Providing accommodation for contractors and tax costs
Acquiring new customers often requires entrepreneurs to establish business contacts. During the talks, it is not uncommon to provide overnight accommodation to contractors. In today's article, we will consider whether such an expense can be classified as a tax expense of business activity.
Providing accommodation for contractors - the initial position of the tax authorities
Originally, in disputes with taxpayers, the tax office took the position that expenses for accommodation for contractors cannot be included in tax costs. In order to justify this thesis, the tax authorities argued that providing accommodation to contractors is expenditure on representation, which, in accordance with Art. 16 sec. 1 point 28 of the CIT Act and art. 23 sec. 1 point 23 of the PIT Act may not constitute a tax cost. In developing this thesis, the tax office indicated that the expenses incurred by entrepreneurs to cover the costs of accommodation for contractors are aimed at representing the company and building its prestige.
In the opinion of the tax office, expenses for accommodation for contractors undoubtedly exceed the level of hospitality customarily adopted in this type of contacts and serve to build a specific impression in the reception of the company. Moreover, the authorities were of the opinion that such accommodation is nothing more than activities aimed at ensuring convenience and comfort, aimed at presenting the entrepreneur as a prestigious partner. As a result, in the issued individual interpretations, the tax authorities finally concluded that the expenses related to the contractors' accommodation costs incurred as part of official business contacts are aimed at building a positive impression in the perception of the company, therefore, as representation costs, they cannot be included in tax deductible costs (cf. individual interpretation of the Director of the Tax Chamber in Katowice of 27 May 2010, No. IBPBI / 2 / 423-421 / 10 / MS).
Changing the approach of tax authorities
However, on the basis of the recently issued interpretations, it can be noticed that the tax authorities have changed their minds on this matter and are now publishing a position favorable to taxpayers. Well, in the light of the latest interpretations, expenses for accommodation for contractors should be considered in the context of general tax deductible costs. Therefore, if the described expenditure is related to the cause and effect of obtaining income from a given source or maintaining or securing the source of income, it may be included in tax costs.
Currently, the tax authorities indicate that tax costs are both expenses directly related to the income obtained and expenses indirectly related, if it is shown that they were rationally incurred in order to obtain income (including to ensure the functioning of the source of income), even if, for objective reasons, the revenue was not achieved.
It should also be added that the costs incurred to maintain the source of income are costs that have been incurred so that the income from a given source of income continues to be obtained and that such a source continues to exist at all. On the other hand, the costs of securing the source of income should be considered the costs incurred to protect the existing source of income, in a manner that guarantees the safe operation of this source.
In the light of the above theories, the tax authorities concluded that providing accommodation for contractors is an expenditure indirectly related to the functioning of the enterprise as a whole. Moreover, contrary to the previous position, there are no grounds to classify such an expense as increasing the prestige and influencing the company's representation.
The entrepreneur invited his main contractor for business talks to discuss the terms of the new order. The negotiations were carried out until late at night. The entrepreneur provided the business partner with an overnight stay in a nearby hotel. The cost of accommodation for the contractor can be recognized as tax deductible costs.
Similarly indicated by the Head of the National Revenue Administration in the tax ruling of September 13, 2017, No. DPP13.8221.3B.2017.MNX:
Taking into account the above, it should be stated that the expenses incurred by the company to provide accommodation for current and potential contractors are not excluded from tax deductible costs pursuant to Art. 16 sec. 1 point 28 of the Corporate Income Tax Act, because, as the state of the case shows, the expenses incurred by the company were necessary in order to organize the business meetings in question.
Therefore, the purpose of these meetings is not only to create a good image of the applicant or to create positive relations with contractors. The expenses incurred are incurred in order to achieve income or to maintain or secure the source of income, and thus may be included in tax deductible costs.
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Additional conditions for taxpayers
It is important for entrepreneurs to remember about the cause and effect relationship between the costs incurred and the conducted activity. As a consequence, meetings with current and potential contractors and expenses for accommodation cannot be purely entertainment or consumption-related. Although the above condition is defined very generally and it is impossible to indicate at what point the cost of accommodation for the contractor may exceed the main goal, but it is certainly necessary to keep moderation and appropriate proportions in the actions taken.
The entrepreneur invited a potential foreign contractor for business talks. As part of the overnight stay, the entrepreneur provided accommodation in a five-star hotel 100 km away from the company's headquarters, SPA packages, sightseeing tours and additional attractions. In the example given, it can be assumed that the scope of expenses incurred exceeded the purpose of the meeting, which is to establish business contacts and conduct talks.
In addition, it should be noted that the entrepreneur is also obliged to properly document the above-mentioned expenses. At the same time, the evidence at hand may not be limited to invoices (bills) stating the amount of expenses incurred, but it should be evidence that makes it possible to establish the cause-and-effect relationship of the expenses incurred with income from business activity, as well as confirming the rationality of the expenses incurred.