On 28 January 2020 the Director of the National Revenue Information, an individual interpretation was issued (ref. 0114-KDIP1-2.4012.692.2019.1.RD) with regard to the correction of declarations taking into account accounting notes issued by the supplier reducing the supplier’s margin and increasing the Company’s margin.
In the described facts, the Company belongs to the capital group within which it purchases medical devices distributed by it. The Company’s key supplier is a related entity with its registered office in Switzerland registered for VAT purposes in a European Union country other than Poland. On the basis of the concluded distribution agreement, the Applicant acquires medical devices from the Supplier as part of WNT performed in the territory of Poland. Each such transaction is documented by the Supplier with a relevant VAT invoice and taken into account by the Company in its VAT settlements.
Both companies belong to the Group, within the framework of which they are obliged to apply a consistent transfer pricing policy adopted by the Group. Its assumption is that all entities being part of the Group will achieve a certain market profitability level. The profitability is measured by the operating margin, calculated as the percentage ratio of profit (loss) on operating activities to the total net sales and other operating income of the entity.
If the Company achieves a level of profitability that deviates from the market level on an annual basis, in accordance with the transfer pricing policy, a so-called “profitability adjustment mechanism” is applied, consisting in adjusting the Company’s operating margin to the level resulting from the comparative analysis. The profitability adjustment is made on the basis of an accounting note, which is issued by the Supplier based on calculations made at the Group level.
Due to the implemented system of settlements within the Group, so called “netting”, the final monetary amount that the Company would actually pay or receive from the Supplier is determined within this system and deducted in settlements with other participants of this system. The described profitability adjustments remain outside the scope of VAT regulations due to the lack of connection with taxable activities carried out by or for the Company.
In the described facts, the Company erroneously included in the current VAT settlements due to WNT (i.e. in the declarations for the periods in which the Company received the adjustment notes) historically issued by the Delivery accounting notes.
According to the adopted assumptions, the correction will be made by removing such documents from the records kept by the Company for VAT purposes and accordingly (depending on the nature of the accounting note):
- increasing the tax base as well as the due and calculated VAT by virtue of WNT in VAT-7 declarations, in which accounting notes reducing the Supplier’s margin and increasing the Company’s margin were taken into account
(i.e. documents being the basis for payment of specified amounts by the Supplier to the Company in connection with the profitability adjustment).
In the Applicant’s opinion, correcting VAT-7 declarations taking into account the accounting notes issued by the Supplier reducing the Supplier’s margin and increasing the Company’s margin, the Company should simultaneously increase respectively: the tax base, output tax and input tax by the amounts which were previously reduced on the basis of the correcting notes.
The submission of corrections to the declarations in order to remove the incorrectly shown and included in the VAT returns accounting notes will be associated with the restoration of the initial state, in which the tax returns submitted by the Company presented the correct amounts of realized WNT. As indicated by the Company with respect to WHT whose value was incorrectly adjusted based on the received accounting notes, the Company recognised the amount of output VAT due under WNT in the tax returns for the relevant accounting periods, and the input VAT was deductible after the Company received the relevant invoices.
The above corrections will therefore constitute a technical removal from the VAT records of negative accounting notes, documenting an event not subject to VAT.
The above position was considered correct.
Author: Beata Rawa ? Transfer Pricing Manager
