Estimated payables as seen by recent case law
The Supreme Administrative Court (SAC) has recently issued two judgments dealing with estimated payables and their effect on the income tax base. The court’s reasoning provides taxpayers with important general information on what to have ready for an inspection by the tax administrator.
Judgment No. 7 Afs 317/2022 – 30: estimated payables for unfinished work
A taxpayer undertook to build infrastructure on building land sold and, for this purpose, concluded a contract for work in 2015. The application for a zoning decision was filed in 2015, although the zoning decision and building permit did not enter into force until 2016.
The taxpayer created an estimated payable for the price of the work already in 2015, arguing that the contractor commenced the work already by filing the application for the zoning decision. The tax administrator disagreed with this approach and held that these were not costs (expenses) incurred in 2015. In the tax administrator’s opinion, the contractor could have commenced the work only once the zoning decision had entered into force. The zoning decision entered into force in 2016, and (except for one invoice) no evidence of specific materials supplied or work carried out was provided for the estimated payable. Moreover, the contract between the contractor and the subcontractor carrying out the building work was concluded only in 2017.
The regional court agreed with the tax administrator’s opinion, concluding that one of the prerequisites for accounting for an estimated payable is proving the existence of a payable for an actually effected supply that in terms of subject matter belongs to a certain accounting period at the end of which the exact amount of the payable is not known.
The SAC agreed with the regional court and reiterated that the estimated payable had been created wrongly. The following arguments led the SAC to its conclusion:
- (i) a prerequisite for accounting for an estimated payable is the proof of the existence of a payable for an actually effected supply that in terms of subject matter belongs to a certain accounting period, while its exact amount is not known;
- (ii) the taxpayer could have carried out the work only after the issuance and entry into force of the zoning decision and building permit (i.e., in 2016); and
- (iii) the taxpayer did not provide evidence of any specific supplies of materials or work in 2015.
- The SAC also emphasised that the mere conclusion of a contract or the origination of a claim for the consideration for a supply is not sufficient reason to account for an estimated payable.
Judgment No. 2 Afs 79/2023 – 62: estimated payables for employee bonuses
In this case, the issue was whether a taxpayer correctly accounted for bonuses for holding employee shares, for which an estimated payable had been created. The case was first considered by a regional court.
In the course of the proceedings, the taxpayer presented their wage policy governing employee remuneration. It did not contain any specific information on bonuses for employee shareholders but stated in its annex that to provide a bonus, an audit was a necessary precondition, and that there was no entitlement to a bonus as a component of wages. The taxpayer also presented a document in which the CEO had approved annual bonuses for certain categories of employees; the taxpayer believed that based on this document, bonuses became a component of wages to which employees were entitled.
According to the regional court, the decisive factor for the creation of an estimated payable is whether employees are legally entitled to the bonus in the civil-law sense. This followed neither from the text of the wage policy nor from the CEO's document. Also, the taxpayer only considered the total amount of the annual bonuses, while amounts of bonuses granted to individual employees within that amount were open to changes. In the court’s opinion, unless the recipients of the bonuses are named and the amounts intended for them fixed in a document by the CEO, employees cannot claim the bonuses in the future, and thus there can be no civil-law entitlement. Therefore, the taxpayer should not have created an estimated payable for the bonuses.
The taxpayer demanded the situation to be resolved by the tax administrator claiming the costs (expenses) for bonuses incorrectly claimed in the previous period (as an estimated payable) and actually paid in the inspected taxable period as expenses in that period. In this regard, the court stated that it is not possible to correct a taxpayer's error by the tax administrator claiming costs (expenses) incorrectly claimed in the previous period in the inspected period. The only option was to file an additional tax return.
The taxpayer filed a cassation complaint against the regional court’s decision with the Supreme Administrative Court, which was limited to the tax administrator’s failure to ’transfer’ the incorrectly claimed bonuses to the correct taxable period, to resolve the situation fairly. The SAC agreed with the regional court's conclusions: the only option was to file additional tax returns for both periods in question. However, this was no longer possible as the deadlines for assessing tax had already expired.
What should we take away from the above decisions?
When creating estimated payables, taxpayers should pay due attention to the conditions for their creation and have sufficient documentation available to support their recognition.