Allowances and discounts – VAT implications
23 August 2012
Posted by: SAIT Technical
By PWC VAT Alert
The second issue of Binding General Ruling 6 (‘BGR 6(2)') eliminates the practical problems created by the original version, but does not address all the risks for VAT vendors.
Differences in the classification of allowances (including discounts, rebates and incentives) in the retail industry have resulted in VAT difficulties and risks for suppliers (e.g. manufacturers) and retailers. When a discount is allowed, suppliers and retailers often disagree on whether the supplier has to issue a credit note for a price reduction or whether the retailer must issue a tax invoice for a separate taxable supply.
The original BGR 6
SARS issued Binding General Ruling 6 (‘BGR 6(1)') (dated 25 March 2011), to provide a legal framework for the VAT treatment of allowances in the Fast Moving Consumable Goods (‘FMCG') industry. The BGR 6(1) distinguished between:
Variable allowances, which were regarded as a reduction in the original purchase price and for which a credit note had to be issued, such as:
· Guaranteed allowances;
· Early settlement allowances;
· Growth (target) rebates;
· Advertising allowances;
· Distribution allowances;
· Swell allowances;
· Category management allowances;
· Incentive discounts;
· Franchise store allowances;
· Broadbase range scorecard allowances;
· Quality assurance allowances;
· Bulk allowances;
· Tallies (amount per product purchased/sold); and
Fixed allowances, which were regarded as consideration for the supply of a service and for which a tax invoice had to be issued, such as:
· New store allowances;
· Major refurbishment allowances;
· Specific promotional allowances;
· Post-recession allowances.
BGR 6(1) had the effect that the risk of incorrect VAT treatment of allowances was eliminated where vendors followed the guidelines laid down by SARS. However, as BGR 6(1) was not law, vendors were not obliged to apply it.
Therefore, unless vendors agreed to follow BGR 6(1), it did not resolve practical VAT issues encountered where, inter alia:
· A deduction from the standard invoice price is termed a ‘discount', ‘rebate' or ‘incentive', while, in reality, the amount is consideration for a separate supply of goods or services made by the retailer to the supplier;
· A rebate is a price adjustment for which the supplier has to issue a credit note, but the retailer treats it as payment for a separate transaction; or
· The trade agreement provides that an allowance is consideration for a separate supply and that the retailer will issue a tax invoice, although the allowance is clearly a variable allowance.
While vendors did not require SARS's approval to deviate from the guidelines laid down in BGR 6(1), vendors were at risk of input tax denials during SARS audits on the basis that input tax claims were not supported by the documentation prescribed in BGR 6(1).
BGR 6(2) (dated 19 June 2012), which was issued to eliminate these practical issues, provides that:
A tax invoice must be issued by the retailer (unless self-invoicing is done by the supplier) where the allowance is regarded by the retailer and the supplier as consideration for the supply of a service; or
A credit note must be issued by the supplier (unless self-invoicing is done by the retailer) where an allowance is regarded by the supplier and the retailer as a price reduction.
This approach is welcomed, as it effectively allows the parties to agree on the most preferred VAT treatment of an allowance. However, it is not clear to what extent the parties' classification of the allowance will be accepted. For example, if an allowance is clearly a price reduction in respect of a sales mix of both standard- and zero-rated products, but the parties agree to regard the allowance as payment for a supply of services merely to prevent the need to accurately allocate the allowance to the underlying supplies, the question arises whether the issuing of a tax invoice will be acceptable, despite the fact that the VAT Act technically requires the issuing of a credit note. Furthermore, BGR 6(2) still does not provide a solution where the parties do not agree on the reason for the allowance, which is often the case where one party dominates the trade relationship or the market.
The risks associated with issuing the correct VAT document for allowances should, therefore, be carefully managed to ensure that input tax deductions are not denied.