Stricter conditions for tax deductibility of expenses?

The difference between the requirements for deductibility of expenses under the Income Tax Act and those for granting an entitlement to VAT deduction for the same expense under the VAT Act seems to be fading. At least this is implied by two Supreme Administrative Court judgments issued within a year. It may therefore happen in the future that taxpayers will have to prove that a supply was actually provided by the person stated in the tax document also for income tax purposes.

In one of its judgments last year, the SAC rather unexpectedly sided with the tax administrator who argued that an expense could not be recognised as deductible if, considering all the circumstances of the case, it was obvious that the customer knew or could have known that the work invoiced was carried out by a person other than the one who issued the document confirming the receipt of a payment for the work. So far, the issue of good faith and (no) knowledge of suppliers’ misconduct has only been typical for VAT.

A similar opinion was expressed in the SAC judgement of March this year. The case in question did not involve a dispute as to whether the work was carried out and paid for. The heart of the disagreement was proving whether the work was carried out by workers of the supplier as stated in the pertaining tax document. As the taxpayer was not able to prove that the work had been carried out by the company listed in the document, the expenses were treated as non-deductible.

These judgments imply that the tax administrators’ efforts to set even stricter conditions for the deductibility of expenses are escalating. In the future, it may even be the case that where the entitlement to VAT deduction is denied on the grounds of failing to prove the supplier, the same expense will automatically be treated as non-deductible for income tax purposes.