In previous years, we have informed you of the ever-tightening trend and increasing demands for evidence in proving tax deductible advertising costs (article 1; article 2).

In 2024, the Supreme Administrative Court (“SAC”) continued this trend, when, in its judgment 5 Afs 208/2023 of 26 July 2024, it considered a dispute between the taxpayer and the Appellate Tax Directorate regarding the costs incurred for advertising services consisting of broadcasting a video spot on a light LED screen placed on a building (hereinafter “advertising”) in the tax year 2015/2016.

Before we look in more detail at the above-mentioned judgment of the SAC, we would like to briefly mention the conclusions of the Enlarged Chamber of the SAC of 12 February 2024 (8 Afs 296/2020), which dealt with the issues of the burden of proof, determination of tax by evidence, determination of tax according to aids and the concept of essential (i.e. objectively minimum necessary) costs. In the matter of essential costs, the Extended Chamber of the SAC stated the following:

• when assessing the tax deductibility of costs claimed and proven by the tax entity, it is decisive whether it has been proven that the cost was incurred in a certain amount, or whether it has been proven that the declared cost must have actually been incurred in at least a certain amount, for an existing supply (if the other conditions for the tax deductibility of these costs are met);
• if the tax entity proves without serious doubt that the declared cost meeting the conditions of Section 24(1) of Act No. 586/1992 Coll., on Income Taxes (hereinafter “the ITA”) actually occurred (had to be actually incurred), albeit under different circumstances than stated on the tax document, it can be recognized as a tax deductible cost. However, it is necessary to realise that this is an extreme situation where the standard, statutory way of claiming the cost has not been observed by the taxpayer;
• it is necessary for the taxpayer to correct its original allegations, offer new allegations and provide adequate proof of its revised allegations. The evidence here is more likely to come from outside the accounting sphere and will de facto replace or supplement unreliable, incomplete, inconclusive or incorrect primary documents. However, this is still the primary method of determining tax, i.e. determining tax on the basis of evidence.
• if the tax subject fails to prove the circumstances testifying to the tax deductibility of a particular cost (group of costs) pursuant to Section 24(1) of the ITA, the tax administrator is under no further obligation to switch from proving to determining the tax according to the aids and to determine the relevant part of the expenses objectively minimally necessary for the acquisition of the existing service or goods.

It follows from the above that if the tax entity wants to eliminate the consequences of its misconduct, it must also prove the incurrence of essential costs (the burden of proof is on the side of the tax entity). In the event that the taxpayer proves the incurrence of essential costs (sustains its burden of proof), the tax administrator should take these costs into account. Otherwise, the tax administrator is not obliged to switch to the determination of tax according to the aids, because the reason for switching to the aids should be a significant obscuration of the management both in terms of the total number of deficiencies in the accounting entries and in terms of the total volume of the questioned transactions.

For the sake of completeness, we would like to point out that three conditions must be met in order to determine the tax liability according to the aids: (1) the taxpayer fails to meet one of its evidentiary obligations, (2) therefore, the tax cannot be determined by evidence, (3) and the tax can be determined reliably by means of aids.

Judgment 5 Afs 208/2023

The tax administrator assessed corporate income tax on the taxpayer, where the disputed issue was whether the taxpayer proved that the claimed advertising costs fulfilled the conditions for tax deductibility in accordance with the provisions of Section 24(1) of the ITA and whether the respective transaction took place as declared by the taxpayer.

In the proceedings, the taxpayer submitted as evidence advertising contracts, play lists in the form of excel sheets showing weekly schedules, photo documentation with metadata and correspondence. The examination of witnesses proposed by the taxpayer was also conducted. In view of the outcome of the proceedings, the taxpayer requested recognition of at least the so-called essential costs.

The Supreme Administrative Court based its decision on the conclusions of the Extended Chamber. In its judgment, the SAC pointed out that the essence of the case lies in the assessment of the tax deductibility of advertising expenses in terms of the complainant’s sustaining the burden of proof. At the same time, the question is whether the tax administrator should have taken into account at least the so-called essential expenses of the tax subject when not proving the specific scope of advertising costs. The judgment contains the following conclusions:

• even though the taxpayer proved that the advertisement was played (photographs of the advertisement were submitted as evidence), it did not remove the doubts as to the frequency of such playing;
• the main reason why the Regional Court considered the photographs with metadata to be inconclusive is the fact that they are not capable of proving the frequency of the broadcast of the advertisement, they only certify that some advertising performance took place, which, however, is not sufficient for the assessment of the scope of the advertisement (the Supreme Administrative Court also agreed with this);
• although the contractual arrangement is purely a matter for the parties, its ambiguity is undoubtedly capable of giving rise to doubts on the part of the tax administrator and thus shifting the burden of proof back to the taxpayer;
• the taxpayer in the present case did not correct its tax claim (although it had ample room to do so in view of the length of the tax audit) but, on the contrary, maintained its original argumentation regarding the burden of proof;
• the taxpayer therefore failed to meet the burden of proof (the submitted play sheets were not entirely conclusive, the data on the frequency of the advertisements did not correspond with each other, the correspondence did not correspond, the doubts were not removed after the witness statements were taken);
• the statutory conditions for the determination of the tax according to the aids have not been fulfilled and, as a matter of fact, the aforementioned declaration of essential expenses is also out of the question.

As mentioned in the introduction, in recent years there has been a steadily tightening trend and increasing demands for evidence in proving tax deductible advertising costs. The means of proof must be sufficiently conclusive and must correspond to each other. In order to avoid possible negative effects, all taxpayers may be advised to keep sufficiently conclusive evidence for the entire period, during which tax can be assessed for the respective tax period.

If you have any additional questions, please do not hesitate to contact any of our experts.