At the beginning of this year, in the process of closing the year 2013, most of the companies provide credits, refunds in some form to business partners with whom they carried out the largest transactions during the past year. Certainly, in most of the cases, credits are provided under terms and conditions set out in advance (e.g. discount is provided only if a certain volume of turnover is reached). But in some cases such conditions are not regulated in agreements concluded with the partners, and refunds are based on the ad hoc decisions of the management. In our current newsletter, we would like to draw your attention to experience gained so far in relation to subsequent credits and the practice of the tax authority, with focusing on the rules of the VAT Act.
Pursuant to Section 65 of the VAT Act, as a general rule, the tax base shall be determined on the basis of the consideration expressed as monetary value received by or due to the beneficiary either from the buyer of the product, recipient of the service, or a third party. Among business partners, however, it is a very often used practice to provide discounts from the above consideration for various reasons, on the basis of business policy or sales strategy. According to the VAT Act, however, not all types of discounts, price reductions can be considered as a discount which reduces not only the consideration payable by the buyer, but also the tax base, as the VAT Act requires the fulfilment of certain conditions for the reduction of the tax base. Moreover, companies providing discounts also determine conditions for the buyers, in order to receive price reduction.
Basically, the following three types of price discounts can be considered as discounts from VAT point of view:
- so-called cash discount related to early payment,
- so-called quantity discount as discount provided on the basis of the quantity of products, services sold earlier,
- business policy based discount.
Separately defined rules and conditions apply to the business policy based discount (e.g. it must be provided and made accessible on equal terms to all parties). Beyond the three classic types of price discounts, all other forms of discounts shall not be considered as a price discount under the VAT Act, thus it is possible that such discount reduces the consideration payable by the buyer, but it does not reduce the VAT base.
However, the VAT treatment of the discount may also depend on whether the discount is deemed to be an immediate discount (conditions are already met at the time of the sale of the product or the provision of service) or a subsequent discount (the parties determine the discount after the sale of the product or the provision of service). In case of an immediate discount, pursuant to Section 71(1) of the VAT Act, the amount of the discount is not included in the tax base, thus the seller or service provider issues the invoice at the discounted value, with indication to the amount of the discount.
In contrast, in case of a subsequent discount, the invoice must in each case be issued on the basis of the original price, and the discount may be provided subsequently - if conditions applicable to the discount are met - by issuing a document which corrects the original invoice. The correction of the invoice, however, and the reduction of the tax base with the discount, is not mandatory; it is left to the discretion of the issuer of the invoice in each case. Section 77(3) of the VAT Act also makes reference to the possibility of reducing the tax base and to the discretion of the issuer of the invoice by stipulating that the tax base may be reduced subsequently if after payment, a discount is provided in accordance with the given terms and conditions, without any amendment to or termination of the contract. Please note the amount remitted as a discount may subsequently modify the tax base only if it is possible to determine from which sale of products or provision of services the discount is provided.
If the seller or provider of services chooses not to subsequently reduce the VAT base with the discount, it is not necessary to issue a supporting document regulated in the VAT Act regarding the discount; but it is sufficient to issue a supporting document that meets the accounting regulations (e.g. credit note etc.). In such case, this discount shall be considered an uninvoiced subsequent discount. For the above reason, its accounting varies from the accounting of the so-called invoiced discounts where the VAT paid on the original transaction is also affected.
If the issuer of the invoice chooses to reduce the tax base, it is then obliged to issue a so-called document qualifying as an invoice. This document shall be issued according to the rules determined in the VAT Act, and it is used to modify the data content of the original invoice, and hence link the discount to a specifically defined sale of products or provision of services. In some cases, it may be necessary to modify the content of more invoices due to the provision of a discount. In such cases, it is acceptable to issue separate correcting documents regarding each original invoice, but it also possible to issue only a single document to correct the invoices issued in the given year. In the latter case, however, it should be taken into account that this document meets the regulations determined in the VAT Act. Pursuant to Section 170(1) of the VAT Act, a correcting document shall include the following data:
- date of issuance,
- invoice number,
- reference to the invoice (invoices), the content of which is modified by the document,
- specification of the data of the invoice (invoices) affected by the modification, and nature of the modification and its quantified effect.
In most cases, companies provided a subsequent discount on the basis of the quantity of products, services sold earlier. As an incentive to make regular purchases, the seller announced its discount in the form of refunding a specific amount in a form of a discount, if a certain quantity or value was reached. In case of such discounts, usually it can be determined only after more purchases whether the buyer meets the conditions for a discount. According to our experience, the VAT treatment of such reimbursements causes most of the problems in practice.
If the seller binds the discount to the condition of reaching a certain quantity of purchases, and it pays a fixed amount from the price or unit price of all of the buyers purchases made so far, or reimburses an amount determined as a percentage of the price or unit price, this practically means that the discount can be connected to certain purchases, and therefore the seller can provide the discount by the correction of all of its invoices issued in connection with the previous purchases.
However, in case of a discount where the seller reimburses a certain amount to the buyer in connection with a purchase of high value, irrespective of a specific performance, or the quantity and price thereof, without having specified the purchase whose price it reduces, then such reimbursement cannot be bound to specific performance. Thus, the tax base can not be reduced with the discount, hence the previous invoice (invoices) cannot be subsequently corrected either. This represents a typical case of so-called uninvoiced discounts.
Please note, that the tax authority assigns high priority to review the tax treatment of discounts and its findings are generally related to the following deficiencies:
- the issuer of the invoice reduced its tax base with a discount that is not defined by the VAT Act,
- the reimbursement treated as a subsequent quantity discount could not be linked to a specific sale, therefore it could only have been accounted for as an uninvoiced discount,
- the conditions of the discount were not supported by proper documentation,
- breach of the supporting documentation obligation, the issued correcting document did not contain all necessary data.
If your company has provided reimbursements, we recommend to review the tax and accounting treatment of the discounts and the supporting documents issued and to consult with an auditor or tax advisor if its needed in order to avoid the questions of the tax authority.