The theory of dynamic discounting is highly appealing.
Suppliers can elect to get paid when they want at a discount rate they can clearly see and accept. Buyers benefit from discounts on a much larger scale which reduce their costs. However, there are some complex compliance hurdles to overcome when deploying these programs, especially when they are deployed in multiple countries.
Today, early payment discounts are commercially accepted and commonly used globally with some jurisdictions having established processes. Businesses deploying dynamic discounting, either as buyers or suppliers, need to be mindful of country specific rules on handling tax, which vary according to in-country VAT/GST law and/or code of practice.
How Treatments of Discounts Vary
As a minimum requirement, invoice adjustments must be applied for all dynamic discount programs. However, this is normally just the start of the compliance process. Certain countries require a supplier-originated credit note, while others are okay with a buyer-originated credit note or even an amended-invoice. In addition, there is the question of "what the discount can be applied to?" given that in some countries the discount is based on the gross amount e.g. inclusive of VAT/GST. While in others it has to be on the net amount, excluding the VAT/GST.
In general, the credit note or amended invoice document must be cross-referenced to the original invoice and it must contain the same information together with the reason for the amendment and the final corrected position. Commonly, we have observed that most countries favor supplier-originated credit notes as such documents can be reconciled clearly with the invoice. Nevertheless, the way the credit note is presented varies and it can include sequential numbering, positive/negative amounts, and invoice references.
Working a Discounting Example
The common procedure in most countries is to deduct the discount from the gross amount (gross total), which includes the VAT/GST amount. For example, in Germany the discount base amount is the invoice gross amount and the discount posting reduces the VAT on the invoice. The following is an example of how this works (where we use the standard tax rate for Germany at 19%):
Supplier issues invoice: €200.00
VAT amount: €38.00
Gross total amount: €238.00
1% gross discount: €2.38
Under the compliance requirements with the equivalent tax or country code of practice the three discount amounts need to be reported:
Net discount: €2.00
VAT amount discount: €0.38
Gross total discount: €2.38
Dynamic Discounting is Not 'For Dummies’
The conclusion that can be drawn from this is obvious. While the concept of dynamic discounting is simple and the benefits are apparent for both suppliers and buyers, deploying programs, especially in multiple countries is complex. It requires deep skill sets, experience and knowledge of how the compliance requirements operate in each of those countries to ensure that the overall program, and therefore both buyers and suppliers remain compliance under country tax laws.
Dynamic Discounting at Taulia - How It Works