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Coordination Committee: Is compensation for unconsumed goods subject to VAT?

Company: KPMG Česká republika, s.r.o.

The Czech Chamber of Tax Advisors has come up with a proposal to unify the interpretation regarding the application of VAT in situations when the customer compensates the supplier for expenses incurred by the supplier for material unconsumed upon the termination of manufacturing. The paper submitted for discussion to the Coordination Committee of the Chamber of the Tax Advisors and the General Financial Directorate mainly derives from the judgment of the Court of Justice of the EU in case C-295/17 MEO.

The Coordination Committee discussed three situations that may occur when the customer decides to terminate production: first, the customer compensates the producer for expenses for the acquisition of unconsumed materials; second, the customer compensates the supplier expenses for the liquidation of unconsumed materials; and third, the customer settles the differences between the cost of sold materials and the acquisition cost.

According to the GFD, for a supply to be liable to VAT, a direct link between the supply of goods/services and the consideration actually received for such a supply must exist. From the paper submitted for discussion, the GFD concluded that a legal arrangement for the delivery of goods exists between the customer and the supplier requiring a certain extent of stockpiling by the supplier. And if there is also a legal arrangement regulating the consequences of unconsumed materials, which is the case of the above paper in the GFD’s opinion, the ‘liquidation’ of such materials may be carried out in form of a sale of unconsumed inventories and a financial compensation up to the acquisition cost of the inventories, or in form of the actual disposal of unconsumed materials. If the liquidation is performed in one of the two above methods, the GFD considers such a supply to be the provision of services for consideration.

In practice, compensations are often labelled as contractual penalties that are generally regarded as supplies not subject to VAT. However, considering the above, certain contractual penalties may be subject to Czech VAT. We recommend reviewing your contractual arrangements and assessing whether the above conclusions affect any of your realised or planned transactions.

Martin Krapinecmkrapinec@kpmg.cz+420 222 123 499

Dominik Kovářdkovar@kpmg.cz+420 222 124 821


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