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Romania: VAT implications after receiving subsequent price discounts (CJEU judgment)

Romania: VAT implications, subsequent price discounts

The Court of Justice of the European Union (CJEU) issued a judgment in a case concerning the value added tax (VAT) implications when there are price discounts (for example, in the case of volume discounts or canceled sales) offered at a later date. The upshot of the CJEU judgment is that there must always be an adjustment of the recovery of VAT after receipt of a discount at a later date.

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The CJEU held that a price discount results in an adjustment to the recipient’s VAT recovery, even absent a (credit) invoice specifying the supplies to which the discount related. For the adjustment of the VAT recovery, the CJEU found it was irrelevant that a supplier could no longer issue a correct (credit) invoice because it had ceased its activities.

The case is: World Comm Trading (C-684/18, 28 May 2020)

Background

The taxpayer (a company established in Romania)—with business activities including the sale of mobile telephones—entered into a distribution agreement with a company in Finland. Under this agreement, the Finnish company supplied mobile telephones to the taxpayer from Finland, Germany, and Hungary. The Finnish company issued invoices for these intra-Community supplies of telephones using its Finnish, German, and Hungarian VAT numbers. The taxpayer reported these supplies as an intra-Community acquisition in its own VAT returns and recovered the VAT charged on these acquisitions as input tax in the same returns. The Finnish company used its Romanian VAT number for domestic supplies in Romania, and charged Romanian VAT.

The Finnish company granted a quarterly volume discount to the taxpayer when a certain number of mobile telephones were purchased. The Finnish company sent one invoice with a negative amount in respect of these discounts. These invoices only reported the Finnish company’s Finnish VAT number, even if some of the discounted products were supplied in Romania.

In 2014, the Romanian tax authorities found that the taxpayer had incorrectly reported the discount in its VAT returns by failing to distinguish between the discounts for domestic and intra-Community supplies. Because the taxpayer acted as if the discounts were entirely associated with intra-Community supply, the adjustments for the amount remitted and the amount recovered were reported as reverse-charged VAT in the same VAT return of the taxpayer (as opposed to a refund to the Finnish company and a payment from the taxpayer). In response to this, the Romanian tax authorities intend to refuse the VAT recovery for the discounts related to the local Romanian supplies (as well as to charge penalties and interest).

The taxpayer asserted:

  • The Romanian tax authorities had taken an excessively formalistic position by demanding that domestic discounts be recorded separately. In the taxpayer’s view, the treasury was not disadvantaged by the manner that the taxpayer had accounted for the Finnish company’s discount.
  • The Finnish company was no longer active in Romania and could no longer issue invoices using a Romanian VAT number for the discounts relating to domestic supplies.
  • The position of the tax authorities meant the taxpayer would have to adjust its recovery (and repay the difference in VAT), at the same time that the Finnish company would not be entitled to a repayment of the amount of overpaid VAT.

In referring the case to the CJEU, the Romanian court questioned whether under the principles of neutrality and proportionality, the taxpayer could be obliged to make this repayment of VAT.

CJEU judgment

Referring to a previous judgment, the CJEU considered that an adjustment of the VAT recovery was necessary if there was a change in one of the factors on which the deductible VAT was based (e.g., the receivable changes due to the granting of a discount). The amount of VAT that is ultimately deductible must correspond to the amount that would be deductible if the discount had already been taken into account in advance. Based on this finding, the CJEU concluded that the taxpayer was obliged to adjust its VAT recovery.

The CJEU further held that it was irrelevant that the taxpayer did not receive separate invoices for the discounts distinguishing between domestic and intra-Community supplies. Even in the absence of such invoices, the taxpayer was obliged to make this distinction in its VAT returns. Elaborating on this, the CJEU noted that the deductible VAT must also be adjusted regardless of whether the supplier could claim reimbursement of the overpaid VAT. With reference to another previous judgment, this did not affect the right of a tax authority to repayment of the excess VAT deducted.

KPMG observation

The CJEU judgment in the present case confirms that in a situation of price discounts such as volume discounts, an adjustment must be made to the initial VAT recovery regardless of whether it was offset by repayment of the VAT remitted.

With this CJEU’s judgment, it is important for taxpayers to meticulously implement price discounts and to issue (credit) invoices that correspond to the actual situation so that the customer is able to correctly and easily adjust its VAT recovery. The judgment emphasizes how important it is that (credit) invoices concerning price discounts indicate the underlying services to which they relate, and it is also important that the VAT implications are carefully considered when the (volume) discounts are legally established.

While it is possible that there may be a drop in demand due to the current coronavirus (COVID-19) pandemic situation and that certain acquisitions may be canceled in whole or in part. In these situations, too, it will be prudent to adjust the VAT recovery if a price discount is granted for this purpose. The VAT implications may need to be discussed with the other contracting parties so that there are no misunderstandings that could potentially ultimately lead to VAT becoming an unnecessary cost item.


Read a June 2020 report prepared by the KPMG member firm in the Netherlands

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