A frequent economic phenomenon is the payment of part of the remuneration before the service or delivery of goods. The question arises how to tax these amounts. In principle, payment before service or delivery of goods may take the form of an advance or a deposit. In the glossary of the Goods Tax Act, we will not find a definition of these terms. If we want to define them, we should reach out to the relevant civil law provisions.
Subsidy and advance – distinguishing concepts
In case of advance, this will be Article 743 kc which provides that, where the execution of an order requires expenditure, the person giving the order should, at the request of the host, grant him an appropriate advance. If the transaction is ultimately not concluded, the advance should be reimbursed.
This is due to general provisions on commitments. According to Article 494 the party who withdraws from the mutual agreement, the party who withdraws from the agreement shall return everything it has received under the contract, and the other party shall accept it.
In addition, the withdrawal party may request compensation for damages resulting from the default. The contribution has a slightly different function. It is a type of flat-rate compensation whose size is determined by the amount of the deposit.
This is due to Article 394(1), which provides that, in the absence of a different contractual reservation or the custom of making a contribution to the conclusion of the contract, it is important that in the event of a failure of the contract by one of the parties, the other party may, without fixing an additional period, withdraw and retain the payment received and, if it has given it itself, may request a sum twice as high.
Fiscal uncertainty
In the field of tax on goods and services, the receipt of advance and advance payments has the same legal effect. Subject to Article 19a(8) At the time of their receipt, we are obliged to tax the amount received.
On the other hand, in the case of reimbursement of an advance or advance due to failure to sell, a corresponding reduction in the taxable amount for the refunded buyer should be made in part of the payment received before the performance of the benefit. For this purpose, taxpayers should make appropriate adjustments.
In this respect, there is no great doubt. However, they appear when the seller, as a result of the withdrawal of the buyer to the contract, legally retains the amount of the deposit. The question then arises as to whether the amount of the levy should be subject to VAT, or whether this benefit will remain outside the scope of taxation.
ETS position
The European Court of Justice replied to the question in its judgment of 18 July 2007 in Case C 277/05. The ECJ investigated the case of a French taxpayer dealing with hotel and restaurant activities. The company received amounts paid in advance as a deposit as a result of the reservation of the stay by the curates.
These amounts were deducted from the subsequent payment of the benefit during the stay, or are retained by that company in the event of withdrawal by the beneficiaries.
A dispute arose between the taxable person and the tax authorities or in the event of the retention of a deposit, such provision should be considered to be due as a reservation service and taxed with a tax on goods and services.
In settling the case, the ECJ took the view that the amounts paid as a toll under the contracts for the provision of hotel services subject to VAT should the customer benefit from the right to cancel the reservation and be retained by the hotel company, should be considered as flat-rate compensation paid in order to make good the damage.
The damage is caused by a customer's failure to comply with the contract, without any direct link to any service provided for payment. An allowance in such circumstances is not taxable. Therefore, the amount of the deposit retained by the seller will not be subject to VAT.
The ECJ judgment will apply not only to hotel services but also to all contracts concerning both the supply of goods and the provision of services. As a result, the contribution from its definition serves as compensation and cannot be linked to any mutual benefit. As in the case of an advance, taxpayers will have the right to adjust the tax base accordingly, despite the retention of the amount of the deposit.
Author:
Marcin Kołkowicz
Tax advisor, tax consultant at Russell Bedford Poland Sp. z o.o., graduate of the Administration, Management and Marketing of the Catholic University of Lublin named after John Paul II. The subject of tax law deals with from 2012. He gained experience in Lublin and in Warsaw tax advisory offices. Author and co-author of many tax publications, in particular for Tax and Tax Portal TaxFin.pl. In his career, he dealt with both direct and indirect taxation issues, with particular emphasis on VAT.