TAX AUTHORITIES ABRUPTLY CHANGE THEIR HEART ABOUT INDIRECT COSTS – A RISK

This is to let you know about a radical turnaround made by tax authorities in their treatment of the tax deductibility of what is called indirect costs.

Previously, tax authorities consistently maintained that the tax deductibility of indirect costs depends on their accounting treatment. The practical result was that they could only be deducted for tax purposes when they were recorded as a charge to P&L for accounting purposes. This generally meant they were recognised for tax purposes "over time" in accordance with the dynamics of their accounting treatment as deferred charges.

But this approach was opposed by courts which confirmed the right to have indirect costs recognised for tax purposes on a one-off basis already at the time when they are "booked", meaning recorded in the accounting system.

The controversial cost items typically included, for example, building alterations, utility connection fees, know-how, transaction advice, advertising, sales commissions.

According to recent tax rulings, e.g. those dated 11 April 2019 ref. 0111-KDIB1-1.4010.68.2019.1.BS, 9 April 2019 ref. IBPB-1-2/4510-237/15-2/PH, and 8 March 2019 ref. 0111-KDIB2-1.4010.11.2019.1.BKD, the tax authorities are making an about-face and now claim that indirect costs may be deducted for tax purposes on a one-off basis at the time they are recorded in the accounting system based on the relevant document, such as an invoice. Importantly, tax authorities are also withdrawing their appeals in cassation against judgments in which provincial administrative courts challenged their previous approach.

This change has good and bad effects.

The good effect is that the new treatment is consistent with the approach of the courts and enables taxpayers to recognise their indirect costs on a one-off basis at the time they are incurred.

But the bad effect is that many taxpayers recognised their indirect costs in accordance with the previous approach of tax authorities, i.e. they deducted them for tax purposes "over time" in line with the accounting treatment.

Given the tax authorities' change of heart, we recommend verifying your tax treatment of indirect costs. Using the new approach, tax authorities may now attempt to challenge the recognition of such costs over time on the basis that the taxpayer's right was to deduct them for tax purposes on a single occasion at the time they were recorded in his accounting system. This can lead to tax arrears in relation to years in which the expenses were recognised gradually or to overpaid tax in relation to years in which the expense was originally incurred, unless tax claims for a particular year are time-barred due to the statute of limitations.

If this issue pertains to your business and you are interested in our assistance, please contact your WTS&SAJA consultant or our office.

Doradztwo Podatkowe WTS&SAJA Sp. z o.o. 

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This Newsletter is provided for general information purposes to keep you up-to-date with changes in tax law, tax rulings by authorities, case law of courts and interesting commentaries. Doradztwo Podatkowe WTS&SAJA shall not be held legally liable for any acts or omissions resulting from reliance on such information.

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