Building a positive company image and the right to deduct VAT
Expenditure on public-benefit activities is unrelated to a business's taxable activities and confers no right to deduct VAT. That was the Kraków Regional Administrative Court's conclusion in its judgment of 29 March 2017, I SA/Kr 92/17. The judgment is not final.
The facts were as follows. The company sells radio advertising airtime and advertising space on a web portal. As part of its marketing strategy, it planned to promote public-benefit activities on air and online, including support for families and foster care, integration, charity, health protection and promotion, science, culture, art and the environment. In its tax ruling application, it argued that addressing social issues through its business activity would build its image as a socially responsible entity, as part of its marketing strategy.
Promoting public-benefit activities and presenting the company as socially responsible could increase radio audiences and interest in the portal, measured in website visits. These factors influence advertisers' choice of media and could therefore affect revenue. Audience and website traffic also influence advertising rates.
However, in a tax ruling dated 11 October 2016, reference IBPP3/4512-437/16-1/EJ, the Director of the Tax Chamber in Katowice found that there was no connection whatsoever between the purchase of goods and services relating to the company's public-benefit activities and the sale of radio advertising airtime and advertising space on the portal. The tax authority argued that (…) 'there is no causal link between carrying out public-benefit activities which may be mentioned during the radio programme and a potential increase in the company's revenue from the sale of advertising airtime'. The Regional Administrative Court in Kraków took the same view.
CSR strengthens a company's image and influences income
Public-benefit activities carried out by a business are distinct from its economic activity. They may nevertheless have a connection, usually indirect, with that activity and thus justify VAT deduction on purchased goods and services. The essential condition is an identifiable link between the taxpayer's public-benefit activities and VAT-taxable business.
Creating a positive business image is an obvious purpose and effect of such activities. They can clearly translate into increased VAT-taxable sales or other benefits, such as a favourable local or national reputation, depending on scale, and a positive perception among existing and, especially, potential future counterparties.
To justify deduction of input VAT on related goods, however, the taxpayer must make appropriate efforts to ensure information about its public-benefit activities reaches the intended audiences among whom the project aims to build its image, such as the local community and current or prospective counterparties.
This must be distinguished from expenditure primarily incurred for public-benefit purposes, with only incidental reputational effects. A key consideration may be whether the scale of activities and spending is proportionate to the expected business benefit.
CSR often has marketing and advertising characteristics
In this context, public-benefit activity undoubtedly has marketing and advertising characteristics. It resembles free legal assistance, for which both administrative courts and tax authorities confirmed a link with VAT-taxable activities, and hence the right to deduct VAT on expenditure related to those services, by reference to its marketing character: the Undersecretary of State at the Ministry of Finance's response of 24 April 2012, on the Minister's authority, to parliamentary question no. 3376 on taxation of free legal assistance; and Supreme Administrative Court judgment I FSK 326/09 of 23 March 2010.
Currently, however, both authorities and administrative courts deny VAT deduction for public-benefit expenditure despite a connection with business activity. An example is Supreme Administrative Court judgment I FSK 1458/15 of 23 March 2017, denying deduction of VAT on goods and services used to build a children's recreation area donated to the city.
Some judgments favour taxpayers
There are also favourable decisions. In judgment III SA/Wa 2881/15 of 8 December 2016, the Warsaw Regional Administrative Court confirmed a company's right to deduct VAT on numerous social initiatives, including renovating children's homes, schools and hospitals. The company displayed its logo and publicised its financial contribution. The judgment is not final, however.
