Selection from tax case-law of the Supreme Administrative Court

4. 7. 2018

Partial tax base for the purposes of tax abatements

In its finding no. 6 Afs 73/2017-27, the Supreme Administrative Court defined the correct procedure of understanding of the partial tax base for the purposes meeting the requirements of Article 35ca of the Czech Income Tax Act, i.e. the possibility of a spouse abatement and an offspring allowance while applying the costs in a form of a lump sum.

In the given case, the tax payer reported two sources of independent business activity income in his Income Tax Return – private commercial activity and a general partnership shareholder income – and both were included in the tax base as defined in Article 7 of the Income Tax Act. In accordance with the law, the lump sum costs were deducted from the income generated from the first line of business only and the offspring tax abatement was claimed. The financial authority and later the Appellate Financial Directorate reached a conclusion that the above claim may not be made as the partial tax base amount exceeded 50 per cent of the whole tax base.

Supreme administrative court confirmed the above decision of the financial administration claiming that all revenues that are included in Article 7 of the Czech Income Tax Act are “needed to be deemed a partial tax from which the costs were claimed on a form of a lump sum” within the meaning of Article 35ca of the Czech Income Tax Act. As the Supreme administrative court see it, both incomes cannot be seen separately for the 50% ratio calculation and, consequently, the fact whether the lump-sum method could in fact be used or not has not also be considered independently.

The given provision may be implemented for the 2017 tax period for the last time. It means that the tax payers may decide for the last time what amount of the lump sum they will apply in connection with the subsequent possibility to claim the spouse bonuses and/or the offspring abatements.


Appropriateness of doubts removal procedure length

Ruling of the Supreme Administrative Court (the SAC) no. 9 Afs 332/2017-39 concerned stipulation of an appropriate length of doubt removal procedure period on the part of the tax administrator. In September 2014, the complainant submitted a VAT return containing an amount exceeding VAT due; next month, she received appeal to remove the doubts from the tax office and subsequent on-the-spot checks were performed, which, however, did not succeed in removing the doubts. The authorities, then, turned to the claimant’s suppliers to provide documents and information on their mutual co-operation and later commenced a tax inspection which confirmed the original amount of the VAT. The procedure lasted for seven months and the steps were taken in succession and not simultaneously (when possible) with considerable delays caused by insufficient personal sources, as the authorities claimed.

The SAC ruled that it is not admissible for a procedure which was established as a fast and effective one for a doubt removal to be unreasonably prolonged and to surpass the intended legal framework. Also, the SAC decided that it is not within its authority to decide at which point the procedure became illegal – it is necessary to take all conditions of each case into consideration, e.g. the average margin of error or usual delays; hence, the case was returned to the Municipal Court for further proceedings.

In its new ruling, it should particularly deal with the question of when the procedure of doubt removal becomes an illegal one in the consequence of the authority’s inability to work with the rate required for the feat. As of now, no statement has been made, but the ruling will surely be one to follow.


Reasonability of costs

Ruling no. 6 Afs 55/2017-33 deals with a case of a complainant running two surgeries with one landline and six mobile phones. He claimed the prices of all the devices as taxable ones as he deemed them directly connected with his business activities; the financial authority commenced a tax inspection and reached a decision that the rightfulness of the claims on telecommunication services could not be proved.

The SAC supported the above logic of the tax authority claiming that it is not possible to admit automatically all the costs connected with telecommunication services. Also, it was not possible to ascertain why the claimant used three times more devices than there were surgeries. The SAC does not exclude the possibility that the claimant may have needed to use more mobile devices at the same time (which probably disproves the advantage of mobile phones in the phone call recipient availability), but they, then could and should prove who and how the devices were used in connection with performing the business activities. The SAC deems it correct for the tax offices to recognize costs for two of the devices only as there could be no doubts that they had been used by the claimant and a collaborating person for the purposes of the operation of the claimant’s two surgeries.

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