Sale of goods at promotional prices – VAT consequences
A common form of promotional action is the sale of goods at promotional prices. It happens that the fixed promotional price of a given commodity is significantly lower than its purchase price and market value, and is only symbolic (it is, for example, PLN 1).
The consequences of sales at promotional prices on VAT grounds are significantly different from those associated with gratuitous transfer of goods. Pursuant to Article 7(1) and (2) of the VAT Act[1], VAT is levied on paid deliveries of goods as well as on gratuitous deliveries of goods, provided that the conditions stipulated by the regulations are met. However, the rules for determining the tax base for these supplies are different. According to Article 29a(1) of the VAT Law, the VAT taxable base for a chargeable supply of goods is everything that constitutes payment. On the other hand, according to Article 29a(2) of the VAT Law, the taxable base for gratuitously given goods is the purchase price of those goods or similar goods, and when there is no purchase price – the cost of production, determined at the time of delivery of the goods. Therefore, there is no doubt that a sale at a promotional price (i.e., symbolic in relation to the regular price) is more favorable for tax purposes than a gratuitous transfer of goods – output VAT is calculated on what constitutes payment (i.e., on the promotional amount), and not on the actual value of the goods (purchase price or cost of production).
On the part of taxpayers organizing promotional campaigns, the question should therefore arise as to whether and when the chargeable nature of the transaction of selling goods at promotional prices can be challenged by the tax authorities, following which the issuance of goods will be considered a gratuitous transfer.
On the one hand, the provisions of the VAT Law do not restrict the taxpayer’s freedom to set the price. This means that, in principle, it is possible to sell at a price lower (even significantly) than the actual value of the goods in question. Only in strictly defined cases and provided that there is a relationship between the parties to the transaction, the tax authorities, in accordance with Article 32 of the VAT Law, have the right to determine the tax base according to market value.
Also, according to the position taken by the tax authorities in individual tax interpretations, for example, dated May 19, 2022, 0114-KDIP4-2.4012.143.2022.1.WH and March 11, 2022, 0111-KDIB3-1.4012.1083.2021.2.KO, a taxpayer has the right to freely arrange his business so that the business is economically profitable for him, including by applying significant price discounts, if it is in his opinion reasonable to achieve this goal.
On the other hand, one should bear in mind the so-called “abuse of right” clause in the VAT Law. Abuse of right, according to Article 5(5) of the VAT Law, is understood as a situation in which a taxpayer, in a manner contrary to the purpose of the provision, achieves a tax benefit in a transaction that was undertaken primarily or exclusively for the purpose of achieving a tax benefit. According to Article 5(4) of the VAT Law, in the event of an abuse of the law, the taxable transactions performed produce only such tax consequences as would have occurred if there had been no abuse of the law.
Therefore, it should be noted that an abuse of the right may be considered, in particular, a situation in which payment for goods sold as part of a promotional action is established solely to achieve a tax advantage, in particular, when the actual purpose of the promotional action carried out is not the sale of goods, but their gratuitous transfer (i.e., donation). The amount of the sale price of the goods, for example, may be considered as a rationale for the above. The key for taxpayers, therefore, should be to determine such a sales price so that the possible “appearance” of gratuity is eliminated, which, however, may pose many difficulties in practice.
It is also worth noting that in cases that are considered an abuse of the law, taxpayers are not entitled to benefit from the protective power of the obtained individual interpretation[2]. Therefore, before organizing a promotional campaign, it is worthwhile to analyze all the consequences associated with its implementation, including tax ones. After all, promotion and advertising, which are the main purpose of promotional actions, can be implemented in various forms, and above all in those that do not expose the organizer to tax risks.
[1] Law of March 11, 2004 on Value Added Tax.
[2] Article 14na § 1(2) of the Tax Ordinance Act of August 29, 1997.
