The Lower Tax Court of Baden-Württemberg recently expressed its opinion that, under the German audit rules, “large companies” are required to set up a provision for costs related to a future tax audit even if the tax authorities have not yet initiated an audit (case reference 3 K 2555/09). The court rejected the tax authorities’ view expressed in the official income tax guidelines according to which an accrual could only be recorded after a tax audit had been officially announced for a given year, but also stated that a mere tax assessment notice that is still subject to review by the tax authorities (i.e. no final tax assessment) does not provide sufficient evidence of a future tax audit.
The case involved a GmbH that qualified as large company and that had set up a provision for costs related to a future tax audit in its balance sheet for FY 2006. The tax audit for the years 2001 to 2003 had closed and the tax audit for 2006 and subsequent years was not announced until 2008.
The taxpayer argued that based on its qualification as a large company, it is expected to be subject to a tax audit for each year and therefore an announcement of the tax audit itself and the issuance of an official notification is not necessary for setting up a provision for tax audit costs. Based on statistics published by the German Ministry of Finance, the probability that a large company will be subject to a tax audit was 80.4% for 2007, 81.7% for 2008 and 78.5% for 2009. In view of this background, the court supported the view that the taxpayer should – with satisfactory probability – have assumed that its business would be subject to a future tax audit. The court also based its decision on the “subjective tax accounts doctrine,” under which in the absence of jurisprudence by the Federal Tax Court (BFH), any tax accounting measure is subjectively correct if it follows generally accepted tax accounting principles.
The tax authorities have appealed the Lower Tax Court’s decision to the BFH (case reference: I R 99/10).
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