SAC on claiming R&D allowance
In its recent judgment, the Supreme Administrative Court (SAC) has addressed whether to allow claimed research and development (R&D) allowances. In the relevant case, the tax administrator disallowed these costs on the grounds that the basic requirements for the project had not been met, the main reason being that the taxpayer failed to bear the burden of proof as to carrying out the R&D project themselves.
A company claimed an R&D allowance in its 2013 and 2014 tax returns, primarily relating to the development of a central information system. The tax administrator challenged the company’s compliance with the statutory requirements for deducting these costs.
Why did the tax administrator disallow the costs?
The company carried out an R&D project partly through their own activities. According to the tax administrator, the company was unable to support how the supplies received from a supplier differed from the activities that were to be carried out by the company’s own employees. In fact, the supplier’s obligation was formulated in the contract for work similarly as the subject matter of the company's R&D project. Other areas of dispute were, e.g., project evaluation and review, where the company had no documentary evidence (minutes from meetings), and the duty to keep separate records of personal costs for R&D projects, whereby according to the tax administrator the formal requirements for an R&D project were not met.
What did the company argue?
According to the company, the subject matter of the contract with the supplier did not exclude its own R&D activities, and it had been the company who had developed the individual algorithms and functionalities, while the supplier was only to set up and implement them. The company also argued that the development activity was confirmed by an expert opinion. According to the company's representatives, project evaluations took place on a weekly basis at internal meetings, while them being only oral did not mean they did not happen.
Why did the SAC dismiss the cassation complaint?
The SAC upheld the tax administrator's view and dismissed the company's cassation complaint on the grounds that it could not sufficiently prove its involvement in the development activity. The submitted contract between the company and the supplier did not make it possible to distinguish between the parties’ supplies, nor was it possible to make an assessment based on the summary records of costs, which, although they listed the names of the employees and their time worked, did not contain any description of the activities. It was therefore impossible to ascertain from them what exactly the company's employees had worked on within the R&D, or, in fact, whether it was R&D-related work at all.
To the contrary, some of the presented minutes of meetings between the company and the supplier indicated that the company was merely making requests to the supplier regarding the information system being developed, while no development activities by the company were apparent from the minutes. The SAC also stated that the company’s own development activity could not have been supported by an expert opinion, since according to sources referred to in the expert opinion, the experts did not have any underlying information to assess this.
In addition, according to the SAC, the company was unable to sufficiently prove that internal evaluation meetings had been held (not even after questioning the company’s CFO and the expert), and therefore, the method of project evaluation and review as set in the project documentation had not been complied with.
Recommendations
The judgment shows the importance of thorough documentation in the event of a company’s own engagement in R&D projects. At the same time, it is necessary to ensure that other requirements are met, such as the impeccable preparation of project documentation, the implementation of the evaluation and review methods chosen and described, and the proper and detailed keeping of separate records of costs for each project.