Changes in VAT Treatment of Retroactive Discounts

On 1 October 2011 important changes to the VAT treatment of retroactive discounts introduced by Federal Law No. 245-FZ dated 19 July 2011 as part of a wider package of VAT amendments will come into effect. The new rules resolve the long-standing uncertainty as to the VAT treatment of retroactive discounts.

 

The new rules provide for current period VAT recognition of retroactive discounts. In contrast, the existing rules require taxpayers to account for retroactive discounts in the relevant past periods by filing amended VAT declarations and issuing corrected VAT invoices for the past periods, which effectively has banned the use of retroactive discounts in practice.

What the law says

The provision of a retroactive discount from the price of goods, work, services or property rights supplied in past tax periods (calendar quarters) must be documented for VAT purposes by a correcting negative VAT-invoice ("schet-factura").

The correcting VAT-invoice must be provided by the seller to the buyer within five days from the date of the relevant documents confirming the notification of the buyer on the provision of a retroactive discount (i.e., notification of the buyer, amendment to the contract, etc.) The new law provides detailed requirements for the content of the correcting VAT-invoice.

The retroactive discount is accounted for by the seller for VAT offset purposes in the tax period when the discount is provided. The buyer has to restore and pay the amount of VAT related to the retroactive discount in the tax period when the buyer receives the correcting VAT-invoice or the relevant documents notifying the buyer of the discount.

The VAT offset may be made by the seller within three years from the date of the relevant correcting VAT-invoice.

These rules would equally apply in other situations of retroactive decrease of the contract value due to, for example, the retroactive adjustment of the actual volume of supplied goods or services.

Retroactive increase of contract value

A retroactive increase of the contract value is accounted for by the seller in the tax period when the original supply took place (i.e., an amended VAT declaration for the relevant past period must be filed by the seller).

Actions to consider

Companies engaged in distribution activities should review their marketing policies with respect to provision of discounts and consider the possibility and potential tax benefits resulting from application of retroactive discounts instead of future discounts or bonuses;
Companies operating in the retail industry or those engaged in procurement activities should review their discount policies and consider any changes necessary to their business policies or the standard contractual documentation to ensure the best VAT treatment.

Conclusion

Compared to the existing VAT rules, the new rules allow for current period recognition of retroactive discounts for VAT purposes and open the way for widespread application of such discounts in commercial activities.

For further information please contact Alexander Bychkov, Roman Bilyk on +7 495 787 27 00 in the Moscow office of Baker & McKenzie or Andrei Serov on +7 812 303 90 00 in the St.Peterburg office.

Baker & McKenzie

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