Deloitte: Research and Development Deduction: The Fundamental Ruling
The Regional Court in Hradec Králové ruled in favour of the plaintiff (ENERGO CHOCEŇ, s.r.o.), revoking the contested ruling and referring the matter back to the Appellate Financial Directorate for further proceedings, Deloitte writes.
The ruling fundamentally clarified the legal term “commencement of the implementation of a research and development project”, expressed the impossibility of generalising conclusions for individual taxation periods and, last but not least, expressed the necessity of appointing an expert for selected assessments.
In a dReport article in July, we discussed the upcoming news in respect of the research and development (“R&D”) deduction, which should result in decreasing the tax uncertainty and administrative burden for tax payers. The ruling issued by the Regional Court in Hradec Králové (the “Regional Court”), ref. no. 52 Af 18/2016-181, is further good news for payers utilising, or intending to utilise the R&D deduction. The ruling refers to an additional corporate income tax assessment and the related fine for the 2009 and 2010 taxation periods for failing to bear the burden of proof as a consequence of not submitting all business documentation, failing to meet the formal and material requirements of the R&D project and not substantiating the presence of an appreciable element of novelty and the necessity to clarify technical uncertainty.
Highlights of the ruling:
- The payer is not obliged to utilise all costs incurred in relation to R&D. In contrast, they may only deduct costs in respect of which they are able to bear the burden of proof before the tax administrator, taking into account their demonstrability, recording and administrative requirements.
- The Regional Court stated that “it may be concluded that the implementation of the R&D project is commenced upon the approval of a written R&D project draft by the authorised person, in which the processor defines the underlying goals, methods and planned costs of the R&D project and other basic details as stipulated by law.”
- Following the approval of the R&D project, the payer must maintain separate accounting records about the R&D project.
- It is solely at the discretion of the payer which activities they will perform prior to the date of approving the R&D project; the costs relating to these activities are automatically non-deductible.
- The Regional Court expressed the impossibility of generalising conclusions for individual taxation periods without demonstrating clear links. This was a response to the generalisation of conclusions whereby the tax administrator inferred from the wording of the internal guideline prepared by the payer that it retrospectively gave rise to the R&D project. It also applied this conclusion to the R&D projects that were, however, related to the period subsequent to the preparation of the guideline.
- In its previous rulings, the Regional Court had already confirmed the above stated necessity of appointing an independent expert, who will themselves assess the sufficiency of the documents submitted and the presence of an appreciable element of novelty and the clarification of technical uncertainty. This is owing to the fact that tax authorities do not have sufficient expertise to be able to assess the appreciable element of novelty, if any, and the clarification of technical uncertainty.
- The Regional Court also addressed the amount of evidence that the payer must submit in order for the appointed expert to be able to prepare the expert opinion for tax authorities. Unless the payer has been demonstrably completely inactive during the tax proceedings, it is fully at the discretion of the expert to assess whether the documents submitted are sufficient for formulating the relevant expert opinion.
>> Read full article by Jakub Vrkoč, Deloitte Czech Republic, here.