digital tax audit

Article

Digital Tax Audit

Data access is more important than ever

On 10.11.2022, the Bundestag approved the government draft of 19.09.2022 on the DAC 7 Implementation Act. In this, Article 3 provides for some significant changes for the future process of digital tax audits, which focus on data access in particular. We provide an overview of the tax authority’s requirements for data access and explain the latest developments in digital tax audits.

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 (so-called 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 up to the taxpayer to select the tax-relevant data under the so-called right of preliminary classification (Erstqualifikationsrecht) and to ensure it is machine-readable. In some cases, the interfaces provided by ERP software providers will determine the format. 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) by using available export options. As a result, the quality of the data exports may vary considerably between different systems and taxpayers.

Pursuant to the new Section 147b of the amendment to the German tax code (Ergänzung der Abgabenordnung, AO-new), lawmakers are proposing that the BMF determine a uniform digital interface and data set description. This would create 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 in 2018 (so-called Digital Lohnschnittstelle (DLS) , or digital wage interface) and for POS systems in 2020 (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.

However, the introduction of a minimum standard could lead to massive changes in accounting and ERP systems. It is the responsibility of all taxpayers to prepare for these changes, especially if a mandatory minimum scope of information is specified in the forthcoming regulation. Some ERP systems still have to develop a usable interface. Other purely practical issues are likely to arise in implementing these interfaces, such as what happens if taxpayers are unable to include the required information in the data set because the system fails to record certain entries at all or fails to collect data with sufficient granularity. Future regulation will specify the details of the required data set.

The new Section 147b AO-new will apply as of January 1st, 2023, without any special trial or transition period. This means that the tax authorities are likely to specify the type of interface early next year. It has not yet been clarified whether and in what form the regulation procedure will ensure that companies and IT providers have sufficient time 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 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 where 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 of particular importance 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). 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. But 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.

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