If an employee travels by private car, the employer does not reimburse the expense for the fuel consumed, but pays them compensation for the use of their private car for official purposes, tax-free up to two kuna per kilometer traveled.
Written by: mr. sc. Marija Zuber, advisor-editor at the magazine Accounting and Finance
[email protected]
As of July 2 of this year, the fuel receipt is no longer a mandatory attachment to the travel order, neither when traveling by private car nor when going on a business trip in an official vehicle. This is due to amendments to the Income Tax Regulation which removed the provision of Article 14 regarding the obligation to attach a fuel receipt as one of the proofs that an official trip was made on a certain route. Let us recall that since August 2005, when the Regulation has been in effect, the provisions regarding the mandatory attachment of fuel receipts have been subject to numerous criticisms. Entrepreneurs have argued that the amount and extent of data required by the tax regulation complicate and unnecessarily increase the cost of doing business. The tax authority justified itself by claiming that without legal regulation of the mandatory content of the travel order as a document proving the justification of incurred expenses, it was difficult to control the payment of public revenues.
The tax authority explained that it was necessary to regulate these issues in detail to sanction the practice of travel orders often being used as a means of paying tax-free income without economic justification. And when entrepreneurs had almost adapted to the new rules, the tax authority relaxed and somewhat eased the regulations governing the amounts and conditions under which expenses incurred by a person sent on a business trip can be reimbursed.
A Minor but Valuable Change
Thus, the receipt for purchased fuel is no longer proof that an official trip was made on a certain route. This is a minor change as the provisions regarding the amount of tax-free allowances and the provisions regarding the mandatory content of the travel order remain unchanged, but it will greatly facilitate both employers and employees. Of course, if an employee travels in an official vehicle and pays for fuel with their own money on the way, the employer will still reimburse that expense based on the receipt. Such a receipt may or may not be attached to the travel order. If an employee travels by private car, the employer does not reimburse the expense for the fuel consumed, but pays them compensation for the use of their private car for official purposes, tax-free up to two kuna per kilometer traveled. Given the other prescribed content and mandatory attachments to the travel order, the tax administration has enough elements to assess in supervision whether the official trip was made for the purpose of conducting business or whether it is an illegal transfer of money from the entrepreneurial to the private sphere, without paying the prescribed public dues.
The Employer Can Determine the Hotel Category
From the perspective of labor law regulations, the travel order for a business trip does not have to be in written form, but accounting and tax regulations explicitly require a written or electronic form of the travel order. Namely, both the Accounting Act and the General Tax Act stipulate that the entry of data into business books is based on orderly and credible accounting documents. An accounting document is a written or memorized electronic record of a business event that serves as a basis for entering data into business records, but also for monitoring the conducted business event. The employer specifies in the travel order the destination to which the employee will travel, the means of transport, their work task, and how long the trip can last. The means of transport approved for the employee serves to determine the amount of expenses that the employer will recognize for the employee. If the trip is expected to last several days, the employer can also decide on expenses related to accommodation, for example, determining the hotel category. Of course, the employee can travel by another means of transport and stay in a higher-category hotel, but then they bear the difference in price themselves.
Car Only with Approval
In the collective agreement binding the employer, the work regulations, and sometimes in the employment contract concluded between the employee and the employer when establishing the employment relationship, it is determined which expenses the employer will reimburse the employee in case they are sent on a business trip. Tax regulations specify which expenses and under what conditions the employer can reimburse the employee tax-free, but they are not a source of the employee’s rights. For example, an employee can claim compensation for the use of a private car from the employer only if the employer has approved the use of the private car on the traveled route, and that up to the amount prescribed by the source of labor law that binds the employer, which is most favorable for the employee. Of course, tax regulations greatly influence the amounts of compensation that employers pay to their employees. If the tax regulation allows the payment of a certain compensation as a tax-free income, the employer is more cost-motivated to pay it to the employee. The obligation to pay public dues increases business costs, so it is in the employer’s interest to pay the employee those incomes for which there is no obligation to pay contributions and income tax.
No Compensation for Half-Board or Full-Board
Regarding the recognition of expenses for business trips, particular caution is required by the provisions regulating the purpose of per diems. According to the Income Tax Regulation, the per diem for a business trip within the country amounts to up to 170 kuna per day and is intended to cover the costs of meals, drinks, and transportation in the place to which the person is sent on a business trip. Separately from the per diem, the employee can be reimbursed tax-free for accommodation expenses based on the travel order, with the understanding that according to the hospitality customs applied in Croatia, accommodation expenses include overnight stay and breakfast.
In cases where the employee attaches a receipt for half-board or full-board for a business trip within the country to the travel order, there are no conditions for them to be reimbursed tax-free for the full amount of the hotel bill and receive a tax-free per diem because the payment of the half-board or full-board bill also covers expenses for which the per diem is intended according to the tax regulation. For the payer to be able to reimburse the cost of overnight stay with breakfast and pay the tax-free per diem, they must have information on which part of the hotel bill relates to the cost of overnight stay with breakfast.
What if Hotels Cannot Separate the Bill
Until 2006, the process of obtaining this data was simple, but since then it has been complicated due to the introduction of a 10 percent value-added tax rate on accommodation, half-board, and full-board services. Namely, when half-board or full-board services are consumed in a hotel, lunch and dinner included in that service are taxed at a VAT rate of 10 percent, while when consumed as a separate service, they are subject to VAT at a rate of 22 percent. For this reason, the hotel cannot issue a bill with separated items because the consequence of such a procedure would be different tax obligations for the hotel. Therefore, it is advisable to inform employees going on a business trip about this, and regarding the payment of per diems, to proceed in one of the following two ways: reimburse the employee the full amount of the hotel bill for half-board or full-board (but then there are no conditions for the payment of a tax-free per diem) or obtain credible documents about the price of overnight stay with breakfast (accommodation service) in the same facility and at the same time, and then reimburse the employee only the part related to accommodation based on the paid hotel bill and also pay them the per diem for the business trip. When it comes to business trips abroad, the regulation explicitly states that in cases where the employee is provided with meals, the per diem is reduced by 80 percent. The reduction of the per diem by 80 percent is mandatory in cases where both main meals, lunch and dinner, are provided to the employee. If only one meal is provided, for example, only lunch, the reduction should be halved, and the per diem should be reduced by 40 percent.
