Tax CMS in tax audits: BStBK calls for clear regulations

As of January 1, 2023, Art. 38 EGAO of the DAC 7 Implementation Act introduced a provision for testing the use of Tax CMS in tax audits, thus taking into account the growing importance of Tax CMS. The findings from the trial phase, which will run until 2029, are to be used to draft a perma-nent statutory regulation.

Demand for clear rules for Tax CMS in tax audits

Against this background, the BStBK published an almost 20-page position paper in mid-December 2024, which contains concrete proposals for the consideration of tax compliance management sys-tems in tax audits.

The position paper emphasizes the need for legal certainty and efficient use of resources. It calls for concrete legal consequences, such as simplified audits when using Tax CMS in tax audits. The overarching goal is a cultural change towards a cooperative approach in tax audits.

Art. 38 EGAO currently stipulates that in cases in which

• the effectiveness of a Tax CMS was reviewed as part of a tax audit, 
• there is no or only an insignificant tax risk for the taxes and determinations specified in Art. 149 (3) AO, and 
• there is no change in circumstances,

taxpayers can, upon request, receive a binding and revocable commitment for the next tax audit to restrict the type and scope of the investigations.

In the BStBK’s opinion, this very general provision rightly needs to be specified in more detail, be it through administrative instructions or nationwide audit guidelines. In addition, the BStBK believes that a distinction should be made between companies that have undergone a follow-up audit and those that have not.

A further specification is required, in particular, for:

• providing evidence of a Tax CMS’ effectiveness,
• the definition of the term “insignificant tax risk”,
• the definition of a change in circumstances, and
• the procedure if a Tax CMS is not in place for all tax types.

Flexible Tax CMS: Tailor-made requirements instead of rigid classification

With regard to the requirements and legal consequences, the BStBK advocates a graduated sys-tem which allows to introduce parts of a tax CMS even with minor measures. The requirements placed on companies must be practicable and have the necessary flexibility in order to meet the companies’ needs. The focus must be on manageability and adaptation to the company’s size and complexity. In the BStBK’s opinion, a classification according to turnover and profit classes is not expedient, but should be based on the identified tax risks. This results in the necessary depth of regulation and control.

With regard to companies subject to follow-up audits, the BStBK makes concrete proposals on the legal framework (e.g., in the form of a model Tax CMS similar to the SKS Audit Ordinance in Aus-tria) as well as the legal consequences and their requirements. The legal consequences are clus-tered in three stages:

• Stage 1: Selective validity for the binding audit of specific facts that could make binding in-formation obsolete and should apply to realized and unrealized facts, even without Tax CMS.
• Stage 2: Timely tax audit with appropriate tax CMS for corporate income tax, trade tax, VAT, income tax.
• Stage 3: Simple plausibility check and ongoing consultation with the tax authorities in the case of an appropriate tax CMS for corporate income tax, trade tax, VAT, income tax and preliminary audit of the same by a person in accordance with Art. 3 StBerG

Further requirements are defined depending on the three stages mentioned above.
In addition, the following basic elements of a Tax CMS are defined in accordance with IDW PS 980:

• Definition of goal
• Definition of organization and processes
• Definition of tax types and tax obligations
• Risk matrix and regulations / consequences of risk definition
• Definition of deadlines
• Definition of responsibilities
• Definition of controls 
• Ongoing monitoring
• Definition of knowledge transfer
• Reporting (monitoring and improvement)
• Sanction measures

Initial audit and error management: BStBK proposals for a practical Tax CMS

In the opinion of the BStBK, the initial audit of a Tax CMS should only concern the appropriateness test (design and implementation). After, for example, 3 years, a follow-up audit should also include the effectiveness.

One important point addresses the handling of discovered errors. If past errors are discovered dur-ing the application procedure, the BStBK believes that the law should include a regulation based on a deemed existence of an error constellation in accordance with Art. 153 AO which allows for a cor-rection in accordance with Art. 153 and no voluntary self-disclosure to avoid penalty in accordance with Art. 371 AO or similar is required.

In the same way, the position paper contains proposals and statements on the legal framework, legal consequences and requirements for companies that are not subject to a follow-up audit.

Finally, the BStBK addresses the (judicial) reviewability of Tax CMS.

Creating clarity: Specific requirements and legal consequences for an effective Tax CMS

The BStBK's initiative is to be welcomed. The general wording of Art. 38 EGAO rightly needs to be specified in a timely manner in order to ensure legal certainty. This applies in particular to the re-quirements to be placed on an effective Tax CMS within the meaning of Art. 38 EGAO, but also to the specific legal consequences granted by the tax authorities for future audits. Only if the parame-ters are defined and known to all parties involved can the use of Tax CMS achieve its goal and her-ald a cultural change in tax audits, as has already been the case for years in the Netherlands or Austria, for example.

Do you have questions about Tax CMS? Please do not hesitate to contact us.