As many companies struggle to use Xero to prepare and share accurate accounting reports with German authorities, this article may provide an overview of the best practices to guarantee efficient accounting processes aligned with German statutory law.
The problem: XERO is not certified for the German market
This means that accounting and financial statements can not be fully prepared in Xero and then submitted to the German tax office. Xero data and evaluations do not meet the German standards for generally accepted accounting principles. Xero data can not be transferred over an ELSTER interface (Elektronische Steuererklärung = electronic tax return) to the German tax authorities the data. For-profit assessments according to § 4 para. 3 EStG as well as for balance sheets, however, is the digital submission to the tax office via ELSTER mandatory.
Moreover, in Xero the distinction between German commercial law and German tax law is not implemented. Numerous tax regulations often lead to differences in the commercial and tax balance sheet. While the annual tax balance sheet is to be provided for the tax office, is the annual financial statement (based on German commercial law) necessary for the mandatory disclosure in the trade register.
Xero has no GDPDU API. In the practice, the German tax authorities will want to access electronically, in the case of a tax audit, all financial data of your company. Therefore, the data must be necessarily submitted in the GDPDU standard to the tax auditors, a data format that the tax authorities in Germany use to evaluate all financial data.
In the case of a tax audit, all documents of the company must be made available to the tax office. Although Xero offers the possibility for incoming and outgoing invoices to be stored in each record of the bookkeeping, you can not currently download all records of the year, quarter, or month at a time, but you would have to export each individual document painstakingly out of Xero. We have already discussed this with Xero. If and when a solution to this problem would come, nobody knows.
Xero interfaces with German accounting software
Xero does not provide interfaces to German accounting software. The sole import of account balance numbers into DATEV or other German systems would not be sufficient for the preparation of financial statements. With the account balance numbers from Xero, it would be possible to create the advance turnover tax notification (VAT) and the ZM (recapitulative statement for deliveries and services in the EU) and then transmit the data via ELSTER to the tax authorities, but to all other purposes, Xero bookkeeping will be more likely to fail.
Xero interfaces with German banks
Xero has no direct online access to German banks at present. The data of German banks have to be imported via CSV files in Xero.
Xero, however, can be automatically synced with German direct banks (e.g. Penta Bank).
Invoicing in Xero
The invoicing in Xero could become in the future also problematic. It is to be expected that the tax office – and all other authorities – in Germany would enforce invoices and other digital documents from 2018 on a special file standard (ZUGFeRD). It remains to be seen whether Xero would also adopt this standard or not.
The solution: Xero in combination with a German financial accounting software
For our clients who work with XERO, we make the Xero bookkeeping and parallel to it the German bookkeeping at the same time. To save time and cost, we proceed as follows:
- Mirroring accounting documents from Xero to Consultinghouse: All required documents (invoices, receipts, expense reports) that are relevant for accounting are automatically mirrored in Consultinghouse's autonomous accounting data platform.
- Please note that a guest-user needs to be provided to Consultinghouse to access Xero data
- The approval status of, e.g. expense reports in Xero can be considered
- Creating booking entries in the local accounting system based on provided accounting documents from Xero: Accounting relevant data of the transferred documents will be automatically be extracted. The extracted data will be used to automatically create a business transaction in the journal and aligned with German statutory law. (Please note that a personalized chart of accounts will be defined for each company)
- Bank statements: All transactions of the bank and petty cash transactions will be automatically transferred from Xero to Consultinghouse's local accounting system (e.g. in CSV, MT940 file format) to further process the bookkeeping data.
- Localizing accounting data for accurate VAT reporting in Germany: With Consultinghouse booking entries (based on provided accounting documents) and the individual bank transaction (based on the provided electronic bank statement), the local accounting for Germany will be harmonized. This way it will be validated whether all required receipts have been provided to prepare the data for an accurate VAT report. For missing documents, an open items list will be created and shared with the company.
- VAT reporting in Germany: A licensed German tax advisor or lawyer will officially review and validate the bookkeeping data to ensure it is accurate and aligned with German statutory law. Once approved by the tax advisor the accurate VAT report will be electronically be submitted to the tax authorities via ELSTER in the name of the German tax advisor, who typically will act as the local fiscal representative of the German company. (Please note that Consultinghouse is exclusively cooperating with www.counselhouse.eu to ensure the quality of the processed accounting data)
- Re-import of localized accounting data back to Xero: Consultinghouse prepares the import of that data into Xero and into our German system. That is, we examine the relevant documents for the bookkeeping and code (account assignment) of all transactions outside of Xero and of the German bookkeeping software. Then we import the pre-coded (bank, petty cash) data into Xero and into our German bookkeeping software. After this pre-coded import, Xero automatically performs the reconciliation. Sometimes you have to readjust manually some parts in Xero. , and the clients have their financial overviews in Xero and use them as they need them.
As more and more companies prefer to use Xero to consolidate the accounting data of their multiple markets Xero becomes an important hub to manage the accounting processes as well as the financial performance of small and medium-sized companies around the globe.
Unfortunately, Xero is not licensed in Germany yet, and therefore the need for solid interfaces to German accounting systems and institutions is very high.
For this reason, the accounting data for the German market in Xero cannot be used to create reliable VAT reports. Further, the VAT reports need to be reviewed and approved by a licensed German tax advisor before being submitted to the German tax authorities.
This is currently driving the need to mirror Xero in German accounting software in order to align the accounting with German statutory law. Only an accounting in accordance with the German accounting standards can meet the requirements of acceptance by the tax authorities in Germany.
In the last step, all accounting data need to be re-imported into Xero to support consolidated group reporting. In this regard, strong and ongoing communication with the internal accounting teams and the local accounting service provider will be key.
Consultinghouse processes the accounting data in the German bookkeeping software for German companies and according to § 6 Nr.3-4 of the German tax adviser direction code. For tax or legal services please contact our cooperation partner www.counselhouse.eu.