The switch from paper to digital is full of tax pitfalls
It is essential to consider the "Principles for the proper keeping and storage of books, records and documents in electronic form and for data access" (GoBD) at an early stage
Standardised processes and comprehensive procedural documentation are important for a successful audit
With the outbreak of the coronavirus pandemic, companies introduced digital working throughout their organisation virtually overnight. For many, the focus was on quickly adapting the IT infrastructure so that employees could work from home without restrictions at short notice and operations did not have to be curtailed. Many people lost sight of the fact that digital work, especially in accounting, usually requires processes to be adapted and documentation obligations and other tax requirements to be observed. These requirements are clearly defined by the "Principles for the proper keeping and storage of books, records and documents in electronic form and for data access" (GoBD) published by the Federal Ministry of Finance. Auditors specially trained for digital tax audits will probably focus increasingly on these topics once the coronavirus pandemic has ended, if not sooner.
Requirements of the GoBD
The GoBD contain rules for all books and other required records to be kept in electronic or paper form. The requirements range from the principle of traceability and verifiability to completeness, accuracy and timely recording to inalterability and structured order. What sounds obvious has considerable implications in practice. To digitise paper documents, for example, there are concrete requirements for the scanning process, which must be documented step by step. Subsequently, only the scanned versions may be processed. Documents with foreign input tax amounts must be kept in their original format. The challenge therefore lies in the many details to be considered.
The tax authorities also place high demands on security: data must not be altered (integrity), only authorised persons may have access (confidentiality, authorisation) and the archived documents must be able to be clearly assigned to the associated business transactions (authenticity). At the same time, companies must ensure that they can make the data available within a reasonable time (availability).
But that's not all: for tax purposes, the legislator also requires procedural documentation in which all tax-relevant processes and systems are described completely and comprehensibly. This documentation must show the content, structure, process and results of the data processing procedure completely and conclusively.
It covers five subject areas:
- General description of the enterprise and its legal environment, organisational structure and business processes within operational organisation.
- User documentation: this describes the tasks covered by IT and provides information on all IT applications. It also contains measures for compliance with regulatory and tax requirements, for example the description of the digital workflow for incoming invoices including the processing of input tax amounts or the workflow for outgoing invoices including the automated determination of VAT keys.
- Documentation of technical system requirements
- Operational documentation covering the technical operating process, data security and integrity, and versioning
- Information on the internal control system to ensure compliance with regulatory requirements
Legal certainty through preparation
The switch from paper to digital is, therefore, complex and fraught with tax pitfalls. In addition to ensuring smooth operations, a company must ensure it has a solid, legally compliant foundation. Standardised, well-documented processes are essential for this. Our experience shows that omissions will come back to haunt companies during the next audit at the very latest: auditors are increasingly asking for the procedural documentation, which should therefore be carefully prepared. In this documentation, information about company-specific processes, tax law and digitalisation know-how must converge. And some things are often forgotten in the heat of the moment: first, processes cannot be digitised without first being standardised - even across company divisions; second, the increasing legal requirements described must be taken into account. If the procedural documentation has not been prepared when the audit is announced, it will in most cases be impossible to create it in the required form by the time the audit begins. Considerable sanctions may be imposed. In addition, doubts may arise as to the evidential value of the accounts. Once these have been established, the tax authorities have the power to make estimates, which in this situation will almost certainly be to the detriment of the company. An additional tax burden will be the likely result.
Deal with the legal requirements for a paperless office early and intensively - because there is much more to digital working than just a functioning IT infrastructure.