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.
© iStockPractitioners 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.
Conclusion
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.
