EXPENSES THAT ARE NOT FULLY RECOGNIZED IN THE TAX BASIS BALANCE SHEET (part two)
We have said that the Corporate Profit Tax Law determines which expenses (among the expenses shown in accounting reports, i.e. income statement) are recognized in the tax basis balance sheet. The provisions of the Corporate Profit Tax Law do not apply only to companies, but also to entrepreneurs keeping business records by applying double-entry book-keeping principles, which means that the provisions of the Article 7a of the Law also apply to tax basis balance sheets of both legal entities (PB1) and entrepreneurs, who submit their tax basis balance sheets using the PB2 form.
The expenses, which are not recognized in the tax basis balance sheet, expand the taxable profit, shown in the income statement.
Here are the expenses that are not fully recognized in the tax basis balance sheet:
– non-documentable expenses;
– adjustments of individual receivables from the entities, which are also creditors, up to the extent of the liability towards that entity;
– gifts and contributions to political organizations;
– gifts the recipient of which is an associated entity mentioned in the Article 59 of the Law;
– interest payable due to untimely payment of taxes, contributions and other public fees;
– costs of forced collection of tax and other debts, costs of tax offence proceedings and other proceedings conducted before a competent authority;
– fines levied by a competent authority, penalty clauses and penalties;
– interests in arrears between associated entities;
– costs, which are not incurred for the purpose of performing business activity, unless otherwise regulated by this Law.
As prescribed by the Law on Accounting, a valid document is a written or electronic record of a business change that has taken place, which contains all the data necessary to post it in business records in a way that the business change grounds, type and content can be unequivocally learned from the accounting document.
A valid accounting document is not only an invoice, but also any other document containing all the necessary data (it can be a contract, VAT calculation or any other document containing all the data necessary for posting).
In order for an expense to be truly recognized as a business expenditure, apart from a valid document (invoice, contract), it is necessary to have other accompanying documentation confirming that the business change has actually taken place.
Within the trade in goods, we encounter quite often the lack of documents, which would actually confirm that someone issued and transported the goods, got their export clearance, placed them in a storage facility, moved them from one storage facility into another, put them up for retail/wholesale, etc. These represent the flow of goods, which requires accompanying documentation. The same refers to services, especially those provided by entrepreneurs who pay lump-sum tax, or to the alleged management free invoices issued by a parent company to its associated entities. For the purpose of submission to tax authorities, the invoices issued for such services are also backed up with mutual correspondence in real time, plans, drafts, sketches, etc., weekly reports showing the activities of engaged persons, etc. To be more precise, all the things that are and can be used as a proof that a specific service has been provided, that a specific consultation has been conducted, etc.
If invoices like these are not backed up with the documentation unequivocally confirming that the company has provided a specific service, the tax authorities usually challenge the expenditures presented in this manner and request from a taxpayer to exclude that expense from the recognized expenses and add it to the non-recognized expenses, expanding the tax base and creating a larger profit tax liability.
The situation is the same when it comes to the invoices of entrepreneurs who pay lump-sum taxes, which do not list or describe a specific provided service, but classify it as a consultation, etc. When entrepreneurs issue an invoice, they shall specify the exact type of service provided. For example, if a creation of a transfer pricing study is listed there, the service shall be backed up with the study. Special care shall be taken to ensure that the service provided by the entrepreneur belongs to the group of services for which the entrepreneur is registered with the Business Registers Agency. The fact is that many services can be provided without registering them with the Business Registers Agency as core activities. It does not have to be the core activity, but you can check the website of that entrepreneur for the activities they perform and the types of services they provide.
Resource scarcity can often be understood in different ways. There is the rulebook prescribing the quantities recognized on the grounds of waste, shrinkage and breakage. Moreover, the scarcity shall be recognized if it has arisen as a result of theft or force majeure. In a case like this, there should be a valid documentation issued by the competent authority.
If the taxpayer cannot document the grounds on which the resource scarcity has arisen, such a scarcity shall be considered undocumented and shall not be recognized in the tax basis balance sheet. The resource scarcity is often a consequence of the assignment of assets to the owner’s personal needs and such an expenditure cannot be recognized in the tax basis balance sheet because it has not been incurred as a result of the taxpayer’s performance but as result of the owner’s personal needs. Such an assignment shall be included in the invoice as ‘owner’s personal earnings’. If the owner’s assignment of resources has been entered into business records as an expenditure, that expenditure is not recognized in the tax basis balance sheet either way.
When the company owner is employed by that company at the same time, the resource scarcity is treated as an employee salary. What does it actually mean? The obligation to pay taxes and contributions on salaries is imposed in relation to the recognized scarcity. Apart from this, the scarcity shown as an expenditure is not recognized in the tax basis balance sheet.
However, if the scarcity is declared as employee salary, it represents the salaries expense, not the expense recorded as scarcity, which means that there are no grounds for the recognition of that expenditure in the tax basis balance sheet. When the scarcity is declared as employee salary (not an asset assignment), both taxes and contributions are calculated on the salary, while the asset assignment is subject only to tax payment. If the scarcity is treated as salary, it is also treated as salaries expense and it is recognized in the tax basis balance sheet, in compliance with the Article 9 Paragraph 1 of the Law.
If there are expenses that cannot be documented in accordance with the previous explanations, the best would be to enter the expenditure amount under the number 6 of the PB1 form and therefore bypass additional complications and explanation.
Expenditure Based on the Value Adjustment of Receivables from the Entity, Which Is Also a Creditor
The Article 7a Item 2 of the Law prescribes that the value adjustments of individual receivables from the entity, which is also a creditor, are not recognized as expenditures up to the extent of the liability towards the entity. The same rule also applies to the relief of debt, considering that the Article 16 of the Law prescribes that the expenditure based on the relief of debt is recognized in the tax basis balance sheet under prescribed terms, except from the receivables listed in the Article 7a Item 2 of the Law. In other words, even if the conditions for recognizing expenditures based on a (direct) relief of debt are met, in accordance with the Article 16 of the Law, that expenditure shall not be recognized if the taxpayer is in debt to the same entity, up to the amount of that debt.
Gifts to Political Organisations
Gifts to political parties shall not be fully recognized as expenditures in the tax basis balance sheet. They increase the taxable profit in full.
Gift the Recipient of Which Is an Associated Entity
The provisions of the Corporate Profit Tax Law stipulate that the expenses related to the gifts the recipient of which is an associated entity shall not be recognized as expenditures. An expense like this directly affects the taxable profit increase. The taxpayers, who made expenditures during the year as a result of giving travel gifts or some of the listed gifts shall not include these expenditures the transfer pricing study and the entire amount shall expand the tax base.