Germany: Electronic Tax Audit in Germany

On January 1, 2002 new legislation became effective that significantly enhances the rights of the German tax authorities to retrieve electronic data in tax audits. The new regulations are sometimes dubbed "EAudit". The most important changes are incorporated in sections 146 para. 5, 147 paras. 2, 5 and 6 and 200 para. 1 Abgabenordnung or Tax Procedures Act ("TPA"). The Federal Ministry of Finance issued guidelines on July 16, 2001 that represent the tax administration’s views on the new regulations. Simultaneously sec. 14 para. 4 Value Added Tax ("VAT") Act has also been amended. Under sec. 14 para. 4 VAT Act an electronic settlement that fulfils the requirement of a sophisticated electronic signature can be accepted as an invoice.

The purposes of this briefing is to highlight the changes that stem from the new principles of electronic data retrieval and the obligation to make electronic data available for audit.

Under the new rules the tax authorities have three options to access electronic data:

• Use the taxpayer’s hard- and software for direct "read-only" access at the taxpayer’s premises ("on site"). This includes data selection using available taxpayer's selection tools.
• The tax auditor can require the taxpayer to select data as instructed by the tax auditor ("indirect access").
• The Revenue Service can require the taxpayer to save all relevant data on external discs (typically CD-Roms), which can be taken away by the Revenue Service.

Sec. 200 para. 1 TPA imposes an obligation on the taxpayer to assist the tax authorities in carrying out the e-audit. It must be ensured that the tax auditor obtains access to all data relevant for tax purposes ("tax relevant data"). From the taxpayer’s point of view it is of the utmost importance to ensure that (1) the tax authorities only have access to tax relevant data to which they are entitled; and (2) the tax authorities are not prevented from having access to all tax relevant data. If tax relevant data is mixed with other data the tax authorities believe that they can surf all the available data electronically in order to retrieve the tax relevant data.

Not surprisingly the first technical discussions between tax practitioners and members of the tax administration revealed a big discrepancy with regard to what kind of information is relevant for taxation purposes and what is not. It is not hard to predict that the not very clear term "tax relevant data" will be the cause of many forthcoming disputes with the tax administration. While it is clear that accounting records, letters received and sent, and bookkeeping vouchers that have to be stored in accordance with sec. 147 para. 1 TPA are tax relevant data, other types of material are more problematic. This is in particularly true as regards e-mail correspondence, both external and internal. Whilst some members of the tax administration have expressed different views it is the author’s position that "tax relevant data" relates only to actual facts and circumstances, and not opinions (hypothetical or otherwise) Sec.102 para.1 no.3 lit.a) TPA sets out a comprehensive tax advisors' professional privilege that applies to all professions entitled to render tax consulting services in Germany eg attorneys-at-law, certified tax advisors and certified public accountants. It will be necessary for such advisers to ensure that they safeguard this professional privilege in day to day practice.

It is obvious that under the new rules it is extremely important for each taxpayer to clearly define, and educate their staff accordingly, which kinds of information should be regarded as tax relevant and which should not. Briefly, taxpayers should go through the following steps:

1. Take an inventory of all available data within the organisation.

2. Define all data that has to be stored for tax purposes in accordance with sec. 147 para. 1 TPA (because only this can be accessed by the tax administration in accordance with sec. 146 para. 6 TPA).

3. Define what is tax relevant data and ensure that it is kept separately from other data. Keep documents that are privileged under the professional privilege separately.

4. Define which systems can, and which cannot, be accessed by the tax authorities.

5. Define access profiles.

In general terms the tax authorities have the right to electronically retrieve data since January 1, 2002, including that for prior years. However, if data has been kept in non-electronic form before January 1,2002 it does not have to be reloaded in an electronic form if this would result in unreasonable expense for the company. If in the case of a fiscal year other than a calendar year electronic storage cannot be implemented for technical reasons, the taxpayer has until the beginning of the next fiscal year (beginning in 2002) to fulfil the requirements. If the system permits electronic data retrieval it is the tax administration's view that they can use it to access prior years’ data as well.

Taxpayers should ideally have acted already to protect their position. Those which have not will have to move quickly if they are to avoid the tax authorities having the right to access the whole of the information on their systems.