“Can I use the tax credit for this …?” or “Will this … be recognized as a of the company?” are frequently asked questions.
Value Added Tax Act (VAT Act) defines the right of VAT credit, and the Corporate Income Tax Act (CITA) treats the right for recognizing an expense for tax purposes. I will not delve into details about the conditions that these laws list, in fact variety of cases and specific exist, but I will point some clear criteria which can always be used approximately accurately to determine the possibility of using VAT credit or recognizing a tax expense.
I will explain the criteria via an example, which I often used – the example with the tomatoes (I apologize to cucumbers for deliberately ignoring them). Let’s assume that company X operates a restaurant, while company Y runs a shoe production facility. Both companies buy tomatoes (even if not entirely clear why the second company does it, but they do nonetheless). During a tax audit, NRA auditors will not even ask why company X bought tomatoes, since it is quite clear that the tomatoes are bought for the company activity, i.e. the purchase clearly corresponds to the company activity (included in the receipts for the dishes offered in the restaurant menu). However, the audit will not go so smoothly in company Y, because the latter cannot prove that tomatoes are a relevant purchase to the company activities (shoe production).
As a recapitulation: the criteria which can easily give you a clue whether you can use the VAT credit or recognize the expense for tax purposes are related to evaluation of how relevant the purchase (cost) is to the company activities or, in other words, how the purchase will be used for creating sales in the company (as the VAT Act additionally requires that the generated sale is also a VAT taxable deal).
Note: the VAT Act and CITA may have different treatment of purchases/costs. The above criteria are general and should be used for general tax planning, as each case must be analyzed separately in details, as special tax provisions can also create additional conditions for using VAT credit right or recognizing the cost for tax purposes.