Proving advertisement expenses: judgments from 2017
Every entrepreneur wants to be famous and to get their potential clients to know them. They often spend a large amount for advertisements and propagation, which will be claimed as an expense for reaching, securing and keeping the income – such an expense has an impact on the amount of the assessed tax.
On the other side, expenses for a fictive advertisement were and, according to the judgment, are an often-used tool for the illegal reduction of a tax obligation. The employees of the financial administration know this and that is why the use of advertisement expenses will be the object of their intensive research. In 2017, the judgments on this problem have been huge and some of the judgments related to the lack of proving the expenses for advertisements. Lawsuits related to the expenses on the advertisement for race cars and sporting events (i.e. 6 Afs 191/2017-42, 10 Afs 310/2016-35 and 3 Afs 177/2016-45). I would like to summarise the general conclusions, which have followed from the mentioned judgments in practice.
One of the cases solved in 2017 was the situation when an entrepreneur in the bakery industry payed 600,000 CZK for an advertisement at car races on cars for the purpose of “finding new customers for its bakery products”. The entrepreneur documented the advertisement materials, photo documentation, and video records with a logo on a car as well as the electronic payments to the supplier´s account. According to the documents, the advertisement could be considered sufficiently grounded. However, the tax administrator and the court that followed did not recognize the expenditure spent tax deductible.
A reason for its decision was a series of contradictions found. The first one was the fact that the supplier of the advertisement service was not in contact during the financial administration control and the entrepreneur did not prove the realisation towards this subject. In the case of questions to starting the business cooperation, there were differences in the evidence. There was an unclear issue related to the subcontractor of the advertisement – the owner of the race car, on which the advertisement was placed, informed the tax administrator in a generally way only with no information with regards to the business transaction with this entrepreneur. Above this, the inadequacy of the expenses for the advertisement was brought into question. According to the amount of expenses for that advertisement, the court certified that it would be logical to suppose that the contract would include the detailed specification of the advertisement space, the graphic visualisation as well as the frequency the logo should appear. However, according to the simple contract, the form as well as the range of the advertisement was not arranged like that (including the place for advertisement on the car, the list of events). Moreover, the entrepreneur was not interested in the efficiency and evaluation of the impact of the advertisement and was not able to specifically answer the question what impact did the advertisement have on the activity (purposefulness of the finance spent). In light of these facts, the Supreme administration court certified that the procedure of the entrepreneur does not seem to be economically rational, documented by an economic motive, but it is only an attempt to cut the tax. “If the tax subject will eliminate the consequences of its fault, has to prove the expenses spent in a univocally, transparent way. It means document and prove all of the real circumstances related to the object expense, which will be in accord with the data found and will create a well arranged and trustworthy picture about the whole transaction.”
From the other judgments on this topic, I would like to mention that within the investigation, the documented photos, video records as well as the lists of racing events are examined in detail – proving in what range and in what way the service was provided. Some of the photos were not recognised as a proof because they did not capture the cars with the advertisement when it participated in some race. The court finds the absence of monitoring the executed advertisement suspicious.
Last but not least is the judgment related to the advertisement at FC Baník Ostrava matches, which brought up the conditions of the providing the advertisement to different subjects and finding a clear difference between the prices for an advertisement service provided to the control subject.
For the purpose of proving the advertisement, it is not enough to document by paper documents, but one has to be able to prove, in a detailed way, the range of the provided service, the economic rationality of the expenditure and the usual price. The complex picture of the “story” has to be believable. Do not forget to always keep the necessary evidence for the future vindication of the expense.
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