Tax audits are a regular part of the business environment and typically focus on specific areas of operations where questions most often arise regarding the required documentation or the tax treatment of certain expenses.

In practice, it has been shown that most questions do not arise from the accounting itself, but from the way business events are documented and explained. Below, we highlight three areas that often attract attention during audits.

Official Travel and Travel Expenses

Expenses for business travel are among the items that tax and other regulatory inspectors very often focus on. The reason is simple: it's in this area that discrepancies between the formal documentation and the actual business purpose of the expense most easily arise.

For travel expenses to be recognized, it is crucial that there is a clearly documented and logically coherent body of evidence confirming that the trip was indeed undertaken in the interest of the business. In practice, this means that the travel authorization cannot be merely a formality but must be substantiated by concrete elements: defined purpose of the trip, timeframe, destination, as well as documentation confirming on-site activities.

Special attention in practice is paid to the calculation of per diems. Although the rules for their calculation are clearly prescribed, the problem most often arises in proving that the trip actually took place. That is why supporting documentation is required – receipts for accommodation and transportation, confirmations of attendance at meetings, conferences, or other business events, as well as any other evidence proving that the purpose of the trip was achieved.

Also, in situations where the vehicle is used for official purposes, it is necessary to keep a proper record of the vehicle's movements and mileage. This record becomes especially important when the vehicle may also be used for personal purposes, as distinguishing between business and personal use is often a key focus of inspection.

Foreign Services and Withholding Tax

When procuring services from abroad, these transactions not only represent a cost to the company but often also carry additional tax obligations. Most commonly, this involves the obligation to withhold tax, and in certain situations, VAT as well.

That is why it is important that tax treatment not be assessed afterward, but rather during the contracting phase or before the actual payment.

Several factors affect the final tax treatment:

• Nature of the service (e.g., licenses, consulting services, marketing, IT, etc.)
• State of residence of the service provider
• existence and application of a double taxation avoidance agreement

These agreements often determine whether withholding tax is applied, what the tax rate is, and whether there is an option for exemption or reduction of the tax. It is important to keep in mind that the reliefs under the agreements do not apply automatically. Their application depends on meeting certain conditions and having the appropriate documentation.

Tax treatment must be clearly defined at the time of payment. In certain situations, tax is charged to the supplier, which means it is necessary to correctly determine the gross and net amounts of the payment. If tax is paid by the company in situations where an exemption was available, such a cost may receive unfavorable tax treatment and unnecessarily increase total expenses.

Transactions between related parties

Transactions between related parties are one of the areas in which the way prices and business terms are set is closely examined. In such situations, particular attention is paid to whether the prices and business terms comply with the market principle, that is, the arm's-length principle.

In other words, prices between related parties are expected to be comparable to the prices that would have been negotiated between unrelated parties under similar circumstances.

For certain types of transactions, there is also an obligation to prepare a transfer pricing study, which documents how market prices are determined between related entities. If it is determined that the prices deviated from the arm's-length principle, any differences may affect the tax base and are reported on the tax balance sheet.

In practice, it has been shown that most questions during inspection checks do not arise from complex or unusual transactions, but from everyday business situations.

That's precisely why the tax treatment of such situations should not be a matter for post-hoc review, but rather part of the decision-making process. The earlier a situation is assessed, the less room there is for subsequent adjustments, additional explanations, and unnecessary costs.

In the next issue, we will review some additional areas that, although common in business, often require extra attention in practice with regard to tax treatment and adequate documentation.