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Value-added tax ("VAT") development regarding sales discount and price protection
The State Administration of Taxation ("SAT") recently issued Guo Shui Han [2006] 1279 ("Circular 1279") to clarify the VAT treatment on sales volume discount and price protection schemes.
Background
Under the prevailing VAT regulations, the VAT treatments of sales discount and sales return/sales allowance were as follows:
- For sales discount that is offered in the current period, the vendor should reflect the original price and the discount in the same VAT invoice and its output VAT may be computed based on the net price;
- If the dealer (customer), in the following period, requests for sales return or sales allowance due to defects in the products purchased, the dealer has to apply for a sales return/allowance certificate ("Certificate") from its in-charge tax bureau and pass the same to the vendor. With the aforesaid Certificate, the vendor is allowed to issue a Reverse VAT Invoice to the dealer. The sales return/allowance so granted may be used to offset the vendor's output VAT in the same period as the occurrence of sales return/sales allowance.
Practice of Sales Volume Discount and Price Protection Schemes
It was not uncommon to see that as a motivation for dealers to sell more products, the vendor would offer some sales volume discount to them based on cumulative sales volume within a prescribed time frame. In addition, when the market price dropped, the vendors would offer some price protection schemes to compensate the dealers' reduction in profit as originally anticipated. These kinds of schemes were applied mainly in many consumer products markets.
Prior to Circular 1279, there was no written rule addressing the VAT treatment on such sales volume discount and price protection schemes. In practice, some vendors would reflect the amount of such rebate in the current period as "discount given in the same VAT invoice" after the dealers met the prescribed criterion in terms of past cumulative sales volume or suffered a profit reduction as result of price reduction (so called "sales discount method"). Some other vendors and dealers would go through the route of "sales return/sales allowance" but not many because of the complicated and time-consuming procedures in getting the Certificate from tax bureaux. However, this practice has long been vulnerable to scrutiny and challenge by the local tax authorities due to the following ambiguity:
- Was it permitted for a vendor to recognize sales volume discount and price protection scheme as "sales discount" (in the same VAT invoice) because they were not related to the sales for the current period in which the VAT invoice was issued?
- Was it permitted for a vendor to recognize sales volume discount and price protection scheme as "sales return/sales allowance" because there was no sales return arising from product defects?
New Development
Circular 1279 has clarified that vendors are permitted to issue Reverse VAT Invoices to their dealers to account for the sales rebate based on the past cumulative sales volume discount or price protection schemes. It implies that such rebate could be treated as "sales return / sales allowance" for VAT purposes.
This will provide flexibility to many consumer products industries to adopt marketing strategies to cope with the dynamic market conditions in China without the risk of violating the VAT regulations.
However, from the practical standpoint, since the application process for sales return/allowance certificate is still complicated and time-consuming, it is possible that some dealers may hesitate to go through the process to obtain the Certificate from their in-charge tax bureaux. |
