Successfully Navigating the VAT Dynamic Discounting Minefield

April 1, 2016 Magaly Charlier

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.

Anyone considering deploying a dynamic discounting program should ensure that their solution partner fully understands and incorporates country compliance requirements into the program roll-out and treatment of discounts that are generated dynamically. Failure to ensure this key aspect of a program is very likely to lead to the program being non-compliant under country VAT/GST laws.
 
 
Different Countries Have Different Rules for Applying VAT or GST to Discounts

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.

The job at the sharp end for Accounts Payable and Accounts Receivable practitioners is to mitigate these operational risks by ensuring that any dynamic discounting programs deployed adhere to such practices that enable them to be compliant. Accounts Payable practitioners and buying organizations in general, need to make sure that solution providers that offer dynamic discounting programs can demonstrate how their programs are compliant. Ideally, to ensure that programs are scalable, by utilizing the benefits of technology to guarantee that this is undertaken in an automated fashion to minimize any manual intervention and therefore inefficiencies to the program. The conclusion that can be drawn from this is that dynamic discounting programs need to be planned and implemented according to the law.

 

Dynamic Discounting at Taulia - How It Works

Taulia’s dynamic discounting solution has been built from the ground up as a core component of the overall solution with the specific objective of working globally across multiple regions and countries to meet the requirements of modern and globally operating businesses. Dynamic discounts are formatted in agreement with relevant country tax laws. Fully amended and reconciled invoices and/or credit/debit notes are delivered directly to clients ERPs. The system creates scheduled payments using the chosen discount rate, date and amount according to the early payment request. Most importantly, a credit note or relevant supporting document is originated to reflect the discount for audit purposes. All of this is processed and completed within the technology solution with rules set by the buying organization and country law to ensure compliance. This approach ensures that buyers and suppliers can maximize their benefits from a dynamic discounting solution and comply with relevant country tax laws.
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