Sale of a set consisting of goods taxed at different VAT rates
In order to increase sales, taxpayers choose to conduct various promotional activities. One example of conducting such activities is selling goods in sets. The benefit on the buyer’s side is that the price he pays for the goods purchased in a set is lower than what he would have had to pay if he had decided to buy the goods separately. This means that the seller has to reduce the price of the goods included in the set. When the goods are subject to taxation at different rates, particularly the basic and preferential rates, the manner in which such a reduction is made can have significant consequences on VAT grounds.
Ministry of Finance informs and warns how not to reduce prices
It should be noted that the Ministry of Finance in 2017 issued a communication “Incorrect determination of the VAT tax base for goods sold in the form of kits,” in which it considered it unacceptable to artificially inflate the price of goods taxed at a reduced VAT rate, while at the same time undercutting the price of goods taxed at the standard rate, in order to achieve a tax advantage.
The Finance Ministry pointed out that in the case of goods and services sold in sets, a disproportionate reduction of the tax base at the standard rate in relation to the tax base at the reduced rate exposes the taxpayer to the risk of a dispute with the tax authority, due to the fact that such optimization solutions may be considered an abuse of the law.
Consequences of considering a reduction in the price of goods in a set as an abuse of the right
Pursuant to Article 5(5) of the VAT Law, an abuse of right is defined as the performance of activities subject to VAT, within the framework of a transaction that, despite meeting the formal conditions established by the provisions of the VAT Law, was essentially aimed at achieving a tax benefit, the granting of which would be contrary to the purpose served by these provisions.
In the event of an abuse of rights, the activities performed, pursuant to Article 5(4) of the VAT Law, produce only such tax consequences as would have occurred if the situation that would have existed in the absence of the activities constituting the abuse of rights had been recreated.
In view of the above, recognizing that a reduction in the prices of goods sold in a set constitutes an abuse of the right will entail negative consequences related to the need to pay VAT in the amount that would have been due if the abuse of the right had not occurred, together with interest, as well as the so-called VAT sanction.
Disproportionate reduction in the price of goods in a set – current practice of the interpretative bodies
However, making a reduction in the prices of the goods that make up the set other than proportionally does not have to be for the purpose of achieving a tax benefit, but rather to be economically justified, which is confirmed in individual interpretations of tax laws.
For example, an individual interpretation was requested by a taxpayer who wanted to confirm whether he could allocate a discount to only one product in a set, which consisted of a beverage (taxable at the basic rate) and a sandwich (taxable at a reduced rate). Reducing only the price of the beverage was justified by the fact that the profitability of the beverage in the set after the discount would still be higher than that of the sandwich. According to the taxpayer, the attractive price of the kit will increase sales of sandwiches and reduce losses typical of products with a relatively short shelf life. The Director of National Tax Information, in an individual interpretation dated April 26, 2023, ref. 0114-KDIP1-1.4012.127.2023.1.MM, found the taxpayer’s position to be correct, indicating that allocating the discount only to the product with higher profitability makes economic sense. Accordingly, the taxpayer is entitled to reduce the price of only one good in the set (i.e., a beverage), and the tax base from the sale of this good should be reduced by the said reduction.
An analogous position was presented in an individual interpretation dated June 26, 2023, ref. 0114-KDIP4-2.4012.235.2023.1.MMA, which also concerned the sale of a set consisting of a drink (taxable at the basic rate) and food (taxable at the reduced rate). In this case, the taxpayer considered adopting one of two methods for pricing the goods in the kit, i.e., based on the margin earned on the products included in the kit or based on a markup on the cost of manufacturing the products included in the kit. As indicated in the request for an interpretation, the taxpayer’s goal is to determine the tax base in a way that best suits the specifics of its business and the structure of the revenues it receives and the costs it incurs, while allowing it to increase sales of food as a range, the current sales of which are unsatisfactory. The Director of the National Tax Information considered that the sale of kits in the planned business model is economically justified and will lead to the goal of generating profit in future business activities.
Accordingly, the Director of the National Tax Information confirmed that the taxpayer would be entitled to determine the tax base of the individual products in the set other than by reducing the individual gross sales prices of these products by a proportion, including according to the methods proposed by the taxpayer.
On the other hand, in an individual interpretation dated October 10, 2023, ref. 0114-KDIP1-3.4012.440.2023.1.JG, the restaurant planned to sell sushi rolls in sets, which could also include optional rolls of the customer’s choice. The sale of each roll could be taxed at a different VAT rate depending on the add-ons. The taxpayer considered allocating the discount mainly to the optional extra roll added to the set. The tax base of the extra roll would be set at the cost of the product. The remaining rebate would be allocated proportionally to the other rolls. Again, the Director of National Tax Information considered the taxpayer’s position to be correct.
How, then, to shape the prices of goods in sets?
If a set offered for sale consists of goods taxed at different VAT rates, taxpayers should ensure that their method of reducing the prices of individual goods is economically justified.
At the same time, it should be remembered that in cases that are considered an abuse of the law, taxpayers are not entitled to benefit from the protective power of an individual individual interpretation. Thus, the mere fact of receiving a favorable interpretation does not in itself guarantee that the method adopted by the taxpayer will not be questioned in practice by the tax authorities (therefore, it is crucial that the taxpayer be able to demonstrate that his action has an economic justification).