Adjustment of the tax base in the case of an uncollectible receivable

On November 5, 2020, the National Council of the Slovak Republic approved Bill No. 344/2020 Coll., amending Act No. 222/2004 Coll. on Value Added Tax, as amended (hereinafter referred to as the “VAT Act”). This amendment to the VAT Act took effect on January 1, 2021. In this article, we will take a closer look at the newly introduced concept of adjusting the tax base in the case of an uncollectible receivable.

On January 1, 2021, Section 25a of the VAT Act came into effect, which governs the adjustment of the tax base in cases of full or partial non-payment of the consideration for the supply of goods or services. Under the new rules, suppliers will be able to adjust the tax base in the case of an uncollectible receivable and request a refund of the VAT paid on such receivables. The introduction of this mechanism into Slovak law was required by Directive 2006/112/EC, which, in Article 90(1), establishes the obligation to incorporate into national law a mechanism for adjusting the tax base in cases of cancellation, refusal, total or partial non-payment, or a price reduction after the supply of goods or services.

Uncollectible Receivable

The key question to be answered at the beginning of this article is, when does a receivable become uncollectible. Pursuant to Section 25a(2) of the VAT Act, a receivable becomes uncollectible if:

it is being enforced through enforcement proceedings and has not been satisfied within 12 months of the commencement of such proceedings = the receivable becomes uncollectible on the day following the expiration of 12 months from the commencement of the enforcement proceedings, and to the extent that it has not been satisfied
the customer (debtor) is in bankruptcy proceedings and

the bankruptcy proceedings were discontinued due to lack of assets = in such a case, the claim becomes unenforceable on the date of publication in the Commercial Gazette of the notice that the resolution to discontinue the bankruptcy proceedings due to lack of assets has become final
bankruptcy was dismissed due to lack of assets = the claim is unenforceable on the date of publication of the notice regarding the entry into force of the resolution dismissing the bankruptcy due to lack of assets in the Commercial Gazette, or
bankruptcy was declared on the customer’s (debtor’s) assets = unenforceability occurs on the date and to the extent that this claim was established in the bankruptcy proceedings; if the creditor did not file the claim in the bankruptcy proceedings, on the date of publication of the notice regarding the entry into force of the resolution to terminate the bankruptcy after the final distribution of proceeds has been completed in the Commercial Gazette and to the extent that the creditor proves that their claim would not have been satisfied even if it had been filed, provided that this claim has not become time-barred as of that date

the customer (debtor) is in debt relief and

the bankruptcy was terminated because the bankruptcy estate does not cover the costs of the bankruptcy = on the date of publication of the resolution on the termination of bankruptcy in the Commercial Gazette, the claim becomes unenforceable
bankruptcy has been declared on the customer’s (debtor’s) assets = unenforceability occurs on the date and to the extent that this claim was established in the bankruptcy proceedings; if the creditor did not file the claim in the bankruptcy proceedings, on the date of publication of the resolution on the termination of bankruptcy proceedings following the fulfillment of the final distribution of proceeds in the Commercial Gazette and to the extent that the creditor proves that their claim would not have been satisfied even if it had been filed, provided that this claim was not time-barred as of that date
the court has established a repayment schedule = the claim becomes unenforceable on the date the repayment schedule is established and to the extent that this claim was included in the repayment schedule

the customer (debtor), who is a legal entity, has ceased to exist without a legal successor = the claim becomes unenforceable on the date of the customer’s dissolution
the customer (debtor) has died and

the court has discontinued the inheritance proceedings if this person left no assets or left assets of negligible value = the claim becomes unenforceable on the date the order discontinuing the inheritance proceedings becomes final
this claim was filed within the time limit set by the court in the estate liquidation proceedings = unenforceability arises to the extent that it was filed, on the day following the expiration of the time limit for filing claims; if the creditor did not file the claim in the estate liquidation proceedings, on the date of the final termination of the estate liquidation, to the extent that the creditor proves that their claim would not have been satisfied even if it had been filed, provided that this claim was not time-barred as of that date

12 months have elapsed since the due date of the claim for the delivery of goods or services and this claim does not exceed €300 including tax, if the creditor proves that they have taken any action aimed at obtaining payment of the claim,
a resolution on the termination of restructuring has been published and the claim was not filed in these proceedings = the claim becomes unenforceable on the date of publication of this resolution in the Commercial Gazette to the extent that the payer proves that their claim would not have been satisfied even if it had been filed, provided that this claim has not become time-barred as of that date.

A concurrence of facts leading to the creation of an unenforceable claim is not excluded. If such a concurrence of circumstances occurs, the rule applies that the claim becomes unenforceable based on the circumstance that occurs first; for example, if the debtor dies during enforcement proceedings, the claim may become unenforceable even before 12 months have elapsed from the start of the enforcement proceedings.

Here we would like to note that for the purposes of fulfilling the condition under point 1 above (i.e., if the claim was not collected in enforcement proceedings within 12 months of the commencement of enforcement proceedings), the claim must be certified in an enforcement title, i.e., in practice, this will most often involve the acknowledgment of the claim in court or arbitration proceedings, or the acknowledgment of the debt in the form of a notarial deed, etc. For the purpose of asserting a claim in court or in arbitration proceedings, it is necessary to be mindful of the expiration of the statute of limitations. In principle, an enforcement order will not be required for claims of €300 or less, where, however, the performance of “any act” aimed at settling the claim is required. Since the law does not expressly mention the need to assert the claim in court or the need for other proof of the claim, a demand for payment of the due debt or a pre-litigation demand will suffice; the latter carries greater weight if drafted by an attorney, who will also assist you in claiming all applicable and legitimate ancillary costs associated with the claim.

Adjustment of the Tax Base in the Case of an Uncollectible Claim

The essence of the newly introduced legal provision in the VAT Act is that if the customer (debtor) has not paid the supplier (taxpayer) in full or in part for the supply of goods or services (domestically) and the supplier’s claim against the customer has become uncollectible, the supplier is entitled to adjust the tax base and request a refund from the state of the VAT paid on the uncollectible receivable. The customer is obligated to refund the deducted VAT to the state.

However, a tax base adjustment for an uncollectible receivable is only applicable to domestic supplies of goods and services. The amount of the tax base adjustment may not exceed the consideration that the supplier (taxpayer) was to receive for the supply of goods or services.

The difference between the original and adjusted tax base must be reported in the tax return for the tax period in which the receivable became uncollectible. The original tax base cannot be reduced by the amount the taxpayer received in connection with the supply of goods or services after the receivable became uncollectible. This means that if, after the receivable became uncollectible, the customer paid the supplier a portion of the amount owed, the supplier may adjust the tax base only by the amount corresponding to the unpaid portion.

An adjustment to the tax base for an uncollectible receivable cannot be made if:

the goods or services were supplied to the customer (debtor) after the customer’s (debtor’s) assets were declared bankrupt
no later than the date of delivery of the goods or services, the supplier knew, should have known, or could have known that the customer (debtor) would not pay, in whole or in part, for the delivery of the goods or services, taking into account the circumstances of the specific business relationship
the customer (debtor) is, or was on the date of delivery of the goods or services, a person who has a special relationship with the taxpayer

Pursuant to Section 22(9) of the VAT Act, persons who have a special relationship with the taxpayer are:

natural persons who are members of the statutory body of the taxpayer supplying the goods or services, or members of the statutory body of the taxpayer supplying the goods or services, as well as natural persons directly subordinate to them,
natural persons who are members of the supervisory board of the taxpayer supplying the goods or services,
persons who directly or indirectly own or control 10% or more of the shares or equity interests of the taxpayer supplying the goods or services, and natural persons who are members of their statutory body or members of their statutory body,
persons in whom the payer supplying the goods or services directly or indirectly owns or controls 10% or more of the shares or interests, and natural persons who are members of their statutory body or members of their statutory body,
persons who are members of the payer supplying the goods or services,
natural persons who are in an employment relationship with the payer supplying the goods or services,
natural persons who are a related party of a natural person referred to in subparagraphs (a), (b), (c), (d), or (f),
legal entities whose statutory body, partner, or member is also a statutory body or partner of the taxpayer supplying the goods or services,
natural persons living in the same household as the taxpayer supplying the goods or services,
persons closely related to the taxpayer who is a natural person and who supplies the goods or services.

Obligation to Adjust the Tax Base in the Case of an Uncollectible Receivable

The legislator, in Section 25a(6) of the VAT Act, regulates the taxpayer’s obligation to adjust the tax base. If, after reducing the tax base, the taxpayer receives any payment in connection with an uncollectible receivable, the taxpayer is required to adjust the reduced tax base by an amount corresponding to the payment received; if the taxpayer assigns the receivable to another person, it is deemed that the taxpayer has received a payment in the amount of the uncollectible receivable. The taxpayer shall correct the reduced tax base in the tax return for the tax period in which this payment was received.

Expiration of the right to correct the tax base in the case of an uncollectible receivable

The explanatory memorandum to the bill states that the period during which a taxpayer may correct the tax base in the event of full or partial non-payment of consideration begins on the last day of the deadline for filing the tax return for the tax period in which the goods or services were supplied and ends three years after that date. It follows from the above that the right to correct the tax base expires three years after the last day of the deadline for filing the tax return for the tax period in which the goods or services were supplied.

The legislature has also established cases in which the running of the aforementioned three-year period is suspended so that a correction of the tax base is not prevented by its futile expiration before the taxpayer’s claim becomes unenforceable.

The period does not run:

during court proceedings or arbitration proceedings, if the taxpayer, based on the results of such proceedings, has asserted a claim against the customer (debtor) in enforcement proceedings or has asserted a claim or could have asserted a claim in initiated bankruptcy proceedings,
from the date of commencement of enforcement proceedings conducted for the purpose of collecting the taxpayer’s claim until the expiration of 12 months from the date of commencement of the enforcement proceedings,
from the date of commencement of bankruptcy proceedings until the date of termination of the bankruptcy proceedings due to lack of assets or the cancellation of the bankruptcy due to lack of assets,
from the date of commencement of bankruptcy proceedings until the date of determination of the payer’s claim in the bankruptcy proceedings,
from the date of the declaration of the decision on discharge of debt through bankruptcy until the date of cancellation of the bankruptcy on the grounds that the bankruptcy estate does not cover the costs of the bankruptcy,
from the date of the announcement of the decision on discharge of debt through bankruptcy until the date of the determination of the payer’s claim in the bankruptcy proceedings,
from the date of publication of the resolution granting protection to the debtor against creditors in the Commercial Gazette until the date of the conclusion of the proceedings to determine the repayment schedule in which the payer’s claim is included,
from the date of the debtor’s death until the date the resolution terminating the inheritance proceedings becomes final or until the claim is filed in the estate liquidation proceedings,
from the commencement of restructuring proceedings until their conclusion, if the payer has not filed the claim in those proceedings.

Thus, the total duration of the period is extended by the duration of these circumstances.

Example of the Expiration of the Right to Adjust the Tax Base

A supplier who is a monthly VAT payer delivered goods ordered by the customer on March 1, 2021, for which the customer did not pay. The claim was enforced in enforcement proceedings that began on May 1, 2021. The claim was not satisfied within 12 months of the commencement of the enforcement proceedings. In the case of enforcement proceedings, the claim becomes uncollectible on the day following the expiration of 12 months from the commencement of the enforcement proceedings. In our case, the claim became unenforceable on May 2, 2022. Since the basic prerequisite for making a tax adjustment is that the claim is unenforceable, the supplier cannot adjust the tax base before May 2, 2022. When would the supplier’s right to make a tax adjustment expire?

The right to correct the tax base expires three years after the last day of the filing deadline for the tax return for the tax period in which the goods or services were supplied. The supplier delivered the goods on March 1, 2021, and since they are a monthly VAT payer, the last day of the filing deadline for the March tax return is April 25, 2021. The 3-year period would expire on April 25, 2024.

However, the legislature has also established cases where the period is suspended; specifically, the period does not run from the date of commencement of enforcement proceedings conducted for the purpose of collecting the payer’s receivable until 12 months have elapsed from the date of commencement of such proceedings. In our case, the period would not run from May 1, 2021, to May 1, 2022.

The supplier’s right to make a tax adjustment would expire on April 25, 2025.

Correction Document

A taxpayer who has made or was required to make a correction to the tax base in the case of an uncollectible receivable is required to issue a correction document within the period prescribed by law. A correction document is not issued if the receivable became uncollectible as a result of the death of the customer (debtor) or as a result of the dissolution of the customer (which is a legal entity) without a legal successor.

The taxpayer is required to issue and submit a correction document no later than the deadline for filing the tax return for the tax period:

a) for which the taxpayer made the tax base adjustment; for example, if the supplier is a monthly VAT payer and made the tax base adjustment on March 15, 2021, the correction document must be submitted by April 25, 2021
b) in which they received payment; this applies to a situation where, after reducing the tax base, the taxpayer receives any payment in connection with an uncollectible receivable

The legislator sets forth in Section 25a(9) of the VAT Act the requirements that a correction document must contain. The requirements for a corrective document vary depending on whether the taxpayer corrected the tax base or was required to make the correction.

A corrective document by which the taxpayer has corrected the tax base must contain:

a) the numerical identification of the corrective document,
b) the date of issuance of the corrective document,
c) the amount by which the taxpayer corrected the tax base and the tax,
d) the text “correction of the tax base pursuant to Section 25a”,
e) the information specified in Section 74(1)(a) through (c) regarding the invoice for the supply of goods or services to which the correction of the tax base relates (identification details of the supplier and customer and the invoice serial number)

A correction document, in the event that the taxpayer was required to correct the tax base, must contain:

a) the numerical identification of the correction document,
b) the date of issuance of the correction document,
c) the details from the correction document (items a) and b)),
d) the statement “correction of the tax base pursuant to Section 25a”,
e) the amount received by the taxpayer in connection with the uncollectible receivable or a portion thereof, and the corresponding tax amount,
f) the date of receipt of the amount under letter e).

If the taxpayer has corrected the tax base but failed to issue and send the correction document within the statutory deadline, the correction of the tax base stated in the tax return for the tax period in which the correction of the tax base was made shall not be recognized. The taxpayer is required to record the correction of the tax base in the records maintained pursuant to Section 70 of the VAT Act. The records must be retained until the end of the calendar year in which 10 years have elapsed since the end of the year to which they relate.

The law firm Hronček & Partners, s. r. o. has extensive experience representing entities in tax audits involving various types of taxes, where it assists taxpayers in defending and asserting their rights and protecting their interests against incorrect or unlawful procedures by public authorities. In the area of tax matters, we work closely with a renowned tax expert, tax advisor Ing. Mgr. Martin Tužinský, PhD. If you are facing a tax-related issue and need assistance, our experts are ready to lend a helping hand.