“Perfect” documentation does not automatically guarantee deductibility for tax purposes
In its recent judgment (file no. 7 Afs 330/2016), the Supreme Administrative Court (SAC) again held that even an accounting document free of any formal deficiencies and containing all essential elements does not prove on its own that the declared taxable supply has really been effected. The taxable supply’s performance and extent must be proven conclusively by other means of evidence.
In the case in question, the taxpayer claimed invoices for cleaning services and advertising and promotion expenses as deductible expenses. The tax administrator expressed doubt about the tax documents. In response, the taxpayer provided further evidence that the services at issue had really been provided. After taking into account uncertain witness statements and partially missing contractual documentation and after carrying out a detailed analysis of the photo documentation relating to the advertising services revealing a number of deficiencies, the tax administrator decided not to treat the reported expenses as deductible.
The taxpayer first tried to reverse the tax administrator’s decision via an action filed with the Municipal Court in Prague and, after its dismissal, via a cassation complaint. However, the SAC confirmed the tax administrator’s original decision, agreeing that the existence of accounting documents, i.e. receipts and invoices, does not on its own prove that the declared deliveries were really performed. To claim expenses as tax deductible, taxpayers must usually also produce other means of evidence to prove that deliveries stated in the invoices were really carried out.
The SAC confirmed that there is no legal regulation specifying how many means of evidence the taxpayer must provide for each individual transaction, i.e. deductible expense item. Logically, though, taxpayers must make sure that they are able to prove individual transactions in a trustworthy manner, especially where significant amounts are concerned. In addition to accounting and contractual documentation, they should collect other means of evidence confirming the actual receipt or performance of taxable supplies, and keep them over the period over which tax can be assessed or additionally assessed.
The SAC’s decision shows a trend that has become obvious over the last few months. Both the SAC and the tax administrators tend to apply a relatively strict approach to assessing whether advertising services (and not only those) were really provided. We therefore recommend paying increased attention to collecting supporting evidence on significant amounts, not only with respect to marketing services.