Provision of a free application on the web - is it subject to taxation?

Service-Tax

It becomes more and more difficult to promote the services provided or goods sold among potential buyers. In order to increase the sale of goods and services, entrepreneurs increasingly use the opportunities offered by the Internet. Companies wanting to encourage both their current and future customers to buy their products, provide them with free applications or guides on the Internet. Providing a free application on the web and guides may be subject to VAT.

Providing a free application on the web

In order to introduce the problem, we will precede our considerations with an example.

Example 1.

The taxpayer exempt from VAT, wanting to encourage both current and future customers to use their services, provided them with an application related to the preparation of transfer pricing documentation. The above service is to help potential customers to find out whether they need to prepare such documentation. The application will also contain information necessary to prepare this documentation. The above application will be available to everyone for free, without logging in. The purpose of its placement is to encourage entrepreneurs to use the services of the taxpayer. He deals with accounting consultancy, and the application is to popularize his services. In such a situation, will making it available for free to future and current customers result in the need to tax them by the taxpayer? In the analyzed example, the taxpayer does not have to tax the service consisting in providing the application free of charge. Below we will try to justify our position.

Activities subject to VAT

Pursuant to the provision of Art. 5 sec. 1 point 1 of the Act of March 11, 2004 on tax on goods and services (Journal of Laws of 2016, item 710, as amended), hereinafter referred to as the "VAT Act", taxation with tax on goods and services are subject to the supply of goods for consideration and the provision of services for consideration within the territory of the country.

Pursuant to Art. 7 sec. 1 of the VAT Act, by the delivery of goods referred to in Art. 5 sec. 1 point 1 shall be understood as the transfer of the right to dispose of the goods as the owner. Goods are understood as things and their parts, as well as all forms of energy (Article 2 (6) of the Act).

Pursuant to Art. 8 sec. 1 point 1 of the Act, by providing the services referred to in Art. 5 sec. 1 point 1 shall be understood as any service provided to a natural person, legal person or organizational unit without legal personality, which does not constitute a supply of goods within the meaning of art. 7

Taxation with VAT on free provision of services

Pursuant to Art. 8 sec. 2 of the VAT Act, the following are also considered as providing services against payment:

  1. the use of goods constituting part of the taxpayer's enterprise for purposes other than business activities, including in particular for the personal purposes of the taxpayer or its employees, including former employees, partners, shareholders, shareholders, members of cooperatives and their household members, members of legal entities, members of the association if the taxpayer was entitled, in whole or in part, to reduce the amount of tax due by the amount of input tax on the acquisition, import or production of these goods or their component parts;

  2. free provision of services for personal purposes of the taxpayer or its employees, including former employees, partners, shareholders, shareholders, members of cooperatives and their household members, members of governing bodies of legal persons, members of the association and any other provision of services free of charge for purposes other than the taxpayer's business activity.

Taking into account the above provisions of law, the purpose for which it was performed is significant for the taxation of a service provided free of charge. In our case, the provision of a free application on the web is related to the conducted business activity.The purpose of providing the application is to increase interest in the taxpayer's services. It should be noted that the taxpayer was not entitled to reduce the output tax by input tax. Referring to the above, it should be stated that the taxpayer's provision of an on-line application for the preparation of transfer pricing documentation is not subject to VAT.

The above position is confirmed by the interpretation of the Director of the National Tax Information of April 4, 2017, number 0461-ITPP2.4512.125.2017.1.AK:

The analysis of the facts of the case in the context of the applicable legal provisions in this regard allows us to conclude that in a situation where you were not entitled to reduce the amount of tax due by the amount of input tax in connection with the creation of the website, free online application and guides will not be subject to taxation with tax on goods and services, pursuant to art. 5 sec. 1 point 1 of the Act, as the paid services referred to in Art. 8 sec. 2 of the Act.

To sum up, in the above case, making the free application available online will not result in a VAT obligation. At this point, it should be remembered that in the presented example, the taxpayer was not entitled to reduce the output tax by the input tax in connection with the purchase of the application. Thus, providing such applications can be a great form of advertising our services and goods.