Undocumented Expenses and Expenditures That Are Not Incurred in Order to Perform Activity – Expenditures That Are Not Recognized in the Tax Basis Balance Sheet
The expenses that cannot be documented and the expenses that are not incurred in order to perform a business activity are not debited to the expenditures recognized in the tax basis balance sheet. The tax base for the income of a legal entity i.e. entrepreneur is increased for the amount of expenditures.
Article 7 Paragraph 1 Item 1 of the Corporate Profit Tax Law prescribes that the expenses that cannot be documented cannot be recognized in the tax basis balance sheet and be debited to the expenditures. Legal entities present the amount of these expenses in the PB-1 form under the ordinal number 6 and entrepreneurs present it in the PB-2 form under the ordinal number 7.
Undocumented expenses shall include the expenditures that are:
1) Presented in a corresponding 5th class invoice with no documentation;
2) Posted based on invalid accounting records;
3) Posted based on the accounting records that do not contain manual or digital signature, as well as some other registration mark of a person in charge.
Documented expenses also include the expenditures related to the current period, which have been calculated as liabilities by a legal entity based on previous experience or management assessment because it had not received an invoice or some other document from a supplier. Expenditures like these, which are presented based on an internal document about the calculation of accrued expenses, are recognized in the tax basis balance sheet.
A payer does not receive an invoice or a related document for the paid registration taxes and fees, obtaining permits, starting certain proceedings before state authorities, etc. but he has a receipt of payment where the type of payment can be seen, so these costs represent documented expenditures.
– Expenses paid with a business card – after completing these payments, a paying slip is received without any invoice or related document. The grounds, type and the content of a business change cannot be determined based on the slip and from that point of view these expenses are considered to be undocumented. At this point, it should be taken into account that this is not the personal expense settlement using corporate account. If the payment refers to these expenses, we are talking about property assignment to meet owner’s personal needs, and it is subject to the individual income taxation calculated at the 15% rate for a gross basis, while the posting is conducted via the account 723 – Employer’s Personal Income. If these are employee’s personal costs, it is necessary to calculate the tax and salary contributions first and conduct posting via the 52 group account recognizing it in the tax basis balance sheet.
– Expenses presented based on a fiscal receipt – the fiscal receipt does not represent an accounting record, so that such expenses are thus considered to be undocumented. However, if the fiscal receipt contains the data on a legal entity (which is the case at some gas stations) and a signature, identification mark of an authorized person or it is sealed with a stamp, it is considered to be an accounting record and a documented expense.
– Expenditures are also presented based only on an invoice, accompanied by no additional documents. Sales tax inspector can request a bill of lading as a proof that the products are delivered and received, and in terms of services, he can request a proof that a service is provided. If the additional documentation does not exist, this can be considered an undocumented expense.
Expenses That Are Not Incurred to Perform Activity:
Article 7 Paragraph 1 Item 8 of the Law prescribes that the expenses which are not incurred in order to perform a business activity are not debited to the expenditures recognized in a tax basis balance sheet. Legal entities present the amount of these expenses that are not recognized in the tax basis balance sheet in the PB-1 form under the ordinal number 14 and entrepreneurs present it in the PB-2 form under the ordinal number 15.
The expenses that do not represent a direct condition to perform a business activity i.e. do not represent a consequence of the activity performance nor are related to a tax payer’s income earning but they represent private income are considered to be the expenses that are not incurred in order to perform the activity.
A deficiency debited to expenditures is an expenditure recognized in the tax basis balance sheet. If it was, however, determined that the deficiency had been made as a result of an assignment to personal needs or the need that were not related to the activity performance, an expenditure presented in that way would not be recognized as an expenditure in the tax basis balance sheet.
Providing benefits and settling personal expenses of employees is considered to be income that is not subject to taxation and the calculation of salary contributions, while the expenditures are recognized in the tax basis balance.
Recreation and team buildings of employees are considered to be recognized in the tax basis balance sheet.
Other personal expenditures – severance pays, jubilee awards, solidarity allowance, reimbursement of expenses, gift expenditures are considered to be expenses that are recognized in the tax basis balance sheet.
Employee life insurance premia represent income that is subject to the taxation of salaries and all accompanying social security contributions. They are recognized as expenditures in the tax basis balance sheet.
Employee additional and voluntary retirement insurance premia – the expenses that are recognized in the tax basis balance sheet and considered to be the expenses made for the purpose of activity performance.
Charitable expenses – medical, educational, scientific, humanitarian, religious, sports, environmental expenses… The sum of these expenses is recognized at the maximum amount of 5% of a total income in accordance with the Article 15 of the Law and these are not the expenses that are not incurred for the purpose of activity performance. However, if the mentioned amounts are given to the entities i.e. organizations that are not registered for that, they will not be recognized even if they do not exceed the 5% limit and will be treated as an expense that it is not incurred in order to perform activity.
Expenses made for the purpose of investing in the culture are recognized as the expenses in the tax basis balance sheet up to the amount of 5% of the total income, if they are made in accordance with the Rulebook on Investments in the Field of Culture.
Undocumented reimbursement of employee transportation expenses – according to the opinion of the Ministry of Finance dated February 2019, these reimbursements represent an undocumented expenditure which is not recognized in the tax basis balance sheet if the employer does not have a valid accounting record such as an invoice issued after the purchase of a monthly prepaid travelcard, daily card or a single ride card.
Consulting, management, marketing and similar services provided by foreign companies – the services provided by foreign suppliers – related legal entities are very specific because there can be suspicion that these are fictional legal affairs conducted to gain profit and, subsequently, lower the tax liabilities in Serbia, so if there is no valid evidence that the services provided by foreign suppliers are really provided and that their payout is justifiable, a tax inspector can classify them as undocumented expenses or the expenses that are not related to business. Subsequently, when it comes to received services, especially those provided by foreign suppliers – related legal entities, it is important that the tax payer acts preventively and in a timely manner.
Also, the expenses that can be considered undocumented or those that are not made in order to perform an activity can include: Value adjustment and a relief of debt for a given security, an expenditure incurred as a result of share transfer without consideration at the favour of a related entity, as well as the expenditure presented based on the property tax paid by a legal entity – Lessee of real estate owned by the Lessor.