Common Mistakes in VAT Input Tax Deduction

In practice, businesses often encounter various mistakes when applying VAT input tax deduction regulations. Therefore, understanding the correct provisions and avoiding potential penalties is crucial.

1. VAT Input Deduction for Discounted Products or Services, and Trade Discounts

Businesses are entitled to discounts and trade discounts when the seller has registered these discounts in accordance with the Commercial Law. In such cases, the VAT input for discounted products or services will be reduced. If a business receives a discount based on a specific date, the business can directly reduce the purchase price, and the VAT input tax will be deducted accordingly. In addition, if the discount is provided periodically (monthly, quarterly, or yearly), two situations can arise:

• If the final transaction value is higher than the discount value, the seller must issue an invoice with an additional line for the discount, and the buyer can claim the full VAT input deduction according to that invoice.

• If the final transaction value is lower than the discount value, the seller must issue a credit note for the discount, and the buyer cannot claim VAT input on that transaction.

If the buyer decides not to purchase any further, the seller will issue a separate VAT invoice noting the discount and provide this to the buyer.

2. VAT Input Deduction for Early Payment Discounts and Purchase Support

• Early payment discount: The seller cannot reduce the early payment discount from the pre-VAT price on the VAT invoice. Otherwise, the buyer will not be able to claim the VAT input deduction based on that invoice. However, the seller may exclude the early payment discount on the purchase invoice if payment is made in cash or offset with debts as per the contract between the buyer and the seller.

• Purchase support: If the seller supports the purchase with cash, this does not relate to VAT input deduction. If the seller provides goods or services as support, they must issue a VAT invoice and report the VAT output tax. However, the buyer will not be able to deduct VAT input tax because they did not pay for the goods or services.

3. VAT Input Deduction for Returned Products or Services

When goods or services are returned to the seller, the buyer must adjust and reduce the VAT input tax, while the seller must adjust the VAT output tax. Both parties must ensure that the return reason is clearly specified in the contract, such as poor quality or incorrect specifications.

• If a business returns goods: The buyer must prepare a goods return record, issue a VAT invoice for the returned items to the seller, clearly stating the reason for the return (e.g., poor quality or wrong specifications).

• If a non-business organization (e.g., a government department) returns goods, the buyer needs to issue a return record and specify the reason for the return. They must also return the original VAT invoice. If only a partial return occurs, the original invoice must be returned first before the seller issues an additional VAT invoice.

• If an individual returns goods: Individuals do not have invoices but must return the original VAT invoice along with the return record. If the invoice is lost, the individual is responsible for a penalty equal to half the invoice value and must pay this fine to the tax authorities.

4. VAT Input Deduction for Lost Products During Inventory Checks, Losses Due to Natural Disasters, or Caused by Individuals

• Lost products during inventory checks: If products are lost and compensated, the business cannot deduct VAT input on these products and must reduce the VAT input tax accordingly. If the accountant issues an invoice for the lost items to claim the VAT input tax, this will be considered fraudulent and subject to penalties.

• Losses due to natural disasters: The business can still deduct VAT input on the lost products if compensation is not based on VAT-inclusive prices. If insurance covers VAT-inclusive prices, no VAT input deduction is allowed.

• Losses caused by individuals: The individual is responsible for the loss, and the business cannot deduct VAT input for these items.

5. VAT Input Deduction for Products Exceeding the Allowable Consumption Limit

If products exceed the self-imposed consumption limits, the business can still deduct VAT input for products within the allowed limit. If the consumption limit is set by the state, the business cannot deduct VAT input, and the associated costs will not be deductible either. If the business does not set a consumption limit, the tax authorities will define the limit.

6. Allocation for Monthly and Year-End VAT Input Deduction for Non-Taxed, Non-VAT Declared, and VAT Taxed Goods

When allocating VAT input for monthly and year-end deductions, accountants must refer to the relevant provisions for non-taxable and taxable goods. VAT input for shared goods used in both taxable and non-taxable activities should be allocated accordingly. The business can only deduct VAT input on activities that involve taxable products. VAT input tax on shared goods can be fully deducted without allocation.

7. Allocation for VAT Input Deduction in Case of Payment Errors Across Fiscal Years or Incorrect Financial Invoices

If a VAT invoice should have been paid in the current year but is paid in the next year or incorrectly, the business cannot claim VAT input deduction or record the cost in the wrong month/year. Allocation for VAT input deduction in this case is incorrect.

If a VAT invoice has been deducted this year but is found to be incorrect in the next year, the accountant must submit an amended tax declaration to reduce the VAT input deduction for the current year.