The procedural documentation

If entrepreneurs do not want to run the risk of additional estimates during tax audits, they must be able to present procedural documentation – often immediately after the audit order.

I. What is procedural documentation and who must keep it?

Procedural documentation is intended to present the structure as well as the organisational processes in a company that are related to accounting in a stringent and comprehensible manner. In addition to general structures such as document storage and financial accounting, this also includes all documents relevant to the individual business processes. This can also include (electronic) correspondence as well as payroll and time recording processes. The procedural documentation extends the general requirements for accounting, which result from the original accounting obligation, from the German Commercial Code as well as the extended accounting obligation of the German Fiscal Code, the principles for the proper keeping and storage of books, records and documents in electronic form as well as for data access (GoBD), by a further issue. In this respect, there is an obligation for companies to prepare and maintain procedural documentation that generate profit income according to §§ 5, 4 para. 1 EStG. In this respect, there are no exceptions, so that even small businesses must maintain procedural documentation.

II Structure and content of procedural documentation

The procedural documentation must be comprehensible and complete for an expert third party, in particular for the auditors of the tax authorities. The documentation of all relevant processes should be done in such a clear way that the expert third party can get an overview within a short time. But how exactly should procedural documentation be structured in order to do justice to this? The concrete design depends, of course, on the respective company and its business processes. However, the Federal Ministry of Finance assumes a general structure described as follows:

1. general description

Within the framework of the general description, the organisation of the company shall be presented. In particular, staff responsibilities and the operational environment should be explained in more detail. Furthermore, the processes relevant under tax law are to be described. The business processes carried out should be clearly presented from start to finish, i.e. from order processing to accounting and the associated payment transactions to the archiving of documents.

2. user documentation

The user documentation describes the software used. For the sake of completeness, the operating instructions for the respective software should also be included.

3. technical system documentation

The entire IT use in the company should also be presented. In addition to hardware and application service providers, this also includes data backup and data protection.

4. operating documentation

Finally, proper procedural documentation also includes a description of the internal control system. This is to guarantee compliance with the procedural instructions and lead to complete operational documentation. Furthermore, the procedural documentation must always correspond to the current procedure used in practice. Changes must be historically traceable; in particular, it must be recognisable which programme version has been used for which period.

III. Consequences of incomplete procedural documentation

If only incomplete procedural documentation or, in the worst case, no procedural documentation at all is submitted to the tax authorities, there is a formal deficiency with material weight and there is a possibility that the auditor will reject the entire accounting. As a consequence, additional assessments of up to 10 percent of the annual turnover on the taxable profit can be threatened. Such costs are unnecessary and avoidable. In order to safeguard themselves in advance, companies should seek professional help if they have doubts about completeness. Our tax advisors will be happy to advise you in detail on the subject and provide you with customised solutions for your company.

If you are interested, please contact us by e-mail, via the form on our website or by telephone.

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    Wenn Sie die im Kontaktformular eingegebenen Daten an uns übersenden, erklären Sie sich damit einverstanden, dass wir Ihre Angaben für die Beantwortung Ihrer Anfrage bzw. Kontaktaufnahme verwenden. Wir benötigen Ihre Emailadresse, um Ihre Anfrage beantworten zu können. Weitere Angaben sind keine Pflichtangaben. Die abgesendeten Daten werden verschlüsselt übertragen und nur zum Zweck der Bearbeitung Ihres Anliegens verarbeitet. Weitere Informationen auch zu Widerrufhinweisen finden Sie in unserer Datenschutzerklärung


    BAFA - Support for entrepreneurial know-how

    A funding programme of the Federal Office of Economics and Export Control (BAFA) subsidises consultations of small and medium-sized enterprises in economic, but also financial, personnel and organisational subject areas. The programme called “Promotion of Entrepreneurial Know-How” is aimed in particular at companies in economic difficulties and provides them with a consulting grant for all questions concerning the restoration of performance and competitiveness.

    The funding programme is initially aimed at companies based in the Federal Republic of Germany. Included are start-ups that are not older than two years, existing enterprises from the third year after foundation and enterprises that are in economic trouble – regardless of their enterprise age. The last mentioned must in addition to having their registered office in Germany fulfil the conditions of the guidelines on state aid for rescuing and restructuring non-financial undertakings in difficulty (2014/249/01), point 20(a) or point 20(b).

    However, entrepreneurs or freelancers who carry out advisory or training economic activities and those for whom insolvency proceedings have been opened or who fulfil the requirements for this are not eligible to apply. Furthermore, such enterprises are excluded that are in a participation relationship with religious communities, legal persons under public law or their own enterprises and also non-profit enterprises. In addition, agricultural enterprises and those active in fishing and aquaculture are not eligible to apply.

    The funding programme “Promotion of Entrepreneurial Know-How” covers various advisory areas, which are divided into general advisory services on all economic, financial, personnel and organisational issues of business management and many special advisory services.

    This also includes advice on the subject of digitalisation and procedural documentation.

    The special consultations include, among others, those enterprises that are run by women, migrants or migrant women, or by entrepreneurs with a recognised disability or enterprises that provide special support to people with disabilities or migrants. In addition, for example, special consultations are also possible for companies that contribute to gender equality and better compatibility of family and work or especially to sustainability and environmental protection.

    Enterprises in difficulty receive subsidies for counselling for business security counselling to restore economic performance and competitiveness and can also take advantage of further general follow-up counselling.

    While young enterprises and enterprises in difficulty can claim the subsidies over the entire subsidy period of 6 months, the subsidy for existing enterprises is limited to a maximum of five consulting days.

    The amount of funding depends on the type of company and the respective region. Start-ups receive a subsidy rate of 50%-80% depending on the region, with an assessment basis of 4,000 euros. The same applies to existing companies, whereby the assessment basis here is 3,000 euros. Unternehmen in Schwierigkeiten erhalten unabhängig vom Standort einen Fördersatz von 90% bei einer Bemessungsgrundlage von 3.000 Euro.

    Advisory services under the funding programme are provided by self-employed advisors or by advisory firms that generate their predominant turnover through advisory services. In addition to the approval in the funding procedure, they have to provide a certain proof of quality in order to ensure that the counselling is carried out in accordance with the guidelines.

    Before submitting an application, start-ups and companies in difficulty must have had an informational interview with a regional person of contact, which is free of charge for them. This requirement does not exist for existing companies. The application must be submitted via BAFA’s online application platform no later than three months after this interview. After receiving an information letter, certain documents must be submitted until finally the registration and, after approval, the payment of the grant can take place.
    Please do not hesitate to contact us if you have any questions. We will keep you informed on this topic!


    ESOP - Reform / Fund Status Act

    Improving of staff shareholding?


    ESOP Reform / Fund Status Act: Improving Staff Ownership?

    Compared to the international competition, Germany is far behind in terms of Staff Ownership opportunities. This is mainly due to the restrictive tax treatment. Those who nevertheless decide to involve their employees must resort to complex constructs such as “virtual employee options” (VSOPs), phantom shares or stock appreciation rights. After years of experts and start-ups drawing attention to this problem, the federal government has now decided to simplify the employee status with the draft of the so-called “Fund Location Act”.

    Wie funktionieren Mitarbeiterbeteiligungen überhaupt?

    Staff Ownership is essentially profit-sharing and serves as an incentive to recruit skilled workers. In the event of an IPO or exit of the start-up, the employees are then paid their shareholdings in the company.

    What are the current complaints?

    The main problem is the so-called dry-income problem. This concerns the taxation point at the time of allocation of concessionary shares or options. In principle, tax is already due at the time of allocation, i.e. before the (virtual) business share could bring in any money at all. This is problematic because before an exit, often neither the company nor the employee has sufficient funds to offset the short-term tax burden.

    What should change now?

    In particular, with regard to the dry income problem, the tax on the allocation of (virtual) shares should be able to be postponed into the future for the first time. According to the draft bill, the prerequisite for this is that the shares are genuine business shares, i.e. they are not merely options, and that the company is an SME, i.e. it employs fewer than 250 people, for example, and is not older than ten years.

    Criticism of the draft

    Although the planned reform leads to an improvement in some areas, it does not solve all the problems of Staff Ownership in Germany. On the one hand, the requirement that it must be an SME already excludes many “grow-ups” – an area in which Germany is already behind the international competition. On the other hand, the allocation of real shares is not unproblematic, so that many start-ups are likely to fail because of this requirement. In addition, the planned draft bill provides that the tax burden can be deferred for a maximum of 10 years from the time the shares are awarded. Statistically, however, many start-ups take longer than 10 years to exit; consequently, they also benefit only to a limited extent from the new regulation. In the worst case, this time limit of 10 years can even lead to successful start-ups being pushed into the exit phase too early.

    Finally, the draft bill ties the possibility of deferring the tax burden into the future to remaining in the company. However, this practically leads to employees being forced to stay in a company because of taxes that would otherwise be incurred. This is precisely not the case with the VSOP solutions currently used under the law of obligations. Despite the planned draft bill, a departure from this seems unlikely in practice for this very reason.

    Finance Minister Scholz plans to bring the new rules into force on 1 July 2021. Representatives of start-ups, however, are first demanding an amendment to the draft. Wir verfolgen die Entwicklungen und halten Sie auf dem Laufenden!


    BFH decision on the purchase price allocation for real property

    Since April 2014, the Federal Ministry of Finance has provided the tax administration with a working aid for apportioning the total purchase price for a developed property (purchase price apportionment). In its ruling of 21 July 2020 (Ref.: IX R 26/19), the Federal Fiscal Court has now decided that this assistance may no longer be used in disputes between the taxpayer and the tax office.

    Why is the purchase price allocation relevant at all?

    Anyone who acquires a property for the purpose of earning an income usually has an interest in dividing the purchase price in such a way that the building accounts for as high a proportion of the purchase price as possible and the land for as low a proportion as possible. This is because depreciation for wear and tear can be claimed on the building portion. In principle, the tax office is obliged to accept the values from the notarial purchase contract as long as there are no significant doubts (BFH, judgement of 10.10.2000, ref.: IX R 86/97). If any doubts arose, the tax office, in its constant practice, referred back to the BMF’s working aid.

    What are the facts underlying the current ruling?

    In the specific case, the taxpayer plaintiff had purchased a rented condominium in a major city. While the plaintiff assumed a depreciable building share of 82%, the tax authorities arrived at a building share of only 31% via the working aid. The BFH has now countered this disproportion. The BMF’s working aid was not entirely suitable for determining the real market values of land and buildings. This is justified, on the one hand, by the fact that the working aid only uses the simplified asset value method. On the other hand, the location factor, which can lead to massive market value deviations, especially in large cities, is not taken into account.

    What is the consequence of the ruling?

    First of all, the ruling leads to the inapplicability of the FOM’s working aid in disputed cases. Instead, the tax authorities now have to obtain an expert opinion from an independent sworn expert in cases of doubt.

    In any case, it makes sense to base the property purchase contract on comprehensible and plausible values. Finally, the above-quoted ruling from 2000 still applies; the tax office is still required to adopt the purchase price allocation from the notarial purchase contract, provided there are no significant doubts. According to settled case law, this only arises if, for example, there are indications of a fictitious transaction or an abuse of the tax structure.

    Therefore, the tax advisor should be consulted on questions of the drafting of real estate purchase contracts in the run-up to the purchase.


    Problems of e-commerce from a tax perspective

    Hardly any other industry can record such rapid growth in such a short time as e-commerce. This is hardly surprising, given that around 14 million parcels are delivered daily in Germany alone, and the trend has been rising sharply since the beginning of the Corona crisis. Doch genau dieses große Wachstum kann schnell unkontrolliert sein und ruft daher nicht selten das Finanzamt auf den Plan.

    Why is it that e-commerce in particular is often targeted by the tax authorities?

    E-commerce has never been easier. Today, any entrepreneur can simply share warehouses via corporations like Amazon and not have to worry about rent and the rest. But this is exactly where the danger hides: Those who think they can run their online business “easily and quickly” often forget to take care of proper bookkeeping and this often leads to dramatic consequences.

    What exactly needs to be taken into account?

    The list of requirements for operating an e-commerce business is extensive. Questions often arise about correct tax registration, VAT registration in EU countries, questions about FBA warehouses and the similar. Invoicing in particular raises special questions in e-commerce: How is the time of performance subject to VAT determined? Which sales are made where? Are deliveries abroad intra-community deliveries or export deliveries?

    Answering these questions is often not easy and poses immense challenges, especially for commercial and/or tax laypersons. It is therefore often advisable to consult a tax advisor who has experience with online traders in order to avoid problems in advance.

    Special features for deliveries abroad

    Progressive global networking offers all entrepreneurs the opportunity to sell their products abroad as well. However, such supplies may be subject to foreign (tax) law and even in the case of supplies within the EU, harmonisation of tax law, in particular VAT, is not a certainty. Often, the entrepreneur must register for VAT purposes in other EU countries and, if necessary, register for VAT. Provide proof of movement.

    The so-called delivery thresholds are relevant in this context. From a certain level of turnover onwards, there may be a a VAT liability in the EU foreign country and the entrepreneur’s invoice may therefore no longer show German VAT.

    The Amazon Pan-EU process, for example, can have a major impact in this context. With a simple check mark in the settings, the online merchant already agrees to the use of Amazon warehouses in the EU. His goods are therefore not only sent to German warehouses, but can also end up in Poland, Italy or another warehouse. This procedure is of course unobjectionable in itself, but the intra-Community transfer is equated with an intra-Community supply (§ 6a para. 2 UStG). It may therefore be necessary to apply for a VAT identification number in the respective country. It becomes problematic if it is not comprehensible for the trader to which countries his goods are shipped. This is not infrequently the case, as Amazon, for example, does not explicitly communicate the warehouses to which it transports the goods. Instead, the trader must equip himself with appropriate software that detects the shipment and informs the trader about it.

    What tools are needed in e-commerce?

    It is not only in the above-mentioned pan-process that applications and programmes help to make e-commerce more efficient and lucrative. What a neatly maintained checkout is for the retailer, a digital set-up is for the online retailer. Special software is required especially for the debit-side recording of sales, which are quickly available in large numbers in e-commerce.

    Challenging for proper accounting to comply with the GoBD are the frequently used payment methods such as Amazon Pay, Paypal or similar, which regularly do not show an invoice number on the receipts. Manual decoding is almost impossible due to products that are often the same price and, above all, takes too much time and thus puts too much strain on the budget.

    Inaccurate or erroneous bookings can have serious consequences, as according to §146 para. 1 S. 1 AO, §239 Para. 2 HGB every business transaction must be fully traceable. If this is not the case, the door is opened for the tax authorities to make additional assessments and this should be avoided at all costs.

    We have the know-how to transfer data via interfaces from the shop systems to the DATEV accounting system. Through this significantly more efficient solution, the accounting can be completed more quickly, which saves costs for the entrepreneur.

    Overall, an online retailer can hardly do without the use of external merchandise management systems/shop systems such as JTL, Shopify, plentymarkets, Magento, Shopware, WooCommerce or similar software solutions. When choosing the right operating system and the subsequent handling, however, every trader should take expert advice in order to keep the error rate as low as possible.

    Conclusion

    Online traders in particular run the risk of becoming the target of a (turnover) tax audit by the tax authorities at home but also abroad. If discrepancies are found, the online trader can be threatened with high additional payments, up to and including criminal proceedings, which in the worst case can even lead to insolvency. It is therefore essential to have an expert tax advisor at your side who is familiar with the special issues in e-commerce.

    Our tax advisors will be happy to advise you in detail on the subject and provide you with tailor-made solutions for your company. If you are interested, please contact us by e-mail, via the form on our website or by telephone.

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      Wenn Sie die im Kontaktformular eingegebenen Daten an uns übersenden, erklären Sie sich damit einverstanden, dass wir Ihre Angaben für die Beantwortung Ihrer Anfrage bzw. Kontaktaufnahme verwenden. Wir benötigen Ihre Emailadresse, um Ihre Anfrage beantworten zu können. Weitere Angaben sind keine Pflichtangaben. Die abgesendeten Daten werden verschlüsselt übertragen und nur zum Zweck der Bearbeitung Ihres Anliegens verarbeitet. Weitere Informationen auch zu Widerrufhinweisen finden Sie in unserer Datenschutzerklärung