DAC 7: Modernization of tax procedural law – expansion of data analysis options for external auditors

Today, the German Federal Council approved the “Act implementing Council Directive (EU) 2021/514 of March 22, 2021, amending Directive 2011/16/EU on administrative cooperation in the field of taxation and modernizing tax procedural law” (“DAC 7”). Following publication in the Federal Law Gazette, the law can enter into force as planned.

One component of the “Modernization of tax procedural law” is the introduction of a new Art. 147b AO (German General Tax Code) with effect from January 1, 2023. 

Art. 147b AO authorizes the German Federal Ministry of Finance to determine, by statutory order with the German Federal Council’s approval, uniform digital interfaces and data record descriptions for a standardized export of data. This authorization extends to all data subject to a mandatory retention period pursuant to Art. 147 (1) AO which has been created using a data processing system. In addition, this ordinance may also stipulate an obligation for taxpayers to implement and use the respective uniform digital interface or data record descriptions for the standardized export of data.

This will be accompanied by a mandatory standardization of the data record structures and the data record description in the used IT systems. Accordingly, the planned interfaces’ implementation is going to cause considerable effort for the taxpayers. 

German GAAP already requires: “The origin and processing of individual business transactions must be completely traceable (progressive and retrograde auditability). The progressive audit begins with the document, continues with the basic (book) records and journals to the accounts, to the balance sheet with the income statement and finally to the tax return or tax declaration. The retrograde audit proceeds in reverse. The progressive and retrograde audit must be possible for the retention period’s entire term and in every step of the process. The verifiability of the books and other necessary records requires meaningful and complete procedural documentation ..." (German GAAP, subsection 32-34). 

Data flow diagrams and/or entity relationship diagrams as components of comprehensive procedural documentation within the meaning of the German GAAP are therefore virtually indispensable. Without corresponding, meaningful procedural documentation, the traceability and thus the auditability of (mass) business transactions are very difficult and only possible to a limited extent.

So far, auditors have not been able – or only with unreasonable efforts – to conduct such progressive and retrograde audit as part of an audit of mass processes due to the volume of data, a non-standardized structure of data records and the data record description; therefore, these audits were and still are only conducted in very exceptional cases. This is going to change once standardized digital interfaces and data record descriptions for a standardized export of data become mandatory. 

The purpose of the corresponding provision under Art. 147b AO is a significant further development of the digitalization of external audits, which will be accompanied by greatly improved evaluation and analysis options for the tax authorities.

(Future) auditors are already being increasingly trained in comprehensively using digital audit tools and methods in future. In the near future, “Special IT Auditors” at the tax authorities are going to be responsible for data preparation during tax audits; the auditors’ specialization is increasingly gaining momentum. In the future, auditors will even be able to (and are going to) analyze mass data, down to each individual receipt and position, with reasonable effort.
On an international level, such trend has been apparent for a while. For example, the OECD Standard Audit File (SAF-T) defines a high degree of detail for the data to be provided. According to such standard, an individual incoming invoice requires, in addition to “standard data” such as invoice number, invoice amount, invoice date, tax rate and booking date, inter alia the provision of the following detailed information: batch entry number, system entry number, position number, order reference, delivery address, shipping address, article number, article description, date of delivery or other services, quantity, packaging unit, reasons for tax exemption, etc. 

It remains to be seen which route the German Federal Ministry of Finance is going to take in Germany with the Federal Council’s approval.