New Notification and Correction Obligation in Germany for Unaudited Tax Returns

In December 2022, as part of transposing the DAC7 EU Directive into German national law by virtue of the DAC7 Implementation Act, an extension to the notification and correction obligations under §153 AO was introduced, adding in a new paragraph, paragraph (4), to the provision. The new paragraph (4) aims to streamline the overall external tax audit process by requiring taxpayers to notify and correct “not-yet-audited” tax returns in accordance with tax assessment notices that are formally finalized and incontestable. This is so that tax authorities, when conducting future external tax audits, can then focus on new, important topics rather than revisiting the same old topics, thereby speeding up the process.

The previous regulation

Before introducing the fourth paragraph, §153 AO required taxpayers to notify the tax authorities without delay if they became aware that submitted tax returns (which were not yet subject to external tax audit) might contain errors, and to make the necessary correction . The triggering event of the notification and correction duty was the taxpayer’s active knowledge and recognition of the error. In other words, should the taxpayer be of the opinion that the submitted tax returns were accurate and in accordance with existing case law or tax practice, §153 AO did not apply.

The new provision - §153(4) AO

Under the newly added paragraph (4) of §153 AO, the duty to notify the tax authority and correct unaudited tax returns shall apply to a taxpayer if the findings of an external audit have been implemented in a tax assessment notice (including partial final notice pursuant to §180 (1a) AO) without contest and under the condition that: (1) the examined facts on which the audit findings are based are also presented in such unaudited tax returns; and (2) implementing the audit findings leads to a change in the tax bases of such unaudited tax returns. In theory, this shall cover both upward and downward tax base changes. The new §153 (4) AO will apply to taxes that either: (1) arise after 31 December 2024; or (2) arise before 1 January 2025, but for which an external audit has only been announced after 31 December 2024.

Owing to the scope of §153 (4) AO, the provision is of particular importance when it comes to recurring circumstances or an approach that has, to a certain extent, a permanent nature which continues to have affect future tax periods (for example, depreciation rates and intercompany transfer pricing policy).

It is important to note that any violation of the obligations under §153 AO can lead to a charge of so-called “tax evasion by omission” (§370 AO), which constitutes a criminal offense.

Uncertainty and controversy in practice

From a legal interpretation point of view, it is not entirely clear whether the new §153 (4) AO was added with the intension to supplement the existing §153 (1) AO or to create a lex specialis rule that address the specific situation involving external tax audits. As the triggering event of §153 (1) AO lies with the active recognition of incorrectness by the taxpayer, should §153 (4) be intended as a supplement of §153 (1) AO, it could be the case that the obligation to notify and correct an opened tax return may already arise before the finalization of an incontestable tax assessment notice; for example, at the point when the taxpayer actively decided not to further appeal the initial tax assessment.

From the reading of the provision itself, it is also unclear how wide the scope of §153 (4) AO is, for example, whether the obligation to notify and correct applies strictly to those items having a fixed application over an extended period (e.g., depreciation rate) or also covers the implication of comparable situation (e.g., treatment of similar contractual arrangements concluded with various counterparts). In specialised literature, opinion is also divided: some believe the interpretation should be applied as broadly as possible to avoid risk; some are of the view that it is unlikely for such a broad interpretation to be pursued by the tax authority.

How companies should prepare

It is therefore advisable for taxpayers to make reasonable efforts to examine the results of external tax audits and their effects on subsequent assessment periods in light of the new provision stipulated under §153 (4) AO, and fulfil the notification and correction obligation promptly. Particular attention should be given to items of a permanent nature, including audit findings on transfer pricing matters.

It is also beneficial for the taxpayers to closely monitor the development of relevant tax authority opinion and case law so as to gain clarity on how the provision should be applied. Additionally, given the practical uncertainty, taxpayers may also consider proactively addressing this topic directly with the tax authority during the final tax audit meeting and agreeing on the extent to which the audit findings need to be implemented in opened tax returns.