Following an audit concerning corporate income tax for 2017, the tax authority concluded that GASTRO MLAD s.r.o. had improperly claimed advertising expenses for social events and online banners. The authority found that the costs had been inflated through a chain of intermediaries without any added value, which suggested the underlying purpose was to reduce the company’s tax base. The authority considered that these transactions had been created primarily for the purpose of minimizing taxes and applied the arm’s length principle, and adjusted the company’s taxable income.
In an appeal to the Supreme Administrative Court, GASTRO MLAD s.r.o. argued that its contractual arrangements were legitimate and that the authority had failed to prove any intent to minimize taxes.
Judgment
The court upheld the assessment issued by the tax authoritieis. It held that GASTRO MLAD s.r.o. had not adequately demonstrated a proper business rationale for the increased advertising costs and agreed with the tax authority’s methodology in comparing market prices for similar advertising services.
Excerpt in English
“20. The tax administrator applied the arm’s length method under the provisions of Section 18(2)(a) of the Income Tax Act. In accordance with the application rules of the arm’s length method, the tax administrator compared the price of advertising services between the dependants (the applicant and LOYS MEDIA GROUP s.r.o. or Varjar s.r.o. ) with a comparable arm’s length price agreed between independent persons (the organisers of the social events and their contractual partners AMADEUS Group s.r.o. and S&P HOLDING, s.r.o. or APA – Art Production Agency, s.r.o. and Varjar s.r.o.). Since there was a difference between the prices compared, the tax administrator replaced the price agreed between the dependants with an independent market price that would have been used by independent persons in comparable legal relationships.
21. There is no merit in the applicant’s claim that it is not possible to compare prices at the beginning and at the end of a chain of trade (in other words, that the benchmarks for the conditions of the compared transactions set out in section 18(1) of the Income Tax Act have not been respected). For the determination of the tax base of a dependent person under section 17(5) of the Income Tax Act using the arm’s length method under section 18(2)(a) of the Income Tax Act, the comparison of the price at the beginning and at the end of the chain of trade is in accordance with the conditions laid down in section 18(2)(a) of the Income Tax Act, the comparison of the price at the beginning and at the end of the chain of trade is in accordance with section 18(2)(a) of the Income Tax Act. 1 of the Income Tax Act, provided that the suppliers of the taxable person (the applicant) in the transactions under scrutiny have not added any value which justifies a substantial increase in the price for the performance of the (advertising) services as compared to comparable transactions between independent persons selected by the tax authorities. In the present case, since the applicant’s suppliers in the audited transactions did not add any value to justify such a substantial increase in the price of the advertising services compared with comparable transactions between selected independent persons, the Court of Cassation concludes that, in the present case, the tax authorities were justified in using the price found at the beginning of the arm’s length chain and that, therefore, the use of the arm’s length price method was lawful and in accordance with the arm’s length principle.
22. The Income Tax Act does not oblige the tax administrator to follow a particular method set out in section 18(2) or (3) of that Act, but allows him to choose (or a combination of) the most appropriate method consistent with the arm’s length principle, which is the result of his sound discretion. If the tax administrator duly justifies its administrative discretion applied in the choice of the method and the tax subject (the applicant) disagrees with the choice but does not indicate what other method the tax administrator should have applied, the tax administrator does not have to justify, as part of its administrative discretion, why it did not test the other method.
23. The applicant has also failed to carry its burden of proof in relation to establishing that the costs of the advertising banners for which it paid Webnet Solution Ltd. were actually incurred for the purposes of earning, securing and retaining income. The tax authority also reached doubts about these costs by its own evidence, when it found that Webnet Solution s.r.o. should have paid for the placement of the banners to Wanding s.r.o., Justify s.r.o. and Holandica s.r.o., which, however, were not the owners of the websites under examination and therefore could not have rented the websites out to anyone else. The funds received by these companies from Webnet Solution s.r.o. were usually withdrawn the following day by their managing director from their bank account in cash withdrawals. These doubts were also not dispelled by the applicant, as a result of which he did not bear his own burden of proof in the tax proceedings and, therefore, according to the Court of Cassation, the tax authorities lawfully increased his tax base in accordance with the Income Tax Act for the inclusion of the disputed costs in tax expenses.”
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