Tax Expenses Under Control

The end of the year is a natural time for companies to do some financial and tax “cleanup.” When preparing financial statements, we review expenses, adjustments, provisions, and transactions with related parties. It is also a good time to ask ourselves whether we can sufficiently justify the expenses we consider tax-deductible in the event of an audit. In practice, it is not enough to simply have an invoice and for the expense to appear, at first glance, to be business-related. During a tax audit, it may be necessary to prove that the service or performance was actually provided, was related to generating, securing, or maintaining taxable income, and meets other conditions set forth in tax regulations. These are some areas where it pays to be cautious.

1. Consulting and Management Services – An Invoice May Not Be Sufficient

“Consulting services,” “management fee,” or “advisory services” are among the items that warrant special attention – especially if they are invoiced to a Slovak company by a parent company or another company within the group. If only an invoice with a general description of the service is available, it may be difficult during an audit to prove what was actually delivered and what economic benefit the service provided to the Slovak company. We therefore recommend retaining contracts, purchase orders, reports, presentations, project deliverables, relevant email correspondence, and other evidence of service provision. In addition, for intra-group transactions, we must keep transfer pricing rules in mind.

2. Marketing, Advertising, or Image Promotion?

Corporate events, promotional items, refreshments, sponsorships, and various marketing activities may be subject to different tax treatments. The decisive factor may not be the description on the invoice, but the actual nature and purpose of the expense. Before the end of the year, we recommend reviewing significant marketing expenses and the related documentation. For a campaign, this may include, for example, a media plan, an order, photographs, campaign statistics, or other supporting documents proving its implementation and connection to business activities. Image promotion expenses deserve special attention, as the Income Tax Act sets specific limitations on their tax deductibility.

3. Services from Abroad

When dealing with an invoice from a foreign supplier, our assessment does not need to end with the question of whether it constitutes a tax-deductible expense. Depending on the nature of the transaction, it may be necessary to verify the VAT regime, any withholding tax, the application of the relevant double taxation treaty, or other obligations. For payments made abroad, it is advisable to analyze not only the expense itself but the entire transaction.

4. Expenses from Related Parties

In transactions between related parties, we should distinguish between two questions: Is the expense tax-deductible at all? And if so, does its amount comply with the arm’s-length principle? This is important, for example, in the case of management services, IT support, licenses, interest, leases, or costs allocated among group companies. The end of the year is a suitable time to review the results of the group’s Slovak companies and to verify whether the established transfer prices align with the transfer pricing policy and economic reality.

5. Reserves, Allowances, and Old Receivables

An accounting expense does not automatically constitute a tax expense. A typical example is reserves and allowances, for which tax legislation sets its own conditions. When closing the fiscal year, we recommend paying particular attention to older and high-risk receivables, reserves set aside for future expenses, and items where the accounting and tax treatments differ. It is equally important to review old liabilities, as these, too, may affect the tax base under certain circumstances.

6. Company Vehicles and Expenses with a Personal Component

Cars, fuel, phones, travel expenses, and other assets used by employees can create situations where business and personal use overlap. In such cases, we recommend taking a comprehensive approach to the issue. A single transaction can affect corporate income tax, VAT, and the employee’s income tax. At the same time, internal rules should reflect how the assets are actually used.

7. One-Time and Unusual Transactions

Every year brings transactions that are not part of the normal accounting process: restructurings, severance payments, contract terminations, asset write-offs, damages, inventory discrepancies, or special consulting projects. It is precisely with significant one-time items that we recommend resolving the tax assessment before closing the books. A few years later, when a tax audit occurs, obtaining documentation or explaining the business rationale for the transaction can be significantly more complicated.

What to Check Before Closing the Year?

When reviewing tax expenses, don’t just look at the accounting list of items. For significant or non-standard expenses, ask yourself three simple questions: Can we explain why this expense occurred? Can we prove that the service was actually provided? Do we have documentation that will allow us to prove this even several years from now?

Do you want to be sure that your expenses will hold up during a tax audit?

We can work with you before the end of the year to review significant and high-risk expense items, identify potential tax implications, and verify that you have sufficient documentation on hand. A year-end review can help uncover a problem while it’s still possible to resolve it, rather than having to address it for the first time during a tax audit.