Nejvyssi spravni soud k problematice prokazani poskytnutych sluzeb

The Supreme Administrative Court on the issue of proving costs for services

In its judgment 10 Afs 299/2021-44, the Supreme Administrative Court ("SAC") again commented on the issue of proving costs for rendered services.  

In the present case, the tax authorities focused on proving the receipt of services by the recipient. It  is apparent from the circumstances that the primary problem appears to have arisen with an unrelated subcontractor whose managing director is presumably a non-existent person.

In the present case, the tax authorities disallowed the taxpayer, an physical person, expenses for the purchase of machined metal parts on the grounds that the supplier could not have carried out the transaction and that it was not possible to verify the delivery of the metal parts with any of the subcontractors. 

The taxpayer argued that it had sufficiently proved the identity of the supplier. In the taxpayer's view, the tax authorities and the Regional Court failed to take into account the taxpayer's assertion that he would not have been able to produce the metal parts himself at the time and place in question because he did not have sufficient staff. The taxpayer further argued that it was not within its power to ascertain whether and which subcontractors were manufacturing the products.

The tax authorities argued that based on the witness of the former managing director of the supplier the supplier did not have the production capacity for the production of metal parts and only mediated the arrangement. At the same time, he did not know for certain who their subcontractor was. The potential subcontractors identified by the witness were uncontactable and also did not have the facilities to produce such a fulfilment. In the view of the tax authorities, in cases where the origin and the course of the transaction cannot be verified, doubts arise as to whether the transaction took place. In he present case, the taxpayer submitted only tax documents, but did not prove the actual delivery of the supply.

The SAC dismissed the appeal.

In the view of the SAC, expenses cannot be automatically tax deductible simply because someone must have carried out the supply in question. While the SAC accepts the taxpayer's right to provide an alternative plausible explanation of the origin of the transaction, it also applies that the taxpayer must prove the expenses in a clear and transparent manner and the supporting evidence must form a complete picture of the course of the business transaction. However, in this case, that condition was not met.

In its reasoning, the SAC also refers to its previous case law. If it is not proven to whom the expense was made, it cannot even be stated with certainty whether the conditions for tax deductibility have been met.  

At the same time, according to the case-law of the Supreme Administrative Court, entrepreneurs should act with caution in business relations. Part of this prudence is also the acquisition of evidence for the claiming of tax expenses. If the taxpayer fails to obtain the appropriate documentation, the consequence of his conduct is that he has not borne the burden of proof.

As regards the taxpayer's objection that the tax authority's assertion that he could have carried out the products and work himself is not supported by the case-file, the SAC states that this is merely a possibility which adds to the tax authority's doubts. The taxpayer could have dispelled that suspicion by proving who had provided the supply.  

We would be happy to discuss this case law and its application to specific practical situations with you. If you have any questions, please contact the authors of the article or the EY tax team you are working with.

Authors:

Ladislava Zamazalová

Lukáš Nitka