In 2008, the Company made corrections of its accounting records for a period of 2000-2005 (the aggregate amount of corrections of income and expenses was booked in 2008). These corrections were not reflected in the 2008 CITR; nevertheless, the Company filed additional CITRs for 2001-2004 (no additional CITRs were filed for 2000 and 2005 as these years were considered lapse periods). However, the Tax Office included the income in the 2008 tax base, without reflecting the related expenses in the tax base for the same year. According to the AFD, the Company failed to demonstrate that the expenses of the 2000-2005 taxable periods had not been booked in prior periods which is why the tax authority did not reflect those expenses in the 2008 CITR.

The Supreme Administrative Court (“SAC”) ruled that the tax authority cannot request the income/expenses to be reflected in the tax base for the taxable period in which the accounting correction was made provided that the income or expenses relate to another taxable period. Furthermore, it is irrelevant that tax can no longer be additionally assessed for that taxable period because of a lapse of claim.

The judgment implies that if a retrospective correction was made in the accounting records due to an error, this would not affect the tax liability for the year in which the error was identified. We would like to note in this context that this involves corrections of errors made by mistake rather than deliberately to postpone the tax liability.

In addition, the Company provided a loan which was insured against risk at Exportní garanční a pojišťovací společnost (“EGAP”). An insured event occurred in 2003 (the receivable became uncollectible). Since that year, EGAP has paid out insurance benefits to the Company in an amount corresponding to the repayments of the original loan, as defined in the agreement concluded with the Company. Concurrently, the original receivable was gratuitously assigned by the Company to EGAP. In 2008, the Company recorded in its accounting records a receivable from EGAP, with the instalments recognised in the balance sheet as a decrease of the receivable’s value. Nevertheless, from the tax authority’s perspective, the Company concluded with EGAP an insurance rather than re-insurance contract for which reason Section 77 (a) (1) of Regulation 501/2002 Coll. does not apply and Section 27 of Regulation 500/2002 Coll. is used instead. As a consequence, insurance benefits should be recognised as income (not in the balance sheet).

It may be inferred from the SAC’s ruling that differentiating between insurance and re-insurance is rather insignificant. The tax base cannot be determined solely based on accounting regulations. The tax authority cannot additionally assess income tax based on the mere assertion that the accounting records of a company do not comply with its statements without concurrently providing convincing evidence of the true nature of the transaction and, accordingly, its tax deductibility in the respective reporting period.

The article is part of dReport – December 2018, Tax news; Grants and investment Incentives.