Business goal concept: new old "must have" for business
Roman Kobets, Attorney-at-Law, Senior associate in law company INPRAXI LAW
The adoption of Law № 466-IX created the illusion of introducing a new concept of a reasonable economic goal (business goal), however, this concept has been widely used by tax authorities and has been reflected in judicial practice for a long time. Should be understood that business goal is the goals of any entity to make gains or maintain assets. In other words, no entrepreneur will work for the sake of loss.
Amendments to item 14.1 (14.1.231) of Article 14 of the Tax Code of Ukraine at first glance indicate that the business goal concept can be applied only to transactions with non-residents. However, numerous case law emphasizes that a reasonable economic goal should be in any business transactions in tax accounting. Otherwise, business transactions unreasonably increase the declared costs of the enterprise and reduce the object of taxation.
So, if we are going to classify a transaction as an expense, it must change the state of the company's assets, have a business purpose and must be confirmed by primary documentation.
It begs the question when should this profit be received: immediately or in the future?
The case law on this issue shows that the economic effect of a business transaction is not limited in time regarding the result. In other words the company may receive income from a business transaction not immediately after its implementation, but can count on the economic effect in the future. For example, an enterprise purchases English language training services in order to expand its customer base in the future and increase sales of goods or services. At the same time, let's not forget that business activities are carried out at your own risk and this means that not all transactions can lead to a positive economic effect. The collapse of markets, changes in market conditions, external economic factors as well as ultimately incorrect management decisions can negatively affect a particular business transaction, however, it does not mean that the company did not have a business purpose when concluding the agreement.
On this issue the courts note that the transaction may be unprofitable due to objective factors, however, the influence of such factors on the economic effect of the operation must be proved in accordance with the procedure established by law.
Thus, we can conclude that the business purpose availability in a business transaction is not limited to time and can lead to losses, but in both cases, these circumstances are subject to proof.
- It is important to move away from the concept of sufficiency to confirm the feasibility of the transaction only through the primary documentation in tax accounting. Currently contracts, acts, invoices, payment documents, etc. are no longer enough.
- In the course of carrying a business transaction, remember that there is a high probability that you will have to prove to the tax authorities that a particular transaction had a business purpose.
- The evidence base for the existence of a business purpose can be quite broad, for example: correspondence with contractors, a report from your management on the feasibility of a particular agreement, market analysis, economic expertise, memoranda, contracts, etc. Keep these materials, especially if the inspection of your contractor raises questions, and you still make the management decision to enter into a contract.