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Dear Readers,

This article will inform you about Judgment of the Supreme Administrative Court (the “SAC“) Ref. No. 5 Afs 208/2023-42 dated 26 July 2024. In that judgment, the SAC dealt with tax deductibility of costs of advertising involving video spots displayed on a LED light screen. In a tax inspection, the tax administrator expressed doubts as to the scope of the supply and did not recognise the costs as tax deductible. The Regional Court agreed with the SAC and confirmed the tax administrator’s conclusions.

What Was the Judgment About?

The complainant (a taxpayer) applied costs of an advertising supply in the form of video spots displayed on a LED light screen located in a building in their corporate income tax return for the 2015/2016 taxation period.

In a tax inspection, the tax administrator expressed doubts as to the declared scope of the advertising supply. For this reason, it called the complainant to prove that the light advertising was effectively run and played. It was impracticable to prove the frequency (scope) of the advertising’s screening on the basis of the submitted evidence. The tax administrator arrived at a conclusion that the complainant failed to bear the burden of proof and assessed additional corporate income tax.

Decision of the Regional Court (the “RC”)

The complainant had entered into a contract with a supplier, which specified the length and minimum frequency of the advertising’s screening a day. The complainant also provided a schedule of actual screenings, which, however, did not comply with the agreed conditions because the screenings’ frequency in the schedule was lower than agreed in the contract. Moreover, the LCD screen’s owner stated during the judicial proceedings that it had played the advertising more frequently at its own initiative. This indicated that the complainant did not monitor the advertising’s effective screening at all as it did not know about such fact.

In addition to that, the complainant submitted photographs and related metadata snapshots as evidence. In the RC’s view, the snapshots do prove the advertising’s screening but cannot be considered evidence of such screening’s frequency. Moreover, the metadata are easy to manipulate in the RC’s opinion and, as a result, they cannot be accepted as a key piece of evidence.

Additional submitted evidence included playlists. As those playlists were not complete playlists of the particular LED screen, the RC stated that they did not contain verifiable information about how and when those spots were screened and, as a result, cannot be considered conclusive.

The Regional Court agreed with the tax administrator’s conclusion that the complainant was unable to sufficiently prove the scope of the provided supply. As the complainant failed to bear the burden of proof in the RC’s opinion, the advertising costs cannot be considered tax effective pursuant to Section 24 (1) of the Income Tax Act.

SAC’s Statement

In the case under discussion, the SAC agreed with the Regional Court. The SAC found discrepancies in the agreed minimum number of screenings per hour in the submitted advertising contracts. When re-calculated to days, the screenings’ number was higher than the minimum number of screenings per day as determined in the contract, and the complainant was unable to explain the difference. A contradiction was also identified in the submitted playlist schedules that failed to comply with the contractual terms and conditions.

The SAC also confirmed the RC’s conclusions in terms of proving with the use of the LED screen’s photographs and the related metadata. Those pieces of evidence prove the supply’s existence rather than the frequency of the advertising spot’s screening.

The SAC found the tax authorities’ doubts about the effective scope of the spent expenses and tax deductibility of the declared advertising costs pursuant to Section 24 (1) of the Income Tax Act reasonable and confirmed that the complainant had failed to bear the burden of proof, which included the obligation to prove not only the advertising’s provision, but also the scope thereof.

Please feel free to contact us, if you want more information about the judgment. We are ready to help you.

Stela Bartošová
bartosova@clarksonhyde.cz