"Fast track" and "contemporaneous" Tax Audits in Germany

A German taxpayer has now successfully objected to the order for a contemporaneous tax audit "on an annual basis". The tax court in Cologne found that the procedure applied by the tax authorities constituted an unreasonable burden and violated the principle of minimum intervention (file no. 13 V 1232/09). This poses the following questions: What is a contemporaneous tax audit? And is such an audit really detrimental to the affected taxpayer?

A typical full-scale tax audit in Germany covers a period of three or more tax years and may last for several years. Although not based on specific legal provisions, a number of tax authorities in Germany have engaged in "fast track audit procedures", however. Such a fast track audit procedure is a streamlined tax audit process in which materiality thresholds will be established and both the tax auditors and the taxpayer will focus their resources and time on the most significant issues in respect of the years under examination, thus largely omitting routine and mere timing issues in order to arrive at a less difficult, less time consuming and less expensive audit process.

In some cases, fast track audit procedures have resulted in "contemporaneous tax audits". Such a contemporaneous tax audit is usually not based on an order, but on an agreement with the taxpayer. Ideally, it takes place before the tax returns for the relevant audit period are filed. The tax auditors expect that a "voluntary tax disclosure" is submitted beforehand and that their information requests are honored promptly. Open issues are then discussed directly between the taxpayer and the tax auditor. In general, a settlement on an amicable basis is reached and the tax audit is completed within a few months. The tax assessment notices are then issued without being released "subject to review".

The advantages for the taxpayer are obvious: a fixed audit plan, an agreed "minimum documentation" of transfer prices, legal security at an early stage and less interest on subsequently assessed taxes. In addition, in a FIN 48 context, a contemporaneous tax audit may constitute an important element of risk management.

There is no legal right to a contemporaneous tax audit. However, this option is available to selected taxpayers whose cooperation, as experience has shown, is indeed rewarded by the tax authorities.

For more information, please contact Ulrich Ränsch, Baker & McKenzie.