In the previous issue, we reviewed some of the areas that most often come under the focus of tax audits in practice. Below, we highlight additional business segments in which, due to their specific tax treatment, questions most frequently arise during inspections.

Representation expenses and business gifts

Representation expenses are common in business and often accompany business meetings, events, or collaboration with business partners. 

In practice, the key focus is not only on the type of expense but on its purpose and documentation. Every representation expense must be supported by documentation that clearly indicates it was incurred for business purposes, including information about the meeting participants, the occasion, and its connection to the company's operations.

When it comes to gifts, it is important to distinguish between gifts that are considered representation and those that can be considered promotional material. Special attention is paid to ensuring that gifts do not represent a hidden fee for services rendered or other forms of counterperformance, but are genuinely intended to foster business cooperation and relationships with partners. Gifts up to 20 KM with the company logo are fully recognized as a marketing expense, while gifts over that amount, regardless of the logo, are considered a non-deductible expense by the PU FBiH.

Given the prescribed limitations on the tax deductibility of these expenses, proper classification and complete documentation are key elements of compliance.

Goods Inventory and Stocktaking

For companies that deal in goods or materials, an inspection in practice doesn't just focus on whether the annual inventory was formally conducted, but also examines whether the company actually tracks inventory levels throughout the year and whether the accounting records match what is found in the warehouse, sales area, or production. This is where problems most often arise: goods are recorded in the business books but are not actually present, there is an unrecorded surplus, goods are damaged or outdated, or the value of the inventory in the books is unreasonably stated.

For this reason, it is important in practice for a company not to wait until the end of the year to identify a problem, but to regularly reconcile its book and actual inventory, especially if it deals with goods that circulate quickly, have an expiration date, or are at an increased risk of spoilage, waste, breakage, or theft. When a shortage is identified, it is not enough to simply record the difference. It is necessary to have a clear record of how the shortage occurred, who was responsible for it, and how such a discrepancy was treated accounting-wise and for tax purposes.If the losses are the result of natural causes (evaporation, drying, spoilage) or handling (package breakage), such a loss is non-taxable if it is within the prescribed norm. The norm is established by the company's internal regulations in accordance with legal provisions. The Regulation on the Application of the VAT Act prescribes the Normative for determining expenses for which VAT is not payable.

Normative.

Scholarships, donations, and sponsorships

Scholarships are often viewed as a simple and useful form of educational support, but from a tax perspective this area requires far more attention than it appears to at first glance.

According to the Law on Income Tax of the Federation of Bosnia and Herzegovina, a scholarship for students in full-time education is tax-exempt up to 75% of the average net wage in the Federation of Bosnia and Herzegovina, according to the latest published data of the competent statistical authority.

The Law on Corporate Income Tax of the Federation of Bosnia and Herzegovina recognizes as an expense scholarships granted to students and pupils who are not related parties to the taxpayer and who are enrolled in full-time education in Bosnia and Herzegovina, up to the amount prescribed by law.

The same applies to sponsorships, where the question often arises whether the expense meets the conditions for tax deductibility and whether there is appropriate documentation confirming the purpose of the payment.

The key difference between a donation and a sponsorship is the existence of a quid pro quo – while a donation is given without compensation, sponsorship implies a certain form of advertising or promotion for the donor. The tax treatment of these payments directly depends on their substance, which is why misclassifying a donation as sponsorship can have concrete consequences for a company's obligations.


Markarth Team