The tax office refused to allow the deduction of an unused tax loss against the tax base determined retrospectively following a tax audit

The taxpayer reported a tax loss for the 2011 tax year. This loss was not fully deducted in subsequent periods due to an insufficient tax base. A tax audit was carried out on the taxpayer for 2017 and the tax administrator increased the tax base (Protocol). Following the audit, the taxpayer requested the tax administrator, as part of the assessment proceedings, to deduct the relevant portion of the 2011 tax loss (pursuant to Section 52za(4) of Act No. 595/2003 Coll. on Income Tax).

The tax administrator rejected the request, primarily on the grounds that the taxpayer had failed to provide evidence regarding the deduction of the tax loss, as a result of which the tax administrator was unable to verify the accuracy of the reported loss. The tax administrator recommended that the taxpayer file an amended tax return after the acquisition. This approach would have resulted in a higher audit finding and a higher penalty for the additional tax assessed.

Decision of the Ministry of Finance

According to the Ministry of Finance’s decision, a general challenge to the taxpayer’s compliance with the arm’s length principle in the 2011 tax period is insufficient to prevent the deduction of a tax loss. If the tax administrator fails to prove the incorrectness of the tax loss claim (e.g. due to incorrect transfer pricing) for the tax period in which the tax loss was claimed, it cannot refuse the deduction of this tax loss in a subsequent tax period. Given that the taxpayer’s retention period for accounting records for 2011 has expired and a tax audit cannot be carried out for that year, the tax administrator should have proceeded, inter alia, in accordance with Section 30 and Section 52za(4) of the Income Tax Act and Section 3(2), Section 24(4) and Section 44(1) of the Tax Code, and apply the tax loss deduction during the assessment proceedings, when the taxpayer requested it.

In other words, since it is not possible to carry out a tax audit for 2011 and the time limit for retaining accounting records has expired, the taxpayer’s submitted tax return must be regarded as a legally valid tax assessment. This assessment, like a final decision by the tax authority, is subject to the presumption of correctness. The taxpayer is no longer obliged to prove the correctness of their claims or to rebut any doubts raised by the tax authority.

Conclusion

A general challenge to the accuracy of a tax return is not sufficient to disallow the deduction of a tax loss reported therein. If the tax authority fails to demonstrate a specific inaccuracy in the reporting of the loss, it cannot refuse to allow the deduction at a later date. Once the time limits for retaining documents have expired and the right to assess tax has lapsed, the tax base or tax loss reported by the taxpayer is deemed to be correct.