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37 (132) 2018
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Corporate Social Responsibility

CSR and tax costs

by Anna Ślasa and Honorata Zakrzewska-Krzyś – managers in the Outsourcing Department, Grant Thornton
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While looking at involving your company in CSR activities, consider the potential tax benefits of doing so.

It’s worth having a professionally developed CSR strategy that involves your management, financial and accounting personnel – and also your tax law advisers.

As a concept based on the win-win principle, CSR gives rise to many difficulties for tax offices and businesses. Tax office and finance ministry decisions make it difficult for companies to win all the time. Fortunately, because of the increased involvement of companies in CSR activities, awareness among tax officials is also rising. As a result, there are increasing numbers of favourable court rulings and successful individual tax interpretations. Here are some of the fundamental aspects of tax practice which should be considered while developing a CSR strategy.

CSR and CIT

There are many measurable benefits from implementing an efficient and well-thought-out CSR strategy. These include developing a more sustainable business, lower staff turnover, improved retention of the best employees, greater loyalty of clients and partners and higher resilience of the company to crisis situations. All of these indirectly raise the competitiveness of enterprises and hence increase revenue. This causal link isn’t that obvious to everybody. Yet to credit the incurred expenses to revenue costs, it’s essential to recognise them properly…

To comply with the provisions of the CIT Act, recognising expenses incurred with respect to CSR as tax costs is possible:

  • on general terms within the law on CIT [1]

  • if such expenses are not in the catalogue of costs excluded from corporate income [2]

  • the expenses are incurred to obtain, secure or maintain the source of income.

Since the objective of enterprises involved in CSR activities is to obtain, secure or maintain the source of income (and not to build a positive image to reach existing or potential contracting parties), it’s essential to accurately recognise these activities when justifying expenses incurred for CSR – by using the causal link between current or future revenue (the impact may be indirect or direct). Expenses must be properly documented, their connection with the conducted business activity must be maintained, and they must be kept non-refundable (permanent) – something that administrative courts frequently point out.

CSR and VAT

To confirm that particular costs incurred for goods or services entitle the taxpayer to deduct VAT, it’s essential to prove their strict connection with the taxed business activity and to translate them to future profits or savings. No more and no less. In practice, in case of inspection, it’s not enough to produce VAT invoices or proofs of payment only. Each incurred expense must be reasonably justified, preferably in the form of a long-term written CSR strategy, which should include a detailed description of the expected results of specific campaigns.  The key is not to focus on image only, but to indicate even indirect impact on the company’s turnover or saved expenses.

Where do the difficulties come from?

Concepts such CSR “are of relatively new origin in the Polish economic space” – pointed out the Supreme Administrative Court in its decision of 13 June 2018 [3]. This is one of the reasons for the inconsistent rulings on tax disputes related to corporate social responsibility. There’s no legal definition of the term ‘CSR’. Fortunately, the European Commission has defined CSR as “the responsibility of enterprises for their impact on society,” which is of great help. The originality of the CSR concept is also confirmed by the relatively recent date that it was systemised by the International Organization for Standardisation (ISO 26000) – 2010. And although CSR activities have a permanent place in the organisational culture in many of the largest Polish businesses, many people are still unfamiliar with the term. In practice, this lack of knowledge hinders proper qualification of CSR activities and expenses in the context of taxation.

Win-win

To sum up – under tax law in terms of VAT, any doubts concerning a business’s CSR activities come down to the question of whether the expenses incurred for buying certain goods or services had a close connection with the business, translating into profits or savings. In case of CIT, it is of key importance to show that the expenses were incurred to ensure current revenue or secure sources of revenue in the future.

Therefore, the taxpayers who want to benefit from tax deductions should maintain reasonable chronology of their CSR activities:

  • describe the CSR initiative,

  • secure its individual tax interpretation,

  • implement the assumed plan.

Only then they shall be able to show a win-win balance, while involving in various initiatives in the field of corporate social responsibility. In particular, from the financial perspective, the point of operations of businesses is to generate profits. If the businesses are also able to have positive impact on their community and environment – all credit to them for that.

CIT, VAT, CSR and the law

The right of taxpayers wanting to justify the tax-deductible expenses incurred due to CSR activities was acknowledged in many interpretations, [4]; the right to deduct the tax charged on the expenses incurred in connection with CSR activities was also confirmed in many individual interpretations. [5]

CSR at Grant Thornton

Grant Thornton – one of the leading audit and consulting companies, present on the Polish market for 25 years. A team of over 550 experts in Warsaw, Poznan, Katowice, Wroclaw, Kraków and Torun can implement even the most challenging projects in the following areas: audit services, tax, economic, European and legal advisory, accounting outsourcing, HR and payroll – irrespective of the size, type and location of the client’s business.

For many years, CSR activities have been executed at Grant Thornton in Poland as part of the three leading initiatives, such as support of orphanages in Chotomów and Lipnica, participation in the Dress for Success programme (for the benefit of long-term unemployed women, fighting for their financial independence and jobs), and participation in the Business Run (support of the Jasiek Mela Poza Horyzonty Foundation).

Footnotes

[1] Article 15 sec. 1 of the Act on Corporate Income Tax Law.

[2] Article 16 sec. 1 – in particular, point 28, which excludes costs of representation from tax costs, incurred especially with respect to food services, food and drink purchase, including alcoholic beverages. The nature of such expenses shall be each time evaluated individually; ‘representation’ shall be deemed to mean any activities undertaken to create and solidify a positive image of a taxpayer. Expenses incurred for advertising are tax costs provided that the advertisement is connected with business activity conducted for the purpose of generating income.

[3] Ref. no. I FSK 1420/16

[4] decision of 29 March 2018, no. 0111-KDIB2-1.4010.47.2018.1.BJ; decision of 14 December 2017, no. 0111-KDIB1-3.4010.400.2017.1.AN; decision of 30 November 2017, no. 0114-KDIP2-2.4010.233.2017.2; decision of 25 May 2017, no. 0114-KDIP3-1.4011.42.2017.1.KS; decision of 16 March 2017, no. 1462-IPPB5.4510.1101.2016.1.BC; decision of 4 April 2016, ref. no. IBPB-1-3/4510-259/16/TS; decision of 7 March 2016, no. IBPB-1-3/4510-92/16/MO; decision of 15 December 2015, no. ILPB3/4510-1-441/15-3/KS; decision of 30 October 2014, no. IPPB5/423-845/14-2/JC.

[5] Decision of 15 December 2011, ref. no. IPTPB3/423-233/11-2/MF; decision of 18 December 2012, ref. no. ILPP2/443-1002/12-2/MR; decision of 04 December 2013, ref. no. IPTPP1/443-730/13-4/MW; decision of 20 January 2014, ref. no. IPTPB3/423-419/13-2/IR; decision of 11 February 2014, ref. no. IPTPP1/443-783/11-5/S/13/MW; decision of 29 July 2014, ref. no. ILPP1/443-353/14-2/AW; decision of 02 October 2014, ref. no. IPPP1/443-1016/14-2/AW; decision of 30 October 2014, ref. no. IPPB5/423-845/14-2/JC); decision of 31 March 2015, ref. no. ILPB3/423-718/14-3/PR; decision of 15 December 2015, ref. no. ILPB3/4510-1-441/15-3/KS; decision of 07 March 2016, ref. no. IBPB-1-3/4510-92/16/MO; and decision of 05 October 2018, ref. no. ITPP1/4512-897/15/18-S/NK.

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