­ter­nal au­dit. The ap­pro­val of the sim­pli­fi­ca­ti­ons will only be gran­ted upon ap­pli­ca­tion and is sub­ject to re­vo­ca­tion.

Note: Due to the short trial phase, it can be as­su­med that com­pa­nies that have al­re­ady im­ple­men­ted a tax com­pli­ance ma­nage­ment sys­tem in par­ti­cu­lar will be able to be­ne­fit from the re­lief, as the tax com­pli­ance ma­nage­ment sys­tem can only be re­viewed in an ex­ter­nal au­dit star­ting from 01.01.2023 at the ear­liest and the re­lief can be gran­ted for the sub­se­quent ex­ter­nal au­dit. Com­pa­nies that are cur­rently con­side­ring the in­tro­duc­tion of such a sys­tem should keep an eye on de­ve­lop­ments to see whe­ther they can still be­ne­fit from this al­ter­na­tive au­dit me­thod.


This draft bill aims to make ex­ter­nal au­dits fas­ter and more mo­dern by amen­ding the pro­ce­du­ral re­qui­re­ments on the one hand and im­pro­ving com­mu­ni­ca­tion and the flow of in­for­ma­tion bet­ween the tax aut­ho­ri­ties and com­pa­nies on the other.

These ob­jec­tives are very much in line with the re­qui­re­ments on the cor­po­rate side, which is why com­pa­nies, trade as­so­cia­ti­ons and con­sul­tants are in fa­vor of the main fea­tures of the in­ten­ded chan­ges.

Howe­ver, the spe­ci­fic de­sign of the re­gu­la­ti­ons falls short of prac­tical ex­pec­ta­ti­ons in some ca­ses. From the per­spec­tive of small and me­dium-si­zed com­pa­nies in par­ti­cu­lar, a size-in­de­pen­dent right to ap­ply for a prompt ex­ter­nal au­dit and a fur­ther shor­te­ning of the as­sess­ment pe­riods would be de­si­ra­ble.

It is also cri­ti­ci­zed that the de­si­red coope­ra­tive col­la­bo­ra­tion bet­ween com­pa­nies and the tax aut­ho­ri­ties on an equal foo­ting is thwar­ted by tigh­ter re­gu­la­ti­ons that con­tra­dict the crea­tion of a ba­sis of trust for such new col­la­bo­ra­tion. It would be de­si­ra­ble for le­gis­la­tors to have more cou­rage to make chan­ges here - not least to the "mind set" in the re­la­ti­ons­hip bet­ween the tax aut­ho­ri­ties and com­pa­nies.

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