Revenue adjustment in case of a counterfeit order

Service-Tax

Unfortunately, not every contractor with whom the taxpayer deals in business transactions turns out to be an honest entity. There is a risk of encountering an unreliable person who may place a false order. Taking into account the specificity of the generation of revenues in the field of economic activity, we will consider how the revenue should be adjusted in the event of a false order?

The specificity of tax revenue in the case of business activity

The general definition indicates that income is amounts received or placed at the disposal of the taxpayer. Consequently, until this event occurs, we cannot talk about income.

The exception to this rule is the case where income is generated as part of business activity.

According to Art. 14 sec. 1 of the PIT Act, income from non-agricultural economic activity is considered to be the amounts due, even if they were not actually received, after excluding the value of the returned goods, granted discounts and discounts. In the case of taxpayers selling goods and services subject to tax on goods and services, the revenue from this sale is deemed to be revenue less the tax on goods and services due.

Additionally, pursuant to Art. 14 sec. 1c of the Act for the date on which the revenue referred to in para. 1, it shall be considered, subject to the provisions of paragraph 2. 1e, 1h-1j and 1n-1p, the date of delivery of the item, sale of property rights or performance of a service, or partial performance of the service, no later than the day:

  1. issuing an invoice or

  2. payment of receivables.

Therefore, let us point out that in the case of running a business, revenues are amounts due, even if they were not actually received

Due revenues are receivables resulting from business activity conducted by the taxpayer, the release of which may be requested by the taxpayer from the other party to the contract. In this sense, the term "due" should be understood as "owed to someone or something".

Therefore, in the case of business entities, it is not actually necessary to receive remuneration for a given service so that we can talk about taxable income.

Revenues due in business activity can be considered when the taxpayer is entitled to receive them, i.e. when there is a claim. In other words, revenue due is a situation in which the taxpayer obtains a claim for payment, and thus the possibility of pursuing the debt.

Consequently, when the taxpayer receives an order from the customer and issues an invoice for it, the revenue is generated on the date the document is issued. In this case, it does not matter that the taxpayer has not received remuneration, because the income is the amounts due.

In the case of entities conducting business activity, taxable revenues are not only the amounts actually received by the taxpayer, but also the amounts actually not received, but due for services rendered or goods sold.

Rules for making adjustments to revenues

In a situation where the taxpayer receives a false order and issues an invoice for it, the income due, in accordance with art. 14 sec. 1c of the PIT Act, it arises on the date of issuing the invoice.

Naturally, this type of income must be corrected, as in the case of a false order we cannot talk about the "receivable" feature of the income.

As we have previously indicated, the amounts due are those for which a claim has arisen, which are due and can be pursued in court. However, when we mention a false order, we cannot speak of a legally effective contract. It will simply be considered invalid, and therefore it is not possible to pursue the claim.

This means that in such circumstances one cannot speak of a receivable income understood as a claim or as an entitlement to claim and receive remuneration.

As regards the correction of revenues, please refer to Art. 14 sec. 1m and 1n of the PIT Act. These regulations provide that if the revenue correction is not caused by an accounting error or other obvious error, the adjustment is made by reducing or increasing the revenue achieved in the accounting period in which the corrective invoice was issued or, in the absence of an invoice, another document confirming the reasons for the correction.

If in the settlement period referred to in paragraph 1 m, the taxpayer has not achieved revenues or the revenues are lower than the amount of the reduction, the taxpayer is obliged to increase the tax deductible costs by the amount by which the revenues have not been reduced.

Therefore, it becomes crucial to determine what was the cause of the revenue adjustment. If it is a billing error or other obvious mistake, the adjustments should be made retroactively on the date the revenue arises.

If, however, the correction was caused by other events, the correction should be made on an ongoing basis by issuing a correcting invoice.

Revenue adjustment in case of a counterfeit order

The PIT Act does not contain a legal definition of a calculation error or an obvious mistake.

Taking into account the linguistic significance, we can indicate that it is a situation where revenue has been incorrectly recognized due to an error in the course of calculations.

On the other hand, an obvious mistake should be considered another error, which is not also a calculation error. It will be, for example, a mistake as to the entity for which the invoice was issued, which consequently led to incorrectly recognized income. The "mistake" will also be associated with an error consisting in either incorrect issuance or incorrect recognition of the accounting voucher.

If we transfer the above to the ground of the problem presented, it should be pointed out that the recognition of the revenue generated as a result of a false order is neither an accounting error nor an obvious error.

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In this case, the reason for the correction is incorrectly recognized revenue, which in fact did not arise at all, because in the case of a false order, we cannot talk about a valid and effective contract. As we have already noted, in such a situation there is no due revenue.

It turns out, however, that in the opinion of the tax office, the revenue adjustment should still be made retrospectively, and not on an ongoing basis.

In the interpretation of the Director of KIS of November 3, 2020 (No. 0461-ITPB3.4510.648.2016.16.AD), we can read that when it comes to the defect in a legal act in the form of a false order, the reason for the correction is primary. Therefore, in terms of adjustments, one should refer to the moment of incorrectly recognized due revenue.

Consequently, the revenue correction should take place in the period in which the corrected revenue arose (backward correction), and not on an ongoing basis on the date of canceling and correcting unjustified invoices.

In the opinion of the tax office, in the case of revenue recognized on the basis of a false order, which was subsequently canceled, the adjustment should be made retroactively, i.e. on the date of incorrectly recognized due revenue.

Summarizing our considerations, we can indicate that in terms of determining the moment of revenue adjustment in the case of a counterfeit order, one should refer to the period in which such revenue was recognized. Consequently, the revenue adjustment should be retrospective and not ongoing.