Scope of application
The new regulations that relate to the modernisation of external tax audits form part of the Act “to Transpose the Council Directive (EU) 2021/514 ...Amending Directive 2011/16/EU on Administrative Cooperation in the Field of Taxation and to Modernise Procedural Tax Law” of 20.12.2022 that came into force on 28.12.2022 with its publication in the BGBl. [Bundesgesetzblatt, or the Federal Law Gazette] Part I (p. 2730). Under this legislation (also referred to as the DAC7 Transposition Act) businesses are obliged, in particular, to make corrections to their tax returns more quickly and to cooperate when requested to do so by tax auditors.
The new regulations that are described in the following section will be generally applicable to taxes that arises after 31.12.2024. They will however also already apply to earlier tax assessment periods insofar as tax audit notices are issued for these periods after 31.12.2024.
Individual regulatory areas
Obligation to correct errors pursuant to Section 153(4) of the German Fiscal Code
Under Section 153 of the Fiscal Code (Abgabenordnung, AO), taxpayers were hitherto already obliged to immediately notify the tax office of errors detected in their tax returns and to correct these. This obligation has been expanded such that, in addition, taxpayers will be obliged to correct errors in tax returns if incontestable audit findings from a tax audit mean that subsequent assessment periods would also be affected (Section 153(4) AO).
Recommendation: Therefore, subsequent amendments that arise from one audit period – insofar as their impact is not positive – should no longer be left to the next tax audit.
Limit to the suspension of the statutory limitation period for the assessment of tax liability pursuant to Section 171(4) AO
The aim of the amended version of Section 171(4) AO is to significantly speed up the execution and completion of a TA. According to the previous version of Section 171(4) sentence 3 AO, in the case of a TA, the limitation period for assessments would expire, at the latest, after the end of the calendar year in which the closing meeting took place.
The new statutory provisions now provide that, in future, the suspension of the limitation period for assessment that is initiated at the start of a TA will have to end no later than five years after the end of the calendar year in which the tax audit notice was issued. Up to now there had been no time limit and this has now been redressed.
Please note: The limit to the suspension of the limitation period for assessments would not apply in cases where the start of the external tax audit is postponed or interrupted at the taxpayer’s request.
Binding partial final assessment pursuant to Section 180(1a) AO
A ‘binding partial final assessment’ in accordance with Section 180(1a) AO constitutes a binding decision by the tax authority on certain parts of a tax assessment which would be regarded as definitive for the respective tax assessment period. As part of the partial final assessment procedure, the tax authority will draw up a document (a so-called partial audit report or partial final assessment notice) in order to record the results of the audit of specific transactions. In this way, a final decision can be made for the respective part of a tax assessment that will be binding for a particular tax assessment period. This means that the taxpayer will no longer have any possibility to appeal against this part of the tax assessment, however, the tax authority will not be able to make any more amendments either.
A binding partial final assessment may only be issued if the taxpayer fully and correctly discloses all the relevant facts for the final assessment. Furthermore, taxpayers will have to declare that they will refrain from initiating further investigations and producing evidence. Taxpayers will benefit from binding partial final assessments because they will obtain legal certainty for their respective transaction and it will be possible to swiftly complete their tax assessments.
Please note: The first-time application is planned for tax periods for which the external tax audit started after 31.12.2024.
Expansion of cooperation obligations pursuant to Section 90 AO
The general clause under Section 90 AO contains general provisions on cooperation obligations for those involved in the taxation procedure. Besides an editorial reclassification of the regulation, the new statutory provisions mean that there are some changes with regard to the record-keeping requirements for cross-border transactions (Section 90(3) and (4) AO). The 30-day deadline for submitting records, which was hitherto applicable solely for extraordinary business transactions, will now apply to all records, i.e. the submission deadline has been standardised and shortened.
Please note: Furthermore, in future, it will be possible to request records to be provided at any time and not solely as part of a TA.
New system of sanctions in the case of cooperation requests pursuant to Section 200a AO
The new Section 200a AO contains rules on qualified requests for cooperation in the context of a TA. To ensure that taxpayers cooperate, also in cases where the duration of the suspension of the limitation period for assessments is shortened in Section 171(4) AO (as amended), a qualified request for cooperation has been introduced in the form of an enforceable administrative order with particular legal consequences in the event of non-compliance. A qualified request for cooperation may be issued, at the earliest, after six months have elapsed since notification of the tax audit order.
The compliance deadline will generally be one month from the date when the qualified request for cooperation was issued to the taxpayer. To ensure timely compliance with the qualified request for cooperation, in the event of late compliance, non-compliance, or incomplete compliance, taxpayers may be subject to a fine for delaying cooperation. For each full day of delaying cooperation this would amount to €75 (for150 calendar days at most).
Please note: In the case of repeated delays there would be a risk of an extra charge in addition to the fine for delaying cooperation. This extra charge is limited to €25,000 for each full calendar day and would likewise be set for a maximum period of 150 calendar days.
Binding assurance pursuant to Section 204(2) AO
In conjunction with the new possibility to lay down binding arrangements in advance for individual transactions in the context of an external tax audit (via a binding partial final assessment (please see Section „Binding partial final assessment pursuant to Section 180(1a) AO“ above), from now on, there will also be the possibility, together with the tax authority, to lay down binding arrangements for such transactions also for the future and even before the external tax audit has been completed. In terms of the contents, such binding assurance would not be any different from the usual binding assurance subsequent to the completion of an external tax audit.
Please note: The timing of such selective assurance can however be brought forward and it can be issued even during an ongoing external tax audit if a legitimate interest for early assurance can be credibly demonstrated. Otherwise, you can always still go down the route of binding assurance after the external tax audit has been completed.
An overview of other provisions
In addition to the changes outlined in Section „Individual regulatory areas“ above, the Act contains other provisions that could play a part in speeding up external tax audits. We would like to highlight the following particular aspects.
- In future, once the accounting records have been submitted the auditing agency will already be able to determine the focal points of its audit (Section 197(3) to (5) AO).
- The tax authority will be able to agree with the taxpayer to meet at regular intervals to discuss its findings and the potential tax implications (Section 199(2) AO).
- In future, it will be permissible to conduct electronic negotiations and discussions (Sections 87a and 201(1) AO).
- There are moreover plans to expand data access beyond physical data carriers (so-called ‘Z3 access’) to digital storage sources (Section 146(6) AO); the tax authorities will be allowed to have mobile data access (Section 146(7) AO).
Audit simplification option when using a Tax CMS
The implementation of the legislative package outlined above also means that Tax Compliance Management Systems (‘Tax CMS’) will grow in importance. At the taxpayer’s request – after appropriate checking by the fiscal administration as part of a TA and subject to reservation of revocation – it would be possible to use specific methods to restrict the type and scope of a future TA (piloting alternative audit methods – a type of ‘risk-based audit approach’ by the fiscal administration). The piloting phase for this is intended to run until 30.4.2029 (Art 97 Section 38 of the Introductory Act of the German Fiscal Code).
Recommendation: Given that the fiscal administration has been provided with the possibility of imposing severe sanctions, we would recommend adapting documentation processes in order to be able to provide proof for transactions and their tax consequences in cases of doubt.