The transposition of the European DAC7 Directive now makes it crucial for companies to ensure the effectiveness of their tax control systems if they are to be able to claim audit simplifications in future.
By transposing the European DAC7 directive, the German legislature has anchored in law regulation dealing with tax compliance management systems and tax control systems (tax CMS) for the first time, beginning from 1 January 2023. Until now, the rules that existed for tax CMS under criminal tax law only had an effect on guidance and regulated intent or tax understatement through gross negligence from the tax authorities’ point of view. The new legislation gives tax CMS explicit and significantly greater importance.
Tax authorities may now promise specific simplifications for future tax audits if the current audit has confirmed the effectiveness of the existing tax CMS as part of compliance with the tax regulations. The promise of simplifications by the tax authorities relates to the type and extent of the audit procedures if no or inconsiderable risk exists in relation to the taxes recorded by the tax CMS.
The law defines the effectiveness of a tax CMS in this context as follows:
‘A tax control system includes all the internal company measures that guarantee that (i) the bases of taxation are recorded and taken account of appropriately and (ii) the taxes incurred hereby are paid on time and in full’ (Article 97 section 38 of the Introductory Act to the Fiscal Code [Einführungsgesetz zur Abgabenordnung – EGAO]). The tax control system must also ‘correspond to the tax risks in an on-going manner’ and alterations to the tax CMS must be documented and reported without delay.
Businesses with a tax CMS that includes the following items under the specifications of IDW Auditing Standard PS 980 (as amended) are well equipped for these requirements:
Source: Grant Thornton Germany
To increase the certainty that the tax CMS will meet tax authorities’ requirements, a readiness check or, in the best case, an appropriateness test or even an effectiveness audit according to the above Standard is recommended.
Our experts will be happy to assist you with implementing, optimising and checking your tax CMS.