SAC did not accept brokerage fee paid to unrelated party as deductible
The Supreme Administrative Court did not accept a brokerage fee (commission) paid to an unrelated party as a deductible expense despite supporting documents and witness testimonies. The burden of proof is on the service recipient who has to prove that the brokerage did actually take place; pleading that this would violate the broker’s trade secrecy will not change the burden of proof.
At the heart of the case was a brokerage fee for negotiating contracts between a local distributor and a manufacturer. Due to a change in the business model, the distribution activity previously carried out by the parent company had purportedly been transferred to the taxpayer (the local distributor). The taxpayer claimed that without engaging a broker it would have been impossible to establish and develop the business relationship with the supplier (manufacturer), and supported this with witness testimonies. The witnesses stated that negotiations on extending the contracts had been significantly more difficult and time consuming without a broker. They, however, did not state anything about the substance or specific circumstances of the services. For the court, the witness statements were so vague that they were found insufficient to bear the burden of proof. The broker’s representative, who was purportedly present at the negotiations, also gave testimony during the tax inspection, but his testimony was inconsistent and at times contradictory. The fact that the distributor could purchase and distribute the manufacturer’s product long before the brokerage agreement was concluded and the business model changed also did not help the distributor’s position.
The SAC emphasised that it is up to service recipients to obtain adequate records to prove that a broker actually negotiated in their interest. Identification of with whom and when the negotiations took place, including the names of concrete persons, is of key importance, as such information would make it possible to determine whether the broker indeed approached persons who reasonably could be expected to be authorised to make decisions or influence the authorised persons in their decision-making. In the case in question, it was the absence of these data that contributed to the conclusion that the witness statements were insufficient. At the same time, the SAC admitted that in some cases it may be difficult to produce such evidence, as a broker’s activity may be so intimate in nature that the broker may not be willing to cooperate as necessary. However, this changes nothing about the burden of proof lying with the taxpayer. The fact that the commission was paid or the goods traded does not in itself prove that the broker actually carried out the brokering.
The SAC judgement thus reminds us yet again that in practice, brokerage fees may bring numerous problems, and proving their tax deductibility may be extremely difficult. Taxpayers should remember this when effecting such transactions and gather necessary supporting documentation for a possible tax inspection.