Proving costs of light advertising
The Supreme Administrative Court (SAC) dealt with the tax deductibility of costs incurred for advertising that broadcast a video spot on a LED screen. The tax administrator had doubts about the spot’s broadcasting frequency and assessed the costs as non-deductible for income tax purposes. The tax administrator then assessed additional corporate income tax plus a penalty. The SAC upheld this conclusion.
In the 2015/2016 taxable period, a taxpayer claimed significant costs for advertising in the form of video spots played on a LED screen in Brno’s city centre. During a tax inspection, the tax administrator raised doubts as to the extent of the supply: according to the tax administrator, the information in individual advertising contracts concluded between the company and the advertising supplier and the information in the subsequently presented playlists contradicted each other. According to the contracts, the spot was to be broadcast twice an hour and at least 26 times a day. The playlists indicated a lower frequency of two to three times in three-hour intervals, with a total of 19 times a day.
The company argued that the condition of two playbacks per hour in itself satisfied the requirement for at least 26 playbacks per day. They also corrected the information given in the playlists: the spot was to be played two or three times within one hour, not in three-hour intervals, although this was not clear from the playlist description. As evidence, the company produced photographs of the relevant LED screen and related metadata images. There were also witness testimonies.
Request to allow essential expenses also denied
The tax administrator held that the entity did not dissipate its doubts and thus assessed the total amount of the advertising as not tax-deductible. The tax administrator also did not accept the company's request to allow at least its essential expenses, i.e., the portion of advertising costs that had been proven.
In agreement with the regional court, the SAC confirmed that the ambiguity of the contractual arrangement may have caused the tax administrator's doubts, although one of the conditions (two playbacks per hour) may have automatically met the other condition (at least 26 playbacks per day). In the SAC’s opinion, it was not clear why the second condition should even be a part of the contract. The SAC referred to earlier contracts between the company and the supplier, which provided for the same frequency of two playbacks per hour and at least 48 playbacks per day. The SAC also found inconsistencies in the submitted playlists, which contained different information on the number of times the advertisement was to be broadcast and made them not sufficiently credible.
According to the SAC, evidence in the form of photographs of the LED screen and images of metadata could not be considered capable of proving the frequency of broadcasting an advertising spot, as they only proved that the advertisement was broadcast, which was not disputed in this case. For these reasons, the SAC dismissed the cassation complaint. The SAC also disallowed the company's essential expenses, since the conditions for the assessment of tax using auxiliary mechanisms had not been met, which is a prerequisite for allowing the deduction of essential expenses.