SAC on proving tax deductibility of repair costs

In a tax inspection, a company claimed that they had hired a subcontractor to overhaul their evaporator. To prove this, the company submitted to the tax administrator a construction log with information on the ongoing construction work on the premises, in which the contractor had also recorded the details on the repairs to the evaporator. The company also proposed to take witness statements of the contractor’s representatives and other persons. However, the tax administrator did not consider the submitted construction log to be sufficient. In their view, it did not contain sufficient records of the repairs, their extent and who had carried them out. The witness statements were assessed similarly: they were of a general nature and did not correspond to the taxpayer's assertions. The Regional Court agreed with the tax administrator.

The SAC then also assessed the content of the construction log, with similar outcome: in the SAC’s opinion, it did not contain specific information about the repairs. While the SAC agreed with the taxpayer that they were not obliged to capture the information on the repairs in the construction log in more detail, it pointed out that it was entirely up to the taxpayer to decide what level of risk they would take if they did not obtain sufficient supporting documentation to prove their incurred costs, on a continuous basis. Nor can full reliance be placed on witness testimonies, which in this case the SAC found to be inconclusive and unreliable. The SAC also disagreed with the taxpayer on the issue of claiming minimum costs: the SAC referred to its previous decisions, under which it is possible to claim minimum costs only if the taxpayer proves that they incurred the cost in question, although under circumstances different from those originally asserted. However, the taxpayer did not assert this in the case at hand.  

The SAC judgment confirmed that the burden of proof lies with the taxpayer who must convincingly prove the extent and manner of incurring the costs, including the identity of the contractor. Construction logs and witness statements, although relevant, may not be sufficient if they do not contain specific information about the work carried out. Once again, it has become apparent that taxpayers need to keep detailed documentation of costs incurred to support them in a tax inspection.