Tax obligation and advance payment - what you should know

Service-Tax

In many cases, entrepreneurs, before providing a service or delivering goods, collect advance payments from the buyer to cover the costs incurred for the performance of the service or the delivery of goods and to protect themselves against possible withdrawal of the contractor from the contract. Such action is understandable, however, the settlement of advances raises many doubts among entrepreneurs. This is due to the fact that in the case of advance payments, the moment when the tax obligation arises is different. Therefore, the date of disclosure of advances in the records is different. Check when the tax obligation arises if you receive an advance payment.

Advance invoice - what should it contain?

The elements that should be included in an advance invoice are listed in Art. 106f of the VAT Act.

The advance invoice should contain:

  • the date of its issue,

  • names and surnames or names of the taxpayer and buyer of goods or services and their addresses,

  • sequential number assigned within one or more series that uniquely identifies the invoice,

  • the date of the delivery or completion of the delivery of goods or the performance of the service or the date of receipt of payment, if such a date is specified and differs from the invoice issue date,

  • numbers by which the taxpayer and buyer are identified for tax purposes,

  • the received payment amount,

  • tax amount calculated according to the formula: tax amount = (value of the advance payment received x tax rate) / (100 + tax rate),

  • transaction data, in particular: name (type) of goods or services, net unit price, quantity of ordered goods, net value of ordered goods or services, tax rates, tax amounts and gross value of the order or contract.

The advance invoice should be issued no later than on the 15th day of the month following the month in which all or part of the payment was received from the buyer of the goods or service. In addition, the invoice should be issued no later than 30 days before receiving the payment, however, due to the inability to predict the date of payment, it was common to issue advance invoices after receiving the payment.

Tax obligation in domestic transactions

As a rule, pursuant to Art. 19a paragraph. 8 of the VAT Act, the tax obligation in VAT arises upon receipt of an advance payment, prepayment or deposit. The exception are the services listed in Art. 19a paragraph. 5 point 4, e.g. telecommunications services.

Advance payment in foreign transactions

Export

Prepayments and advances can also be used for foreign transactions. Pursuant to Art. 41 sec. 9a of the VAT Act, if the entrepreneur has received all or part of the payment before the delivery of the goods, it is possible to apply the 0% rate if the export takes place within 2 months of receipt of the payment and if within this period he has received a document confirming the export of the goods. In such a situation, the moment when the tax obligation arises due to the receipt of the advance payment on the date of receipt of the advance payment.

Example. 1.

The company received an advance payment on August 20, 2017 for the export of machines outside the EU. The export took place on September 15, the IE-599 message was received on September 16. On the part of the entrepreneur, there was a question whether in such a situation it is possible to apply a 0% rate and by what date should the received advance payment be shown.

A 0% VAT rate can be applied to the transaction. Additionally, the transaction should be shown in August, i.e. in the month of receiving the advance payment.

Example 2.

The company received an advance payment on August 20, 2017 for the export of machines outside the EU. The export took place on September 15, the IE-599 message was received in November. On the part of the entrepreneur, there was a question whether in such a situation it is possible to apply a 0% rate and by what date should the received advance payment be shown.

The shipping documents have been received more than 2 months after receiving the payment. In such a situation, in August (the month of receiving the advance payment), the amount received should be shown with the national VAT rate. However, after receiving the transport document in November, it is possible to correct the payment shown in August to show the advance payment in November, using the 0% VAT rate.

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Intra-community delivery of goods

Pursuant to Art. 20 paragraph 1 of the VAT Act, in the intra-Community supply of goods, the tax obligation arises when the invoice is issued by the taxpayer, but not later than on the 15th day of the month following the month in which the delivery was made, subject to paragraph 4 and art. 20a.

If the invoice is not issued by the 15th day of the following month, then the tax obligation for the transaction arises on the 15th day of the following month.

Example 3.

Mr. Janusz sells plastic packaging to a company from Germany. The sale was made on August 30, 2017. On the part of the entrepreneur, the question arose when the VAT obligation arises on the basis of intra-Community supply of goods?

Entrepreneurs are required to issue an invoice by the 15th day of the month following the sale, ie on September 15th. The tax obligation arises on the date of issuing the invoice. If the invoice is not issued on time, then the tax obligation will arise on September 15th. Receiving an advance payment under the WDT is tax neutral. Such a transaction is not shown for tax purposes.

With regard to intra-Community supplies that are performed continuously for a period longer than one month, the transaction is deemed to have been completed each month until the end of delivery of the goods. Advances received under these continuous ICS transactions are tax neutral.

If an invoice has been issued for the said transaction, the tax obligation arises at the time of issuing the invoice.

Example 4.

On the basis of a long-term contract, Mr. Wiesław delivers goods to a German company every month. On the part of the entrepreneur, the question arises whether the received advance payment generates a tax obligation and when does the tax obligation arise?

The received advances do not create a tax obligation on the part of the seller. As a rule, the tax obligation arises on the last day of the month, unless the invoice is issued earlier, then the tax obligation arises on the date of invoice.

Intra-Community acquisition of goods

Pursuant to Art. 20 paragraph 5 of the VAT Act, the tax obligation in relation to intra-Community acquisition of goods arises at the moment of issuing a VAT invoice (applicable to active VAT payers), but not later than on the 15th day of the month following the month in which the goods being the subject of intra-Community acquisition were delivered. In the case of WNT, the advance payment is tax-neutral, i.e. it does not generate a tax obligation.

Example 5.

Mr. Emil bought clothes from a contractor in Germany. A 50% advance payment has been made for the future delivery of goods. On the part of Mr. Emil, a question arose whether the advance payment on the WNT transaction generates a tax obligation?

Payment of an advance in a WNT transaction does not result in a tax obligation.

Summary

Advances in relation to domestic transactions generate a tax liability under VAT upon receipt of the advance.

In WNT and WDT transactions, the advance payments are neutral, i.e. they do not give rise to a tax obligation.

In an export transaction, the tax obligation for receiving the advance payment arises on the date of its receipt, provided that the goods are exported within 2 months of receiving the payment and if a document confirming the export of goods from the country has been received within this period.