**3. Cost of acquiring income**

The list of exemptions from income tax contained in the draft directive is relatively short.

(a) Grants directly related to the acquisition, manufacture or improvement of fixed assets

(b) Income from the sale of assets referred to in Art. 39, par. 2, including the market value of

**0 1 2 3 4 5 No** 

92.86 0.00 0.00 0.00 0.00 3.57 3.57 100.00

66.07 16.07 7.14 3.57 1.79 1.79 3.57 100.00

69.64 8.92 5.36 1.79 5.36 5.36 3.57 100.00

80.36 1.79 3.57 8.92 0.00 1.79 3.57 100.00

69.64 17.85 5.36 1.79 1.79 0.00 3.57 100.00

82.15 8.92 5.36 0.00 0.00 0.00 3.57 100.00

87.50 7.14 1.79 0.00 0.00 0.00 3.57 100.00

92.85 1.79 0.00 0.00 1.79 0.00 3.57 100.00

94.64 1.79 0.00 0.00 0.00 0.00 3.57 100.00

94.64 1.79 0.00 0.00 0.00 0.00 3.57 100.00

94.64 1.79 0.00 0.00 0.00 0.00 3.57 100.00

**Table 1.** The importance of nontax revenues for polish businesses (0, insignificant; 5, very significant) (in %).

**answer**

**Total**

Article 11 *Income exempt from taxation* reads: The following is exempt from corporate tax:

in-kind donations

8 Taxes and Taxation Trends

Revenues from forestry and agricultural activities

Accrued but not received interest on receivables, bank deposits and so on

Foreign exchange gains established at the balance sheet date but unrealized

Dividends and other revenues from participation in profits of legal

Returned taxes, charges and expenses

Interest received on excess payment

Grants, subsidies and payments received to cover the costs or as

Income earned from foreign governments derived from non-

Revenues generated from the economic activity of the SEZ

Income from real estate made available free of charge

Revenues established by decision of the head of the tax office

Source: Author's own calculation based on surveys.

persons

of tax

not included in KUP

reimbursement of expenses

returnable aid

(c) Distributed revenues received

(d) Proceeds from the disposal of shares

(e) Income from a facility in a third country

subject to depreciation in accordance with Arts. 32–42

The provisions of the Corporate Income Tax Act do not contain a strict list of expenses that are treated as tax-deductible costs [4]. According to the Act, deductible costs are costs incurred to generate revenue or maintain or secure sources of income, apart from the costs, which are listed numerically in the laws as not deductible.3 A literal interpretation of this provision leads to the conclusion that all incurred expenses, excluding those restricted by law,4 are tax-deductible costs as long as they remain in the causal link with revenues, including those aimed at maintaining or securing the functioning of the source of revenue. The provisions of the Act show that it is possible to recognize as deductible costs these expenditures, which judging rationally—can help to create or increase the company's revenue, provided that the expenditure has not been excluded from such costs. In the jurisprudence of administrative courts and tax authorities, the notion that costs within the meaning of the Corporate Income Tax Act may include those expenses that are in a causal relationship to the economic activity and the revenue obtained in respect thereof has perpetuated.

While defining deductibles for tax purposes, one should not use the definitions contained in other laws, e.g., the Accounting Law. The definitions presented in the theory of economics and

<sup>3</sup> Expenses that are not deductible for tax purposes are defined by the legislator in Art. 16, par. 1 corporate income tax.

<sup>4</sup> The basic condition for the recognition of the expense as a deductible cost is the absence of this expense in the catalogue of expenditures that are not recognized by the legislature as deductible costs. A list of these expenditures is set out in the law on corporate income tax.

finance and accounting law do not apply to the tax law, and for the purposes of interpretation of the texts of acts of tax law, one should only use the definition of tax expense in Art. 15, par. 1 of the Corporate Income Tax Law.5

It should also be noted that the definition formulated by the legislature is very general. Therefore, every expense incurred by the taxpayer should be subject to individual scrutiny in order to carry out its legal qualification. The exception is when the act clearly shows its affiliation to the category of deductible expenses or disables the ability to include it in such costs.

Base of Corporate Income Tax and the EU Concept http://dx.doi.org/10.5772/intechopen.72530 11

*In determining deductible costs, every expense - other than those expressly set out in the Act - requires individual assessments of the direct relationship with income and the rationality of action to achieve this income. Situations, in which this causal relationship is not clear, should therefore be solved according to* 

Expenses not recognized by the legislature as tax-deductible costs can be divided into three

• Expenses that are not included in the cost of revenues beyond the statutorily defined limits

• Expenses which, by their nature, are not deductible for tax purposes but in certain circum-

Among the presented groups of costs not considered deductible costs, one can distinguish the

The definition of deductible included in the draft CCCTB directive (on a common consolidated tax base) differs from that recognized in the corporate income tax. According to the provisions

(a) Expenditure on the purchase and modernization of fixed assets and intangible assets

In its judgement, the Supreme Administrative Court stated that:

*the principles of rational reasoning, individually for each case.*

• Loss of prepayments, advances and down payments

• Reserves created on the basis of the accounting law

(e) Expenditure on the operation of cars not included in fixed assets

• Interest, contractual penalties and damages

• Enforcement costs, fines and penalties

• Costs associated with tax-free income

(c) Liabilities and reserves, including, e.g.:

• Overdue receivables

(f) Other expenses, including, e.g.:

in the draft directive:

• Representation expenditure

or when no distinct conditions are met

• Expenses which re absolutely not deductible

(b) Losses and penalties, including, e.g.:

stances are recognized as such

groups:

following groups:

(d) Taxes

The wording of the provision on tax-deductible costs gives the company the ability to deduct for tax purposes any cost, provided that there is a direct or indirect connection with the activities and that bearing it has or may have an impact on the amount of income earned. Therefore, taxdeductible costs are all rationally and economically reasonable expenses associated with running a business whose goal is to achieve the protection and preservation of sources of income.

The most important prerequisite that must be met for a certain expense to be recognized as tax deductible is that there should be a causal relationship between the expense and the revenue. This involves such relationship that incurring the cost has an impact on the generation or increase of revenue. In its judgement, the court stated:

*undoubtedly the costs of revenues must be related to a specific source of revenue, i.e., the amount of income from that source is affected by the costs incurred in order to obtain revenue, i.e., there must be a causal relationship between the expenses incurred and the actual resulting income or the possibility of obtaining that income.*

Tax-deductible costs directly related to revenues should be considered these costs which directly affect the revenue acquired from that source. So these are all costs which are essential for the specified source of revenue to bring specific profits. To recognize the expense as tax deductible, it is not always necessary to demonstrate a direct link between it and the revenue. It should be noted that the deductible costs are all expenses incurred in order to obtain revenue, including in those incurred in order to maintain and secure a source of income, so that this source of revenue brings income in the future as well. Therefore, the costs will also include indirect costs associated with the revenue obtained, if it is shown to have been reasonably incurred in order to obtain revenue (including for ensuring the functioning of the source of revenue), even if the revenue is not achieved due to objective reasons.

Deductibles will therefore include such an expense that meets the following conditions:


<sup>5</sup> The exception is made when the lawmakers reer directly to the provisions of other acts.

It should also be noted that the definition formulated by the legislature is very general. Therefore, every expense incurred by the taxpayer should be subject to individual scrutiny in order to carry out its legal qualification. The exception is when the act clearly shows its affiliation to the category of deductible expenses or disables the ability to include it in such costs. In its judgement, the Supreme Administrative Court stated that:

*In determining deductible costs, every expense - other than those expressly set out in the Act - requires individual assessments of the direct relationship with income and the rationality of action to achieve this income. Situations, in which this causal relationship is not clear, should therefore be solved according to the principles of rational reasoning, individually for each case.*

Expenses not recognized by the legislature as tax-deductible costs can be divided into three groups:


Among the presented groups of costs not considered deductible costs, one can distinguish the following groups:

	- Loss of prepayments, advances and down payments
	- Interest, contractual penalties and damages
	- Enforcement costs, fines and penalties
	- Overdue receivables
	- Reserves created on the basis of the accounting law

finance and accounting law do not apply to the tax law, and for the purposes of interpretation of the texts of acts of tax law, one should only use the definition of tax expense in Art. 15, par. 1

The wording of the provision on tax-deductible costs gives the company the ability to deduct for tax purposes any cost, provided that there is a direct or indirect connection with the activities and that bearing it has or may have an impact on the amount of income earned. Therefore, taxdeductible costs are all rationally and economically reasonable expenses associated with running a business whose goal is to achieve the protection and preservation of sources of income. The most important prerequisite that must be met for a certain expense to be recognized as tax deductible is that there should be a causal relationship between the expense and the revenue. This involves such relationship that incurring the cost has an impact on the generation or

*undoubtedly the costs of revenues must be related to a specific source of revenue, i.e., the amount of income from that source is affected by the costs incurred in order to obtain revenue, i.e., there must be a causal relationship between the expenses incurred and the actual resulting income or the possibility* 

Tax-deductible costs directly related to revenues should be considered these costs which directly affect the revenue acquired from that source. So these are all costs which are essential for the specified source of revenue to bring specific profits. To recognize the expense as tax deductible, it is not always necessary to demonstrate a direct link between it and the revenue. It should be noted that the deductible costs are all expenses incurred in order to obtain revenue, including in those incurred in order to maintain and secure a source of income, so that this source of revenue brings income in the future as well. Therefore, the costs will also include indirect costs associated with the revenue obtained, if it is shown to have been reasonably incurred in order to obtain revenue (including for ensuring the functioning of the source

of revenue), even if the revenue is not achieved due to objective reasons.

• It remains in connection with the economic activity of the taxpayer.

The exception is made when the lawmakers reer directly to the provisions of other acts.

Deductibles will therefore include such an expense that meets the following conditions:

• It was incurred by the taxpayer; i.e., in the final analysis, it must be covered with resources

• It is definitive (actual); i.e., the value of the expenses incurred has not been reimbursed to

• It was incurred in order to obtain revenue or maintain or secure the sources of income.

• It cannot belong in the group of expenses that shall not be deemed tax deductibles in ac-

of the Corporate Income Tax Law.5

10 Taxes and Taxation Trends

*of obtaining that income.*

of the taxpayer.

5

the taxpayer in any way.

• It was properly documented.

cordance with the provisions of the Act.

increase of revenue. In its judgement, the court stated:

	- Costs associated with tax-free income
	- Representation expenditure

The definition of deductible included in the draft CCCTB directive (on a common consolidated tax base) differs from that recognized in the corporate income tax. According to the provisions in the draft directive:

*deductible costs include any costs incurred by the taxpayer for business purposes related to the achievement, maintaining or securing income, including costs of research and development work and the costs of increasing the capital or debt for commercial purposes.6*

(d) Corporate tax

Expenses for the purchase of land or the right of perpetual usufruct of land

Costs related to the operation of a car to the extent determined by the value of the car exceeding the equivalent of 20,000

Repayment of loans (credits), excluding capitalized interest on these loans

Interest on liabilities accrued but not paid or written off, including loans

Interest, fees and currency exchange differences on loans (credits that increase the cost of investment in development)

Interest on late payment of overdue budget payments and others

Reserves formed in accordance with the provisions of the accounting act

Depreciation write-offs calculated for tax purposes more quickly than for

Source: Author's own calculation based on surveys.

accounting purposes

Revaluation of assets in the accounting books

(f) Fines and penalties paid to a public authority for breach of any legislation

the taxpayer is able to demonstrate that he has incurred a lower cost

(g) Costs incurred by the company in order to generate income exempted from taxation pursuant to Art. 11; the amount of such costs is fixed at a flat rate of 5% of that income, unless

Enforcement costs related to defaults 75.00 14.29 3.57 0.00 3.57 0.00 3.57 100.00 Fines and penalties 76.78 10.71 5.36 1.79 1.79 0.00 3.57 100.00 Debts written off as overdue 58.93 19.64 3.57 0.00 3.57 1.79 12.50 100.00

Representation costs 55.36 32.14 5.36 3.57 0.00 0.00 3.57 100.00

Interest on loans granted by shareholders 44.64 25.00 16.07 1.79 3.57 3.57 5.36 100.00

**Table 2.** The importance of non-deductible costs for polish businesses in income tax (0, insignificant; 5, very significant) (in %).

**0 1 2 3 4 5 No** 

66.07 10.71 8.93 1.79 0.00 8.93 3.57 100.00

60.72 12.50 8.93 7.14 3.57 3.57 3.57 100.00

46.43 21.42 8.93 8.93 1.79 7.14 5.36 100.00

62.50 16.06 1.79 3.57 8.93 1.79 5.36 100.00

73.22 7.14 3.57 1.79 3.57 7.14 3.57 100.00

55.36 32.14 5.36 3.57 0.00 0.00 3.57 100.00

62.50 7.14 10.71 3.57 5.36 1.79 8.93 100.00

62.50 7.14 10.71 3.57 5.36 1.79 8.93 100.00

71.42 1.79 12.50 5.36 3.57 1.79 3.57 100.00

**answer**

Base of Corporate Income Tax and the EU Concept http://dx.doi.org/10.5772/intechopen.72530

**Total**

13

(e) Bribes

Euro

(credits)

It follows that the deductible cost of doing business should normally include all costs related to sales and costs associated with achieving, maintaining and securing income. The deductibility also covers the costs of research and development and the costs incurred in raising own or foreign equity for the business purposes. The supplement on deductible costs in the draft directive stipulates that:

*tax-deductible costs also include donations to charities specified in Art. 16, established in a Member State or in another country covered by the agreement on the exchange of information on request, comparable to the provisions of Directive 2011/16/EU. The maximum amount of deductible costs related to contributions or monetary donations to charities is 0.5% of revenue in the fiscal year.*

In the analysis of deductible cost for income tax and the concept of a CCCTB, the category of cause and effect relationship between the income tax and the cost of its acquisition is extremely important. The draft directive stipulates that deductible costs are the "costs incurred by the taxpayer for commercial purposes related to the achievement, maintenance or protection of revenue". This condition, referred to as the "economic purpose test", is ambiguous [5] and imprecise. As indicated earlier, a provision in the Polish law requires an individual approach to every cost incurred by the company, especially when it concerns the so-called indirect costs associated with maintaining sources of income. However, even a thorough analysis does not eliminate tax risks arising from the fact that the assessment made by the tax authority may be different from the subjective assessment of the taxpayer. It is then often the court that decides on the eligibility of cost as a tax cost. In one of its judgements, the Supreme Administrative Court stated:

*to include the expense in deductible costs it is not enough to hope that such income would one day be achieved. Each entrepreneur acting professionally must analyse the actions they take, and not just hope that they will prove to be beneficial.*

The risk of an erroneous inclusion of a cost into deductibles is also clear from the wording contained in the draft directive. The fact that the wording is imprecise may result in the assessment of the cost incurred by a company also being ultimately carried out by a court, as setting "economic purposefulness" of the expense incurred can be difficult and ambiguous. However, it should be emphasized that the draft directive contains a provision that "deductible cots are considered as such if they are incurred by the taxpayer for business purposes". This wording is still flexible than that contained in the law on corporate income tax.

The draft directive also allows for pro rata write-downs due to depreciation of fixed assets.

Article 14 of the draft directive lists the costs that are not deductible. These include, e.g.:


<sup>6</sup> Article 12 of the draft directive *Deductible expenses*


*deductible costs include any costs incurred by the taxpayer for business purposes related to the achievement, maintaining or securing income, including costs of research and development work and the costs* 

It follows that the deductible cost of doing business should normally include all costs related to sales and costs associated with achieving, maintaining and securing income. The deductibility also covers the costs of research and development and the costs incurred in raising own or foreign equity for the business purposes. The supplement on deductible costs in the draft

*tax-deductible costs also include donations to charities specified in Art. 16, established in a Member State or in another country covered by the agreement on the exchange of information on request, comparable to the provisions of Directive 2011/16/EU. The maximum amount of deductible costs related to* 

In the analysis of deductible cost for income tax and the concept of a CCCTB, the category of cause and effect relationship between the income tax and the cost of its acquisition is extremely important. The draft directive stipulates that deductible costs are the "costs incurred by the taxpayer for commercial purposes related to the achievement, maintenance or protection of revenue". This condition, referred to as the "economic purpose test", is ambiguous [5] and imprecise. As indicated earlier, a provision in the Polish law requires an individual approach to every cost incurred by the company, especially when it concerns the so-called indirect costs associated with maintaining sources of income. However, even a thorough analysis does not eliminate tax risks arising from the fact that the assessment made by the tax authority may be different from the subjective assessment of the taxpayer. It is then often the court that decides on the eligibility

of cost as a tax cost. In one of its judgements, the Supreme Administrative Court stated:

This wording is still flexible than that contained in the law on corporate income tax.

(a) Distributed revenues and repayment of equity or debt

The draft directive also allows for pro rata write-downs due to depreciation of fixed assets.

Article 14 of the draft directive lists the costs that are not deductible. These include, e.g.:

(c) The transfer of retained profits to other reserves forming part of the company's equity

*to include the expense in deductible costs it is not enough to hope that such income would one day be achieved. Each entrepreneur acting professionally must analyse the actions they take, and not just hope* 

The risk of an erroneous inclusion of a cost into deductibles is also clear from the wording contained in the draft directive. The fact that the wording is imprecise may result in the assessment of the cost incurred by a company also being ultimately carried out by a court, as setting "economic purposefulness" of the expense incurred can be difficult and ambiguous. However, it should be emphasized that the draft directive contains a provision that "deductible cots are considered as such if they are incurred by the taxpayer for business purposes".

*contributions or monetary donations to charities is 0.5% of revenue in the fiscal year.*

*of increasing the capital or debt for commercial purposes.6*

directive stipulates that:

12 Taxes and Taxation Trends

*that they will prove to be beneficial.*

(b) 50% of representation cost

Article 12 of the draft directive *Deductible expenses*

6



Source: Author's own calculation based on surveys.

**Table 2.** The importance of non-deductible costs for polish businesses in income tax (0, insignificant; 5, very significant) (in %).

While analyzing deductible costs for income tax and the CCCTB concept, it is important to note how businesses perceive the burden of costs that are not deductible for tax purposes. **Table 2** shows the importance of the costs that are not considered deductibles for Polish companies.

Common consolidated corporate tax base is a major initiative designed to eliminate obstacles to the creation of a single market.10 It is considered11 an initiative stimulating growth that should be undertaken in the first place in order to facilitate economic development and create new jobs. CCCTB concept would guarantee the coherence of domestic tax systems but no

Base of Corporate Income Tax and the EU Concept http://dx.doi.org/10.5772/intechopen.72530 15

According to the proposal for the directive, tax rates ought to be subject to fair competition. Different rates enable particular countries to maintain a certain level of tax competition on internal market. Furthermore, fair competition based on tax rates provides a greater transparency and allows the member states to take into account the competitiveness of their markets

Supporting research and development is one of the fundamental objectives included in the directive under discussion. As part of common consolidated corporate tax base, all costs associated with R&D are tax-deductible expenses. For enterprises that would decide to adopt the system, such an approach will be an incentive to further investment in research and development. In case of economic losses which are subject to cross-border compensation, consolidation within the framework of CCCTB will contribute significantly to reducing the tax base. Nevertheless, the implementation of CCCTB will expand the average EU tax base mainly due

The introduction of CCCTB would reduce or even eliminate barriers to conducting cross-border activity in the European Union. This is of profound importance for enterprises regardless of their size. In the case of small- and medium-sized companies, costs involved in adjusting the activity to regulations imposed in particular countries are a major barrier. Compared to the turnover of such firms, these costs are an important item. As for large enterprises, the possibility of cross-border settlement of tax losses is the main advantage of the new solution. A system will be chosen voluntarily. Since not all enterprises conduct their activity abroad, CCCTB will not require companies which do not intend to expand their business outside their homelands to cover costs associated with adopting a new tax system. Only methods for determining tax base will be subject to harmonization. It will not be the case with financial statements. Therefore, the member states will still apply domestic principles of financial accounting, and CCCTB will impose autonomous regulations on calculating corporate tax base. These regulations will not exert any effect on producing annual and consolidated financial reports. As for CCCTB, certain enterprises would have to follow uniform tax rules (applicable in the entire European Union) and would deal with single tax administration (one-stop shop). Having decided to apply common consolidated corporate tax base, the company is no longer subject to domestic corporate tax system as far as all the issues regulated by joint regulations are concerned. Enterprises conducting activity in more than one state will benefit from the possibility of cross-border loss relief and lower the costs involved in conforming to

10Communication from the Commission Towards a Single Market Act: For a highly competitive social market economy—50 proposals for improving our work, business and exchanges with one another (COM(2010) 608 Brussels

11Communication from the Commission Annual Growth Survey: advancing the EU's comprehensive response to the

and budgetary requirements while determining tax rates [6].

to the option taken as far as the depreciation of assets is concerned.

harmonization of tax rates.

27.10.2010)

crisis (COM(2011) 11 Brussels 12.01.2010).

The data contained in **Table 2** shows that for Polish company costs that are not considered deductibles in income tax do not have much significance. The least important include fines and penalties, enforcement costs, interest expenses, commissions and foreign exchange differences on loans. In contrast, the cost of interest on loans granted by shareholders has greater importance for tax-payers.

It is important to note the wording states that revenue, expenses and all other deductible items shall be recognized in the tax year in which they were achieved or incurred. It follows that the tax costs are deducted in the tax year in which they are incurred. Incurring a deductible cost occurs when the following conditions are met: firstly, the obligation to make payments; secondly, the ability to determine the amount of liability with reasonable accuracy; and thirdly, in the case of trading goods, transfer of significant risks and rewards of ownership of goods to the taxpayer, while in the case of services, receiving the services by the taxpayer. It should be stressed that the proposed solution is possible to implement in the Polish law on corporate income tax.
