TAX NEWS NO: 2012/4
September 4, 2012
Change of Authority’s Opinion on Documentation and VAT Interpretation of Subsequent Price Discounts (“Credit Notes”) For Imported Goods.
According to earlier tax rulings of Turkish Tax Administration; regarding with cases which the VAT of the goods had been paid during the customs clearance stage; price discounts in favor of the resident importer entity which had been provided by the non-resident exporter entity with a document “credit note” are not within the scope of Turkish VAT Code, with the condition that the resident importer entity raises an official invoice without calculating VAT on even though such price discounts are interpreted as out of the scope of Turkish VAT Code. It is perceived that interpretation of the case for Turkish Tax Authority has changed according to 23.07.2012 dated B.07.1.GİB.4.34.17.01-KDV.24-2260 numbered tax ruling published on the website of Turkish Revenue Administration.
1- The ongoing procedure
Turkish Revenue Administration used to focus on the nature of the price discount (“Credit Note”), which was decreasing the debts abroad, in order to decide to the situation of the discount according to VAT Code.
According to the opinion of the Administration; sales premiums, revenue premiums, year-end discounts were all considered as discounts for a service provided and subsequently were subject to VAT whereas discounts arising from the change on the price of goods were not subject to VAT.
Tax Ruling - Ankara Tax Office dated 04.11.2008 numbered KDV-3935
It is perceived that, your company is Turkey operator of …. providing …. services and within the scope of this activity, you receive services from the mentioned non-resident company and reverse charge VAT was calculated for these services, however a “credit note” was issued later on by the same non-resident entity related with these services. You request our opinion as the Tax Authority on the following questions: Can VAT amount for this Credit Note be deducted from the earlier paid reverse charge VAT? If not, is this Credit Note subject to VAT?
According to 26 nr. VAT General Communique (L) section; discounts calculated and shown on invoices issued for goods and services are not going to be included to the VAT base, but payments made at period ends or when certain revenue is exceeded (under the names such as sales premiums, revenue premiums, year-end discounts) are subject to VAT.
In this context, credit note issued in the name of your company is subject to VAT and cannot be deducted from the earlier paid reverse charge VAT in case it is issued for services acquired from the company abroad or because of revenue premiums, sales premiums etc. which arise at year ends or after a certain revenue is exceeded according to an agreement between the parties. On the other hand, credit note is not subject to VAT, if, it is issued for decline of prices so that there isn’t any benefit from any service.
Tax Ruling - Istanbul Tax Office dated 08.09.2006 numbered 7055
Your company which is engaged in import and trade of healthcare materials submitted a petition demanding our opinion on the accounting treatment of credit notes/memos. These documents provide a discount between 10% and 35% to be deducted from your payables. These credit notes or memos are received after the goods have been sold. You want to learn whether it would be appropriate to include the discount in cost of goods sold or book the discounts as extraordinary income. The explanations which have been prepared taking the previously received opinions of the Ministry on similar issues into account are as follows;
The discounts applied by the vendor in favor of the importer after the actual importation date for these imported goods are out of the scope of Turkish VAT. However, it is required to issue an invoice to the non-resident vendor even if the transaction is out of the scope of Turkish VAT. Such invoice shall not include VAT and shall be recorded and shall be retained with other documents of price discount such as credit memos until the end of period of prescription.
Up to date, Turkish Revenue Authority’s general opinions and operations were carried out within the framework of tax rulings given above.
2- New situation arose with recent Tax Ruling numbered B.07.1.GİB.4.34.17.01-KDV.24-2260 and published on Tax Administration’s website on 23.07.2012.
In this particular tax ruling published with the heading; VAT procedures on price differences in favor of the importer entity for the imported goods, below articles of VAT Code are emphasized and conclusion is reached.
VAT Code’s below articles clearly states that;
- 1/1 deliveries and services provided within the framework of commercial, industrial, agricultural activities and independent personal activities are subject to VAT Law
-10/I commencement of the liability at importation is to pay customs tax pursuant to the Customs Law, and in cases of transactions not subject to customs tax, registration of the customs declaration
- 20/1 the taxable base for deliveries and services means the value of these transactions,
- 21/c VAT base includes other expenditures and payments incurred until the registration date of the customs declaration as well as the payments such as price differences and exchange rate differences calculated on the basis of the value of the good
- 24/c miscellaneous incomes such as due costs, price differences, interests, and premiums and all types of benefits, services and assets provided under the name of services and similar names are included in VAT base,
- 35 in cases where there is a change in the tax base due to the return of the goods, failure to realize the transaction, abandonment of the transaction or other reasons, the taxpayers who have conducted transactions subject to tax shall correct the tax they are liable to and the other party subject to that transactions shall correct the tax to deduct in accordance with the nature of the change and within the period in which the change took place.
Accordingly, in case a price discount in your favor due to transfer pricing adjustment occurs followed by the customs clearance of the imported goods, the tax base of the transaction will change because of the discounts, and this change should be corrected according to the Article 35 of the Code.
In this case, it should be taken into consideration that VAT amounts paid during the importation of goods are also considered as Input VAT and deducted and that Input VAT amounts should be corrected according to the change occurred for the price of goods.
This correction process will be undertaken on the VAT return of the tax period in which the change occurred and amounts deducted excessively will be declared at the “additional VAT” line of the VAT return. Thus issuing an invoice in the name of the non-resident vendor and calculating VAT over the deduction amount is not required.
Although this new opinion does not state the requirement of VAT calculation for the price differences, it leads to the same result for the taxpayers.
From taxpayer’s point of view, declaring additional VAT in the period of the change for the tax base because of the price discount is no different than issuing an invoice and declaring VAT.
With the condition that the overpaid VAT amount to the Customs Administration cannot be refunded simultaneously; this situation is going to put significant cost to the taxpayers’ side.
Unfortunately, there isn’t enough transparency on VAT refund process neither in tax nor in customs legislation for the price discounts. Even if the adjusted VAT can be refunded, long-lasting audit and refund procedures will create an unpleasant environment for the taxpayers.
Although the tax ruling covers only the adjustments for price differences related to transfer pricing issues, same view can be valid for all price differences in favor of buyers in Turkey.
It is our opinion that the authority’s view of VAT adjustment for the price differences according to Article 35 of the Code will create an unpleasant environment for the taxpayers.
We believe legal arrangements should follow this opinion for a faster and simpler refund procedure, if this new opinion is embraced by the Authority.
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