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SAC: intermediary services abroad must be proven as well

In a number of countries, trading is virtually impossible without a local intermediary. In its recent judgment (8 Afs 315/2019), the Supreme Administrative Court (SAC) dealt with the burden of proof regarding intermediation of sale of goods in China. The SAC admitted that in view of cultural differences, different means of evidence may be available in foreign trade. However, this does not relieve taxpayers of the obligation to have sufficiently robust evidence supporting the extent of the intermediary services, and the person of the intermediary.

At a taxpayer importing goods from China, the tax authority was reviewing expenses/amounts charged by a Chinese company for brokerage and goods inspection. Payments for the services were made to an account in the Seychelles. The taxpayer neither submitted any written communication with the intermediary, nor produced any other written evidence of the performance of the services, nor provided an explanation for making the payments to the Seychelles.

For intermediary services to be tax-deductible, taxpayers must submit a coherent and error-free chain of evidence supporting the provision of the services. The SAC emphasised that the taxpayer must not fail their obligation to produce at least some documents confirming the intermediary services. According to the SAC, the primary means of proof is the related communication with the intermediary. It is necessary to prove both the existence of a particular intermediary and the precise scope of the activities they have carried out. In the present case, the problem was that the taxpayer's representative had never been to China himself, although he was supposed to have provided intermediary services in that territory. Contracts, invoices, or customs documents do not themselves prove the provision of intermediation activities, according to the SAC.

The SAC emphasised that in terms of the quality of evidence, the argument of cultural differences when conducting trade abroad will not stand. Foreign trade cannot be a reason for the preferential treatment of taxpayers who are subject to Czech law. Cultural differences may lead to a different type of evidence being submitted to the tax authorities, but they do not relieve the taxpayers of the obligation to prove the intermediary services as such. According to the SAC, the taxpayers must submit evidence of an appropriate quality, especially where the business activity concerned is of a continuous and extensive nature.

Regarding intermediary services, we therefore recommend keeping in mind the burden of proof upon their commencement and then throughout the course of intermediation, and gathering the necessary documents to prove the person of the intermediary and the extent of the activities carried out.