Advertising agency scheme vs. VAT

In some industries (e.g., manufacturing, FMCG), sales-supporting promotional actions involving the transfer of prizes to consumers or businesses are regularly used, the organization of which is entrusted to specialized advertising agencies. As part of the organized action (e.g., a contest or lottery), the task of such an agency is, among other things, to acquire and transfer prizes. What are the VAT implications of such an action? Can the inclusion of the value of the prizes in the agency’s invoice for the marketing service provided entail a VAT risk for the principal? It is worth thinking about this already at the stage of planning the action and estimating its costs.

According to the uniform practice of tax authorities and administrative courts formed on the basis of the judgment of the Court of Justice of the European Union (“CJEU”) of October 7, 2010 in the joined cases C-53/09 and C-55/09 Loyalty Management UK Ltd and Baxi Group Ltd, payments made by the principal of a campaign to an advertising agency, in the part in which they cover the value of prizes provided by the agency to clients, are not included in the tax base of the service provided by the agency to the principal. These payments should be considered a payment made by the principal as a so-called “third party” on account of remuneration for the service rendered by the agency to the client consisting in the transfer of a prize for consideration. Consequently, from a VAT perspective, it is the agency that transfers the prize to the participants for a fee, with the principal being the entity making the payment to the agency on this account.

This means that the invoice issued by the agency to the principal for the service rendered should not include the value of the prizes in the taxable amount of the service. If the agency nevertheless issues an invoice to the principal on which it includes the value of the prizes, in light of the above-mentioned case law practice, the principal is not entitled to deduct VAT on that part.

However, it should be borne in mind that before, and for some time after, the above-mentioned CJEU judgment, the authorities considered the issuance of prizes as an element of a comprehensive service, i.e. a service provided by agencies to principals (so, for example: Director of the Tax Chamber in Warsaw of August 4, 2011 ref. IPPP1-443-971/11-2/Igo and of July 27, 2011 ref. IPPP2/443-737/11-4/KAN).

This means that, in practice, many principals are in possession of favorable individual interpretations confirming the right to deduct VAT shown on invoices issued by the agency for services rendered, including the portion covering the value of prizes. A question that may therefore raise doubts is whether principals who obtained such individual interpretations in the distant past can also benefit from their protective power with regard to actions organized now.

First of all, it should be noted that the protective power of individual interpretations issued in the past may be affected by legislative changes that have occurred in the meantime (i.e., if the legislation on the basis of which the interpretation was issued has been repealed or amended). However, it seems that the effect of the loss of protective power of an interpretation should not apply to situations in which the legislative changes were only of an editorial nature and did not substantively affect the essence of the position of the authority applied in the interpretation.

It should also be emphasized that the individual protective power of an individual interpretation is limited to a specific factual state or future event. Therefore, in the event that the subject of the obtained individual interpretation was a strictly defined action, or the conditions for carrying out the action have changed over the years, the authorities may not take into account the interpretation held by the taxpayer in their proceedings and attempt to undermine the deduction of VAT from the invoice issued by the agency to the extent that it includes the value of the prizes.

Therefore, when planning promotional campaigns involving the issuance of prizes by the advertising agency that organizes them, one should carefully analyze their tax consequences. In particular, it should be ascertained whether the described risk of non-deductibility of VAT (e.g. whether the individual interpretation held by the agency actually “secures” the right to deduct VAT with respect to prizes) will not occur with the method used by the agency to settle the value of prizes with the principal. Unexpected non-deductibility of this tax may significantly affect the actual cost of the conducted promotional campaign.