- Bundesfinanzhof: Time-Series Comparison Only Permissible as Method of Estimation under Certain Conditions
- September 15, 2015 | Author: Michael Rainer
- Law Firm: GRP Rainer LLP - Munich Office
The tax authorities are increasingly applying time-series comparisons as a method of estimation in the context of external audits, but according to the Bundesfinanzhof (German Federal Fiscal Court), this is only permissible under certain conditions.
GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London - www.grprainer.com/en conclude: In its judgment of March 25, 2015, the Bundesfinanzhof (BFH) ruled that a time-series comparison is only permissible subject to certain restrictions (Az.: X R 20/13). A time-series comparison is a method of estimation that is increasingly being used by the tax authorities within the framework of external audits. This particularly affects catering businesses.
This approach essentially entails breaking down the revenue and purchases of goods in a year into smaller units, e.g. a week. The gross profit mark-up percentage, i.e. the ratio between revenues and purchases, is then calculated for these units. In doing so, the tax authorities proceed on the assumption that the highest gross profit mark-up from a given ten-week period can be applied to the entire year. The consequence for businesses is that this gives rise in most cases to higher revenues and thus also tax liabilities.
However, the BFH has now placed restrictions on this procedure, stating that it is only permissible if certain conditions are met. For instance, the ratio between revenues and purchases of goods must remain largely stable throughout the year. The Court also said that a time-series comparison is inappropriate if the accounting complies with formal bookkeeping requirements. Even if the accounting does not comply with formal bookkeeping requirements but it is not possible to provide specific evidence of material inaccuracies, the Court stated that other methods of estimation are to be given priority. If no other methods are available, the result of a time-series comparison can only serve as an indication. According to the BFH’s ruling, a time-series comparison is only permissible if improper accounting has been demonstrated. The results of a time-series comparison could then be used for the purposes of a supplementary estimation.
The BFH went on to state that in the case of programmable cash register systems the absence of documents which one is obligated to retain, e.g. the instruction manual and programming protocols, represents a formal accounting irregularity which justifies a supplementary estimation.