In its judgment of 25 March 2015, X R 20/13, the X. Senate of the Bundesfinanzhof (BFH) ruled on the estimation method of the time series comparison. This method is being applied with increasing frequency by the tax authorities in the course of external audits, particularly at hospitality businesses. It is a mathematical-statistical verification method in which the annual revenues and goods purchases of the business are broken down into small units — typically into periods of one week. For each week, the gross profit markup rate (the ratio between revenues and purchases) is then determined. The tax authorities assume that the highest gross profit markup rate identified for any given ten-week period is to be applied to the entire year. As a result, the calculation usually produces substantial additional estimates on top of the revenues reported by the taxpayer. The BFH has now permitted this estimation method only subject to the following restrictions:
- The ratio between revenues and goods purchases at the business must remain largely constant throughout the entire year.
- Where the accounting records are formally proper, the time series comparison is inherently unsuitable for proving substantive defects in the accounting.
- If the accounting is formally improper but no substantive inaccuracies have been specifically established, other estimation methods take precedence.
- Even where such other estimation methods are not available, the results of a time series comparison may not be adopted without scrutiny, but may at most serve as an indication for an additional estimate.
- Only where the substantive inaccuracy of the accounting has already been established on the basis of other findings may the results of a — technically correctly conducted — time series comparison also be relied upon for determining the amount of the additional estimate.
In this context, the BFH further held that, where a programmable cash register system is used, the mere absence of the documentation required to be retained for it (operating instructions, programming logs) constitutes a formal defect in the accounting records that, in principle, on its own justifies an additional estimate.
Frequently asked questions
Frequently asked questions
What is the time-series comparison as an estimation method used by the tax authorities?
The time-series comparison is a mathematical-statistical verification method applied in particular to restaurant businesses during tax audits. Annual revenues and purchases of goods are broken down into weekly segments, and the gross profit markup rate is calculated for each week. The tax authorities then apply the highest markup rate from any ten-week period to the entire year, which often results in substantial additional assessments.
Under what conditions is the time series comparison permissible according to the BFH?
According to the BFH ruling of 25 March 2015 (X R 20/13), the time series comparison is only permissible if the ratio between revenues and goods purchases within the business remains largely constant throughout the year. Where bookkeeping is formally proper, the method is inherently unsuitable for proving substantive defects. In cases of merely formal defects without concretely established substantive inaccuracies, other estimation methods take precedence.
Can the results of a time-series comparison be adopted without scrutiny to determine the amount of an additional estimate?
No. If no other estimation methods are available, the results may not be adopted without review, but at most serve as an indication for an additional estimate. Only if the material inaccuracy of the bookkeeping is already established based on other findings may the results of a technically correctly performed time-series comparison also be used to determine the amount.
What are the consequences of missing programming logs for electronic cash register systems?
When using a programmable cash register system, the operating manual and programming logs are subject to retention requirements. According to the BFH, the absence of these records constitutes a formal defect in the bookkeeping. This defect alone generally entitles the tax authorities to make an additional estimate of revenue.
What role does formally proper bookkeeping play in the time-series comparison?
If the bookkeeping is formally proper, the time-series comparison is unsuitable for proving material deficiencies and may not be used to justify additional estimates. The method therefore cannot undermine existing formally proper bookkeeping; its application requires further substantive objections.