Judicial practice

21 October 2018

Expenditures of business for context advertising: the judicial practice of cancelling tax fines

Today it’s hard to imagine any company that does not use context advertising to promote its own business in online search engines, such as Google. Until the prohibition of internet services of the aggressor country introduced in Ukraine in 2017, Yandex browser and context advertising service Yandex.Direct were quite popular.

Despite the fact that the use of context advertising appears to be logical in economic activity and the need for its use does not cause particular questions, the State Fiscal Service of Ukraine (hereinafter – the “SFS”) has a specific opinion on this.

The main points of the case:

In 2017 the General Office of SFS in Kyiv region conducted a planned on-site inspection of financial and economic activity of one of our clients – self-employed individual, who is on the general system of taxation. The inspection concerned compliance with tax, currency and other legislation requirements over the past three years. As a result of the inspection, no violations were found, except non-business-related expenditures for context advertising of the entrepreneur in Yandex.Direct system spent in in 2015-2016 (we emphasize that during this period the use of Yandex services in Ukraine was not prohibited).

According to the inspection results, the documents confirming the provision of context advertising services are all similar, they do not indicate the time expenditures and prices for the provided services, that is the provision of context advertising services and their connection with the entrepreneur’s economic activity is not proved. In this regard, the tax authority included in the signed tax audit act the amounts paid for the context advertising services to the general taxable income of the self-employed individual and, as the result, obliged the entrepreneur to pay from the mentioned amounts the personal income tax, the unified social tax, the VAT, military fee and even imposed tax fines.

Disagreeing with the above conclusions of the fiscal authority, our company in the interests of the client submitted a lawsuit to the Kyiv Region Administrative Court on the recognition as illegal and cancelling of the tax decision. According of the court ruling in the case No.810/1670/17 as of 26.09.2017, which was left unchanged by the decision of the Kyiv Appeal Administrative Court and the Supreme Court of Ukraine, our lawsuit was fully satisfied – the claimed tax decision was declared illegal and canceled.

Legal conclusions:

The legal position in the case is based on the following conclusions, being supported by the norms of the current legislation of Ukraine:

  • Lack of details in invoices and acts of completed works and their similarity is not a legal ground for making a conclusion on non-provision of services in case if the original documentation is compliant with the current legislation, whereas the current legislation of Ukraine does not establish any requirements to the rate of detailing of the primary documentation.
  • The main condition for the documentary confirmation of a business transaction is the possibility to conclude that the costs are actually incurred and aimed at obtaining of a positive economic effect, based on available documents. By itself, the lack of any detailing of services provided does not lead to the fact that the documents in question are the evidence of the absence of completed business transactions. The abovementioned conclusions are also confirmed by the judicial practice of the Supreme Administrative Court of Ukraine, the similar legal position is set forth in the ruling of the Supreme Administrative Court of Ukraine from August 5, 2015, in the case No. К/800/40727/14, as well as in the ruling as of August 5, 2015, in the case No. K/800/68410/14.
  • The appropriate reason for assigning the amount paid for advertising services to the cost structure of business is the aim of such expenses to receive profit by business in future, but the receipt of certain profit or any other result by business due to the incurrence of the relevant costs is not a compulsory condition for such cost incurrence. The similar legal position is contained in paragraph 3 of the Letter of the Supreme Administrative Court of Ukraine dated 02.06.2011 No. 742/11/13-11, which states that courts should take into account that for the purpose of confirming the right of a taxpayer for deduction and/or tax credit on VAT, the availability of the purpose of using the goods and services purchased matters, regardless of the actual results of such use.
  • In addition, the determining factor for confirming the right of the taxpayer for the tax credit and/or assigning the corresponding amounts to gross expenditures is the reality of the business transaction, that is, establishing the fact of a change in the movement of assets or changing the state of the taxpayer’s obligations as a result of the acquisition of goods (services), used by such a payer in its economic activity. The similar legal position is given in the ruling of the Supreme Administrative Court of Ukraine dated March 10, 2015 in the case No. К/800/65251/14.

The abovementioned decisions of the administrative courts in this case are available by this link.