Planned modernisation of external tax audits
Qualified request for cooperation
A qualified request for cooperation would allow the fiscal administration to randomly require a taxpayer to hand over documents and records within a period of one month without it having to provide an explanation or to state an objective reason for the request. If the taxpayer fails to comply with the request within the deadline then there would be a risk of heavy fines for the delay.
It is intended that specific framework conditions would be agreed between the fiscal authority and the taxpayer. In the best case, a cooperative audit procedure would emerge. However, the question of what is meant here by specific framework conditions still remains. These types of framework conditions could be realised, for example, via an integrated tax compliance management system (CMS).
Cooperative audit procedure
Details about how the audit should be carried out were already mentioned in the draft that was updated by the BMF on 6.7.2022. Thus, by implementing the EU Directive on Administrative Cooperation (referred to as DAC7), an obligation will be introduced for digital platform operators to report information to the fiscal authorities on the income derived by sellers on these platforms. According to the BMF, the term ‘platform operator’ covers any system based on digital technologies that enable users to enter into contact with each other and to conclude legal transactions via the internet by means of software. Moreover, platform operators will also be affected by specific due diligence obligations such as checking the tax residency of the sellers and the plausibility of certain pieces of reportable information.
If, in the course of an ongoing tax audit, the effectiveness of the ICS has been confirmed and thus there is no, or merely a minor, tax risk then, in the future, the local fiscal authorities may bindingly confirm - with the knowledge of the German Federal Central Tax Office - that there will be simplifications for subsequent external tax audits.
Associated sanctions
An amendment to the German Fiscal Code will mean that there will be particular legal consequences in the event of non-compliance with an enforceable administrative order. A failure to meet the obligations to cooperate would result in, above all, an extension to the suspension of the deadlines prescribed by the statutory limitation period, according to which the authority would, in the future, be able to intervene within five years after issuing a tax audit notice. This would provide the competent authority considerable flexibility, but unfortunately at the taxpayer’s expense. The latter would thus frequently get legal certainty at a very late stage. In addition, the taxpayer could be at risk of having to pay tax arrears related to a tax issue from way back in the past.
Partial final assessments
Then again, upon application by the taxpayer, the authority would issue partial final assessment notices for tax bases that have been determined during the audit period and that are separately identifiable. This could provide great relief for the taxpayer during the taxation procedure. An application would also seem like a sensible course of action if particular intervals had already been worked through.
A glimmer of light
In the future, tax audit notices for income tax and VAT returns would be issued by the end of the year following the one in which the tax assessment notice became effective. This corresponds to the desire of taxpayers for tax audits to take place in a timely manner. However, this provision would not protect against the possibility of tax audit notices also being issued at a later point in time.
Conclusion
By modernising the provisions on the procedural rules under tax law the aim is to speed up external tax audits in order, in particular, to reduce the burdens on taxpayers that result from long audits and, thus, to curtail the associated bureaucracy costs. Taxpayers’ obligations to cooperate would indeed be broadened, however, the tax auditors would specify the focal points of their audits and also hold interim talks.
Please note: Under DAC 7, specific due diligence and reporting obligations for operators of digital platforms will come into force already on 1.1.2023. However, as the purpose of the regulation is to pilot alternative audit methods, initially, it will automatically expire at the end of 2027, unless German law makers extend it.