VAT on price supports and discounts: Who should bear the tax costs?

Buy me a new smartphone!, my wife told me, and you will also save some money during the ongoing Dubai Shopping Festival.

As we bought a new phone, she noticed that the Value Added Tax (VAT) was charged on the pre-discounted price i.e. the original price before deducting the DSF promotional discount.

As she started questioning the retailer, I intervened saying, wait, its possibly correct.

During sales promotional periods such as DSF, brand owners/manufacturers often provide price support to the retailers to promote their products. To illustrate, a smartphone brand may ask the retailers to give additional Dh500 discount on a particular model. The additional discount is later reimbursed by the brand owner to the retailer depending on the total number of units sold by such retailer during the promotion period.

VAT law

VAT is calculated on the basis of the taxable value of the supply. The taxable value essentially means all that is received or expected to be received for the supply, whether in money or other acceptable forms of payment.

The UAE VAT law does not specify that the payment should flow from the recipient alone. In other words, the payment for a supply can also flow from a third party i.e. a person other the buyer. Even the European and other similar VAT laws provides that the payment for a supply includes payments made by the buyer as well as by one or more third parties.

VAT treatment of discount

While the general notion is that VAT should be charged on the net price received from the customer, the VAT law provides that discounts can be deducted from the taxable value only if the following two conditions are met :

a) the customer has benefited from the reduction in price

b) the supplier has funded the discount

The DSF discount does in fact benefit the customers by way of a price reduction. Thus, condition (a) is generally satisfied in all cases.

It is condition (b) which is a bit tricky. It needs to be determined whether the retailer has funded the discount or not.

A person is said to have funded a discount if that person has borne the cost of such discount. If a retailer is merely receiving a reduced payment from the customer and the differential is reimbursed by the brand owner, the retailer cannot be treated to have funded the discount.

The Dh500 discount that you have received seems to have been funded by the brand owner, I explained to her, in such cases, the retailer should calculate VAT on the pre-discounted price only.

Related tax issue

Price support schemes by the brand owners/manufacturers are a common market practice in retail industry. It is the nature of price support that will determine the VAT implications

Where the retailer is required to charge VAT from the customers on the pre-discounted price, an issue arises whether the reimbursement by the brand owner should be subject to VAT? More importantly, if a retailer has charged VAT on such reimbursements instead of recovering from the customers, is the brand owner eligible to recover input credit on such invoices?

Let me not discuss these questions now. The retailers and the brand owners/distributors should re-validate their tax positions to ensure tax compliance. Lets go for dinner, I said.

Yes. For their tax queries, let them AskPankaj, she smiled as she enjoyed her new phone.

The writer is the managing director of AskPankaj Tax Consultants. For feedback and queries, you may write to info@AskPankaj.com. Views expressed are his own and do not reflect the newspapers policy.