Winning defence of the right to deduct expenses as tax-deductible costs after the limitation period for tax liability

The tax authorities challenged the client’s right to deduct multi-million expenditures on the purchase of goods as tax deductible  costs. The goods were acquired in one tax year but resold in the following year.

According to the tax authorities, since the limitation period for the tax liability related to the year of purchase had expired  (and thus the correctness of the tax settlement for that period could no longer be verified), these expenses could not be  recognised in the tax calculation for the subsequent period. Additionally, the authorities argued that the client had failed to  prove that the goods purchased in the previous tax period were the same goods subsequently resold in the following period.

MDDP team took a dual approach to the case. First, they successfully argued that the expiry of the tax liability limitation  period should not solely benefit the tax authorities but could also “work in favour” of the taxpayer. Secondly, they  undertook extensive evidentiary efforts to establish the consistency between the purchased and resold goods.

A key challenge in proving these matters was the fact that more than ten years had passed since the transactions took place.

This necessitated a range of non-standard evidentiary measures, including engaging an external IT firm to review the  company’s systems and conducting an in-depth analysis of warehouse documentation.

The explanations and analyses presented by MDDP, based on these efforts, ultimately convinced the tax authorities that the client was entitled to deduct the multi-million expenditures as tax-deductible costs. The case was of particular importance as  the findings regarding corporate income tax (CIT) also had implications for the client’s VAT settlements.

The attorneys in this case were Jakub Warnieło and Konrad Medoliński