Forward Payments on VAT

In compliance with the Act, since January 1, 2009, upon transferring the forward payment to the seller, the buyer has the right to deduct VAT from this amount, without receiving a confirmation of shipment of goods (completion of works, delivery of services). Within 5 calendar days after receipt of a down payment (in part or in full), the seller should submit to the buyer an invoice on a given sum (p. 3 Art. 168 of TX of RF). The Tax Code of RF provides for observance with the following conditions for the buyer receiving for the deduction of the “incoming” VAT on forward payment: the invoice on the down payment, documents that prove its actual transfer, and the contract that contains a provision concerning the forward payment (p. 9 Art. 172 of TX of RF).

It should be noted that in its Order of October 31, 2000, № 94n, the RF Ministry of Finance states that VAT submitted by the seller upon receipt of a down payment from the buyer does not constitute a tax on the valuables, works, services procured by the buyer, for as of the moment of its transfer a given good, work or service is not considered actually purchased and, accordingly, this amount of VAT is the sum of VAT due to withholding, which does not conflict with provisions of TC of RF.

It is known that this novelty was aimed at increasing the buyer’s cash assets – he enjoys the possibility to deduct VAT from his down payments without waiting for the substantial conditions of the agreement (shipment of goods, provision of services, etc.) to be completed. However, the law enforcement practice revealed numerous critical comments on this novelty on the part of taxpayers.

As noted above, the withholding of VAT received as a result of the down payment is possible only if there is the respective invoice, documents that prove its actual transfer and the contract that contains the respective provision.

Let us consider a situation when the taxpayer (the buyer) employed the new provision of TC of RF and deducted VAT on the down payment without waiting for completion of the substantial conditions of the contract (completion of the work, delivery of service, etc.).

Later, as of the moment of the delivery of services as per the contract, the seller provides an invoice wherein the amount in full is quoted as per the contract. Basing on the invoice, the buyer has the right to deduct the whole amount of the tax due. Meanwhile, to avoid a doubling of the amount due to deduction, the buyer is bound to repay into the budget the amount of VAT that was earlier withheld from the down payment, and this should be done within the same tax period. (sp. 3 p. 3 art. 170 of TC of RF). Besides, VAT should be also be repaid into the budget in the event the contract has been canceled (or its terms have been modified) or the seller has returned the down payment to the buyer.

So, the buyer is ultimately bound to withhold VAT from the amount of the down payment first, to repay it then, and only after that – to deduct the whole amount of VAT levied on the whole value of the contract. It was this “going around in circles” that triggered the taxpayers’ discontent. Meanwhile, the tax novelties have had no effect on the seller’s duties.

But it is worth noting that the buyer also has a right to deduct VAT received due to down payments, as the overall value of VAT with respect to a given deal will not be lowered. Should the taxpayer opt for this alternative method, there will be no losses for the budget, either.

A. Levashenko – Research Fellow, Department of Tax Policy