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Minister of Finance changes position regarding taxation of cash bonuses

2012-12-19

Taxation of cash bonuses with goods and services tax (VAT) has raised to date many disputes. There have been doubts how to tax bonuses which are paid by the taxpayer to its customer e.g. in connection with the latter having made purchases in excess of a certain amount in the period concerned. It was the Minister of Finance himself who partially caused the above problems with interpretation by issuing a ruling of 30 December 204 No. PP3-812-1222/2004/AP/4026 (Official Journal of the Minister of Finance of 2005, No. 2, item 22). In the ruling the Minister of Finance stated that the amounts of bonuses were remuneration for performance by the customer receiving the bonus, which resulted in the necessity to charge VAT on the bonus. So accounting for the supplies effected by the seller resulted in VAT chargeable at the same time on the part of both the seller and the purchaser.

Over nearly eight years since the above ruling was issued the taxation of rebates was the subject matter of interpretation disputes. Recently, however, the courts have issued predominantly decisions questioning the above position of the Minister of Finance. As emphasised in the jurisprudence, taxation of a single transaction at two counterparties as supply of goods on one part and as service on the other part is contradictory with the principles prevailing pursuant to the VAT law. In addition, the courts indicate that the buyer that is granted a rebate does not make any performance (supply or service) for the seller in connection with the payment, and hence it cannot pay VAT on the rebate. The rebate granted should lower the seller’s turnover. So the seller must adjust the invoices already issued by the amount of the rebate granted.

The above argumentation was presented by the Minister of Finance in a new general ruling of 27 November 2012 (No. PT3/033/10/423/AEW/12/PT-618). The Minister of Finance has found that a cash bonus constitutes actually a rebate if there exists a connection between the cash bonus and the effected supplies. So a rebate will be a cash bonus on account of the buyer’s achieving a certain level of turnover. According to this new general ruling, the cash bonus on account of the buyer’s achieving certain turnover in the period concerned is at the same time connected with each supply separately and all supplies jointly. The Minister of Finance indicates that there exists also a close connection between cash bonuses on account of timely settlement of payments and individual supplies. So in economic terms, a cash bonus for the period concerned comes down to the seller returning to the purchaser a portion of remuneration paid on account of transactions effected previously in the period concerned with the purchaser, as a consequence of which the total value of the remuneration as specified previously is decreased, and thus the value of remuneration due on account of individual transactions concluded in the period concerned is decreased proportionally.

So suppliers granting cash bonuses to their customers face adjustments of all invoices issued in the bonus eligibility period.