Tax authorities clarify VAT treatment of price adjustments and imposition of penalties for wrongly charged input VAT
Italy’s tax authorities released a ruling and a resolution in August 2021 that clarify the VAT treatment of price adjustments on the taxable base and the imposition of penalties for wrongly charged input VAT, respectively.
Ruling on price adjustments
The ruling published on 6 August 2021 clarifies the VAT treatment of a price adjustment of goods determined on the basis of profits shared between two counterparties to an agreement.
The ruling involves two foreign companies that are not VAT-established in Italy and that concluded an agreement under which:
- The first company (“Alfa”) is responsible for the development and production of an active pharmaceutical ingredient; and
- The second company (“Beta”) is responsible for the transformation of that ingredient into a finished product and the subsequent sale of the product in Italy and other EU member states.
A peculiarity of the agreement concerns the method of determining the sale price of the active pharmaceutical ingredient sold by Alfa to Beta. The pricing—as stated in the VAT invoice—is comprised of a “provisional” price that is later adjusted (called a "profit true-up"). The profit true-up is applied after the sale of the finished product to final customers and is based on a complex calculation of the profits derived by the two companies.
Company “Alfa” requested a ruling on the relevance of the profit true-up price adjustment for VAT purposes on the taxable base.
The tax authorities clarify in the ruling that the price adjustment is relevant based on the following:
- There is a direct link between the amount determined as a final adjustment and the provisional sale price of the active ingredient; the profit true-up represents a mere adjustment of the original sales price; and
- The adjustment directly affects the VAT taxable base, either by decreasing or increasing it, depending on the difference in profits derived by the two companies.
Thus, the profit true-up amount is subject to Italian VAT.
Resolution on penalties imposed for wrongly charged input tax
In the resolution issued on 3 August 2021, the tax authorities comment on a 2020 Supreme Court decision relating to the imposition of two types of penalties for the deduction of input VAT wrongly charged by a supplier.
A Legislative Decree issued in 1997 provides for the penalties, as follows:
- Where input VAT is wrongly deducted, an administrative penalty equal to 90% of the deducted VAT is applicable; and
- Where the amount of VAT charged is higher than the correct VAT amount, an administrative penalty, ranging from EUR 250 to EUR 10,000, is applicable (assuming the vendor has paid the VAT wrongly charged).
The resolution clarifies that the penalty ranging from EUR 250 to EUR 10,000 is applicable only to transactions subject to VAT and in cases where, for example, the supplier applied a VAT rate higher than the correct rate (e.g., 22% rather than 10%) or a VAT amount higher than the correct amount. On the other hand, the 90% penalty applies to non-VAT-able transactions for which VAT basically is not due, but the supplier has wrongly charged VAT to the customer (e.g., as a VAT-exempt transaction or a transaction that is outside the scope of VAT).
The reason for the different application of the penalties—based on principles enunciated by the Court of Justice of the European Union and the Italian Supreme Court—is that the right to deduct VAT is possible only where the relevant transaction is subject to VAT. In other words, if a supplier wrongly applies VAT to a transaction that is not subject to VAT, the violation is subject to a more severe penalty than the penalty applicable where errors are made on transactions relevant to VAT whose amount was not properly determined.