Accounting vs. tax law: Why more coordination is needed

In many companies, accounting is well organized internally. However, tax advice – including annual financial statements and tax returns – is provided externally. This model is widespread in practice. However, if tax requirements are not taken into account in accounting at an early stage, systematic weaknesses arise that can be corrected in the annual financial statements only to a limited extent.

After all, a formally correct entry is not automatically a correct tax valuation – with consequences for compliance, reporting, tax planning and communication with the tax authorities, investors or shareholders.

Tax-related issues arise in everyday life – but often only become apparent in retrospect

Many tax issues arise not only in the context of the annual financial statements, but also in day-to-day business. If the tax perspective is not incorporated at an early stage, structural errors can become entrenched. Typical examples from practice:

• Withholding tax obligations (Art. 50a EStG (German Income Tax Act) for payments to foreign companies – for example, for licenses, construction services or artists’ fees – are recorded in the accounts, but are carried out without withholding or checking an exemption certificate.
• Service relationships with affiliated companies take place without written contracts – although a documented agreement is required in advance for tax purposes (particularly in the case of transfer prices, see Art. 1 (1) AStG (German Foreign Transaction Tax Act)).
• Managing directors’ remuneration is treated uniformly, although a distinction must be made for tax purposes as to whether they are third-party or shareholder managing directors (see also German Federal Fiscal Court (“BFH”), decision of May 10, 2006 - I R 28/05).
• Intra-Community supplies (Art. 4 No. 1b UStG (German VAT Act) in conjunction with Art. 6a UStG) or exports are recorded tax-free even though evidence is incomplete or not available – particularly in cases of collection where there is no documentary evidence (Art. 17a UStDV).
• Places of performance for cross-border activities are assessed as domestic on a flat-rate basis – without checking the correct allocation in accordance with Art. 3a (2-8) UStG.
• Construction projects in the company are recorded directly as expenses, although there could be an obligation to capitalize them in accordance with Art. 6 (1) no. 1 EStG (acquisition and production costs).
• Provisions for impending losses, which may be permissible under commercial law (Art. 249 (1) sentence 1 HGB (German Commercial Code)), are also taken into account for tax purposes – although they are not deductible under tax law (Art. 5 (1) sentence 1 EStG). This leads to a distortion of tax planning and to deviations in advance payments and tax returns.

These cases show: The gap does not arise at the time of booking – but at the time of classification.

Year-end adjustments are not a permanent solution

It is true that tax corrections and transfers are regularly made when preparing the annual financial statements. However, the traceability of many business transactions is limited at this point. Documentation is missing and the economic background is no longer transparent. This also makes it more difficult to comply with tax obligations to cooperate (Art. 90 (2) of the German Fiscal Code (AO)) and to reflect these in tax returns or e-balance sheets (Art. 5b EStG).

In corporate structures with growing reporting pressure – for example, in the case of shareholdings, PE investments or international groups – these subsequent clarifications can no longer compensate for what should have been recognized at an early stage.

Tax risks often arise from organizational gaps

Failures in the ongoing reconciliation not only lead to additional expenses, but also entail legal risks. If, for example, withholding tax is wrongly not withheld, the company is liable for the tax (Art. 50a (5) EStG). VAT errors – for example, in reverse charge situations (Art. 13b UStG) – can lead to additional claims, interest (Art. 233a AO) and possibly fines (Art. 378 AO).

In addition, there are reporting obligations in accordance with Art. 138 AO, for example, in the case of cross-border shareholdings, permanent establishments or business relationships, which are often disregarded in day-to-day accounting. The tax authorities are increasingly conducting data-based audits, which means that structural discrepancies are revealed more quickly.

Solution: Create structures instead of recalculating individual cases

Systematically integrating the tax perspective into the accounting process not only reduces risks, but also creates reliability. Helpful factors include:

• Routines for identifying tax-sensitive transactions in day-to-day business
• Coordination between accounting and tax advice – not only for annual financial statements, but also on a quarterly or monthly basis
• Checklists for typical problem areas – e.g., foreign transactions, intra-group services, managing director remuneration
• Documentation of agreements with affiliated companies prior to the procurement of services (transfer pricing principle)
• Transparency in dealing with investments, provisions and places of performance

This is not about control, but about cooperation in a partnership of equals – between operational accounting and tax assessment.

Conclusion: Tax and accounting considerations must be consistent

The line between accounting correctness and tax accuracy does not run along the documentary evidence, but at the interface of organization, communication and classification. Acting with foresight in this respect not only creates security in relation to the tax authorities – but also trust among investors, banks and stakeholders.
This is because the tax result not only shows how transactions have been recognized in the books, but also how well tax thinking is embedded in the business process.