VAT Amendment – Sections 42, 43 and 44

Aleš EppingerPartner, Schaffer & Partner

The amendment to the VAT Act brings changes related to the tax base and rate adjustments. There will also be changes in the rules on price and tax base adjustments after the supply date, as well as to the error correction rules. There will be a new possibility to correct the tax rate related to unsettled claims against debtors in insolvency proceedings.

Section 42 Adjustments to the tax base and rate

The obligation to adjust the tax base and rate in any and all cases, including when the tax base is to be reduced, is an important change as well. Such change responds to the imposition of duty under Section 42 of the VAT Act and articles 184 and 185 of the Directive. A payer is therefore obliged to adjust the tax base also if a discount or reduced payment for a service or goods have
been provided for other reasons. The Act stipulates various reasons for the tax base and rate adjustments. In the first place, the reason may be the cancellation or refund of the whole or partial amount of taxable supply. It may be as well a mere reduction or increase of the tax base resulting from the terms and conditions agreed upon after the taxable supply date. It is important here that the terms and conditions, being the reasons for changes, need to be agreed upon after the taxable supply date. The moment when the amended price terms and conditions are agreed upon is important.

The tax base and rate will also be adjusted with respect to the concise tax refund, Section 40 (2), if goods are not delivered or real property not transferred, Section 13 (3) (d), if consideration is refunded, if taxable supply for which it is provided has not been realised or, when used for payment of another supply.
Example: A customer has returned some of the goods supplied back to the supplier for qualitative reasons. Starting from 2011 the customer will always receive an adjusted tax document (until the end of 2010 called credit note), in such a way avoiding an additional tax return, which is in terms of administration more complicated. A tax payer obliged to issue a tax document needs to do so within 15 days from the day when the facts decisive for making the adjustment are ascertained. A payer not obliged to issue a tax document will make an adjustment in the records for tax purposes within the same time period. Mandatory particulars of the adjusted tax document are almost identical with the particulars of a tax credit or debit note. This shall not apply for prepaid telecommunication services, Section 43 (3) requires the customer’s identification data and the original tax document number.

An important question is when, i.e. in which tax period a payer makes the adjustment in the tax return. It is a separate taxable supply realised not later than on the last day of the tax period in which the payer:
by adjusting the tax base and rate increases the output tax or its own tax liability;
by adjusting the tax base and rate reduces the output tax or its own tax liability and a person liable for tax, a legal person not established or incorporated for business purposes or a person identified for tax for which the original supply has been realised or which provides consideration resulting in the tax liability, has received the adjusted tax document;
has made an adjustment to the tax base and rate in the tax records provided that a payer was not obliged to issue an adjusted tax document under paragraph 2.

Section 43 Adjustments to tax rates in other cases:

Mistakes that may be made by a payer in individual transactions are also situations that require adjustments (taxing supplies exempt from taxes, supplies that are not subject to tax, applying the basic rate instead of a reduced rate). Section 43 enables a payer to make such adjustments, always in the additional tax return for the period in which the original transaction is made or in which consideration is accepted. A payer is obliged to issue an adjusted tax document under Section 45 when it has such obligation, or otherwise he makes an adjustment in the tax records. Starting from 2011 a payer is entitled to deduct input tax only within the limits of the respective rate, Section 72 (2).

Example: I receive an invoice with an incorrect VAT amount – wrong rate. The supplier applied the basic rate while a reduced rate should have been applied according to the law.In such a case the customer is entitled only to a reduced tax
rate deduction regardless of the fact that the basic rate is specified in the document. Even if the customer did not receive the adjusted tax document it made a mistake by applying the basic rate deduction, it is obliged to file a supplement tax return for the respective tax period by the end of the calendar month following the month in which it found the mistake, and to pay the outstanding amount of tax within the same time period – Section 141 (1) of the Tax Rules.

Section 44 Adjustment to the tax rate with respect to claims against debtors in insolvency proceedings

The Act introduces new possibilities of adjustments with respect to unpaid claims if the debtor is in insolvency proceedings. To make an adjustment, the following conditions must be complied with:
The claim arose not later than 6 months before the adjudication of bankruptcy and has not ceased to exist. The debtor is in insolvency proceeding and the insolvency court has ruled upon the bankruptcy method. The creditor registered such claim within the period of time set out in the bankruptcy order. The creditor and the debtor are not persons connected in terms of capital. The creditor has delivered a tax document under Section 46 (1) to the debtor.

The creditor is entitled to make an output tax adjustment not earlier than in the tax period in which the mandatory terms and conditions are complied with. If the creditor makes an adjustment to the tax rate, the debtor is obliged to reduce its input tax on the taxable supply received by the amount of tax adjusted by the creditor corresponding to the amount of tax deduction from the taxable supply received. If the claim is then settled by creditors the creditor is obliged to refund the tax it required from the state under the above mentioned provisions. A payer will apply the same procedure as in 2010 in case of exchange rate and rate will apply as for the original taxable supply with the same three-year period in which an adjustment may be made, and the same will apply for the financial leasing adjustment periods.