(Non-)tax costs of advertising in practice: how does the court see it?

The tax deductibility of costs is a very complex topic, in which many companies struggle and some even try to shortcut the tax. How the administrative authorities deal with such a situation is shown by two cases concerning advertising, which were considered by the Supreme Administrative Court (SAC) in 2022.

Tax (dis)deductibility of advertising costs

In its judgment of 16 June, the Supreme Administrative Court addressed the issue of tax deductibility of costs for the purchase of advertising items. The tax administration disputed the costs of their acquisition by the taxpayer. The tax authorities were led to doubt the extent of the supply and the use of the items in the company's business.

The company submitted only invoices, delivery notes and samples of the items ordered as evidence. However, it did not prove that it had actually received the promotional items ordered. The court also found other discrepancies in the accounts. For example, the company recorded the invoices as outstanding debts, but its supplier claimed that it had paid for the goods - in cash.

Invoices from another supplier of the taxpayer also raised doubts. In fact, the subject of the delivery note did not correspond to the issued order. The company also defended the lack of evidence by alleging that the accounting records had been destroyed in the flood.

According to the tax authorities, the company was unable to prove the actual receipt of the goods or their use for its economic activity. The tax authority therefore assessed the invoices in question as not tax deductible, assessed the related income tax and imposed penalties. The Supreme Administrative Court upheld this procedure.

To explain: Costs are generally considered deductible under the law if they are used to "achieve, secure and maintain taxable income." For details, see the article on tax costs.

Tax (dis)deductibility of advertising costs

Advertising costs are generally considered a tax deductible expense. Many entrepreneurs pay considerable sums to advertising service providers and often leave aside the evidence of such costs in the context of the Income Tax Act. However, as a recent ruling of the Supreme Administrative Court (SAC) has shown, the costs of advertising and the use of advertising must be properly documented.

In its judgment No. 8 Afs 42/2020-58, the SAC focused on advertising services, specifically on advertising that was broadcast on LCD panels in shopping malls.

Despite the testimony of witnesses and the documentation submitted on the provision of services, the doubts of the tax administrator and subsequently of the court as to the extent to which the supply (in terms of the frequency of broadcasting of advertising spots) was provided were not removed. It is therefore essential to prove not only that the advertising was provided, but also the extent of the advertising itself. This is therefore another tightening judgment on the subject.

What to take from this?

The authorities' decision confirms that it is not enough to simply post an invoice received to prove the tax deductibility of costs. As a taxpayer, you have to prove that all declared costs are legitimate and actually relate to your taxable income.

In addition to the service contract, which specifies exactly what the supply is and how often it will be provided, you should always be able to prove that the supply actually took place or took place on an ongoing basis. Photographs, for example, are suitable evidence to show the advertising performance at a given time and place - ideally take them regularly.

Not sure how to determine which costs are tax deductible? Our article on tax and non-tax costs will help you find your way. And if you need help with your bookkeeping, don't hesitate to contact us using the form below.

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