Digital Tax Audit

Is Germany on the way to a federal tax audit file?

The key issue before starting a digital tax audit is the request for data access from the tax authorities with three different types of data access (referred to as Z1, Z2 or Z3 access) to choose from. In the absence of a law or regulation, no minimum scope is currently defined, in particular for the machine-readable data set for data transfer. Therefore, it is the taxpayer's responsibility to select the tax-relevant data under the so-called right of preliminary classification (Erstqualifikationsrecht) and to ensure that it is machine-readable. In some cases, the format is determined by the interfaces provided by ERP software providers. If the system does not offer a default interface, the user must classify all tax-relevant data (from the point of view of the taxpayer) using available export options. As a result, the quality of the data exports may vary considerably between different systems and taxpayers.

The legislator has created the possibility for the BMF to define a standardized digital interface and data record description in accordance with Section 147b of the amendment to the German Fiscal Code (AO-new). This creates a standardized data format for financial accounting exports, analogous to the regulations governing exports of payroll accounting and cash register systems. Such standardization is already in common practice worldwide, mainly based on the OECD’s Standard Audit File – Tax Version 2.0 (SAF-T 2.0). For example, tax audits in Portugal and Poland use this standard, albeit with modifications.

Uniform data interfaces were introduced for payroll accounting (referred to as Digital Lohnschnittstelle (DLS), or digital wage interface) and for POS systems (DSFinV-K). This offers several advantages in the context of tax audits. Among other things, a legal certainty that the data records contain a minimum standard of essential information and are machine-readable for tax audit purposes.

The discussion draft of the uniform digital interface for accounting data defines data standards for the following areas: Transactions (journal data of individual business transactions), master data (e.g. for debtors and creditors), reconciliation to the e-balance sheet, digital documents, fixed assets and system data.

The data standard also defines technical requirements for the readability of data exports. Overall, the standardization will improve the comparability of data exports on the part of taxpayers and the tax authorities, but massive changes to the system are also to be expected, depending on the accounting system.

Some ERP systems still need to develop a usable interface. Systems that cannot provide a corresponding export must either be comprehensively adapted or replaced; this applies in particular to old versions for which the system manufacturer no longer provides support. Any existing localization requirements must also be checked and implemented if this is the only way to meet the interface requirements.

The new Section 147b AO-applies since January 1st, 2023, without any special trial or transition period. The discussion draft of the uniform digital interface for accounting data currently stipulates that companies and IT providers have a period of 3 years from publication to implement the interface.

Sanctions for non-compliant data access in a digital tax audit

In addition to the new regulations on data sets, lawmakers have established much more severe sanctions for the failure to provide sufficient data sets in a digital tax audit. Section 158(2) of the amendment to Germany’s tax code (AO-new) stipulates that the probative value of audit evidence no longer applies when auditors object to the factual accuracy in individual cases. In addition, if the taxpayer fails to provide data sets that comply with the regulations governing uniform digital interfaces (e.g., Section 147b AO-new).

This provision also applies if the auditors issue an unqualified opinion on the taxpayer's annual financial statements. Even though most audits of annual financial statements today also rely on digital access to accounting systems and downloads. In such cases, if the accounting records are no longer evidentiary, future tax auditors have full assessment authority and legal authorization to declare the accounting records invalid for tax purposes. Once again, this underscores the importance of having the correct export options for all tax-relevant systems.

Administrative offences

Section 379 of the AO-new also introduces further administrative offences. For example, the failure to set up or provide data access (Z1, Z2 or Z3 access) or to retain tax-relevant documents in their entirety constitutes an administrative offence punishable by a fine of up to EUR 25,000. This is particularly important for archived ERP systems.

Auditors have a direct right to access this data for up to five years after archiving pursuant to Section 147 (6) of the German Tax Code (AO). Many companies will find this challenging. After all, archiving systems involve reimplementing a (different) ERP system. Providing direct access to a legacy system comes with considerable technical hurdles, and maintaining even a minimal set of licenses for legacy systems may pose a substantial financial burden.

Conclusion and recommended actions for digital tax audits

In conclusion, we recommend taxpayers to check which export interfaces are available in all of their tax-relevant systems and determine what options they have (e.g., third-party solutions or drafting reports with relevant content). This includes, in particular, contacting the system manufacturer to determine whether and to what extent the requirements of the uniform digital interface for accounting data can be implemented and which requirements must be set by the system user (e.g. certain version upgrades or localizations).

The new regulations outlined above are particularly onerous for German
taxpayers with foreign parent companies.

The parent company selects and controls the group’s IT infrastructure. However, the so-called GoBD interfaces designed to comply with German rules for electronic accounting are often only available in the German localization of the system. When it comes to archiving and introducing new systems, we advise taxpayers to pay special attention to maintaining access to data from legacy systems for the duration of the statutory retention periods.