Taxation on Trade Discounts and Goods returned
Revenue Measurement and Tax Invoices
A wholesaler sells goods to a retailer for RMB1,000,000, giving a trade discount of 20% to the retailer. The wholesaler issues VAT Special Invoices RMB 1 million, and issues a credit note of RMB200,000. The analysis of the accounting and tax treatment are as per below:
Sales recognized under accounting rules: RMB 0.8 million; the sales amount under VAT and IT rules: RMB 1 million.
The use of credit note results in higher amount of tax payable. The trade discount should have been printed in the same VAT special invoices in order to get the deduction from gross revenue. See SAT document Guo Shui Fa (1997) No. 472
After receipt of goods, the retailer discovers that some goods have quality problems. Wholesaler agrees to give a 10% discount on gross amount of RMB 1 million. Accordingly, it issues a second credit note for 0.1 million to the retailer. The account receivable from retailer is further reduced from 0.8 million to 0.7 million.
The tax implication is below:
The use of credit note is NOT tax efficient.
Since the quality problem is discovered after delivery, the wholesaler cannot state the sales discount in the original VAT special invoices.
Two possible treatments:
If the retailer can return tax invoices, the wholesaler can issue revised tax invoices; If retailer already made payment or has used the tax invoices for accounting purposes, wholesaler needs to obtain from retailer a copy of "Certification of Purchase Returns or Sales Concession" issued by the tax bureau in charge of the city where retailer is located before wholesaler can issue credit note and reduce the sales amount for VAT and IT purposes. See SAT Document Guo Shui Fa (1993) No. 150;
Taxation on Returned Goods Taking Place Across Different Accounting Periods
Company A sold goods costing RMB70 to Company B for RMB100 on 10th December 20x1. Company B returned the goods on 28th January 20x2. The board of directors of Company A had not approved the financial statement for the year ended 20x1 until 31st March 20x2. Assuming that the corporate income tax rate is 30% and we also ignore the legal requirement for profit appropriations. In accordance with the accounting rules for post-balance sheet events, the accounting entries for goods returned taking place after the balance sheet date but before the approval of the accounting reports will be as follows:
(1) Adjusting sales income
Dr. Prior year adjustment (Profit & Loss) -100
Dr. VAT payable -17
Cr. Account Receivable -117
(2) Adjusting cost of sales
Dr. Stock in trade +70
Cr. Prior year adjustment (P/L) +70
(3) Adjusting the income tax 30% x 30 = 9
Dr. Income tax payable - 9
Cr. Prior year adjustment +9
(4) Adjusting the retained profit
Dr. Retained profit -21
Cr. Prior year adjustment +21
The balance sheet extracts will show the following:
| Assets | Liability | ||
|---|---|---|---|
| Inventory | +70 | Retained profit | -21 |
| Account receivable | -117 | Tax payable | -17-9 |
| Total | -47 | Total | -47 |
The PRC accounting rules require the adjustment to be made to the profits of the preceding year in accordance with the rules for post-balance sheet events since the directors have not approved the accounting reports. The VAT rules do not allow the return of goods to be adjusted retrospectively. The adjustment should be made in January 2005 when the return of goods took place. Again it is assumed that the accounting profit and the taxable income report no differences, RMB1,000 in 2004 and RMB3,000 in 2005 respectively. The accounting reports, income tax returns and VAT returns will show the adjustments in different periods:
| Profit and Loss A/C | Income Tax Return | VAT Returns | |
|---|---|---|---|
| Income 2004 | 1,000 -100 | 1,000 -100 | 1,000 |
| Income 2005 | 2,000 | 2,000 | 2,000-100 |
| Both 2004 and 2005 | 2,900 | 2,900 | 2,900 |
If the buyer returns the tax invoices to the seller in the following month or thereafter, the seller should issue an invoice with the same amount in the negative through the anti-forgery tax invoice controlling system, and make adjustment in the VAT return in the month the goods and the invoice are returned.
Taxation on Returned Goods With Quality or Specification Problem in Import-Export Transactions
If imported goods are returned in original condition within one year from the importation date, the Chinese customs shall not impose export tax; the consignee can apply for the refund of import duty and VAT within one year from the date of duty and VAT payment.
If export goods are returned in original condition within one year from the exportation date, the Chinese customs shall not impose import duty and VAT; the consignor can get a refund for export tax, if any, within one year from the date of making the export tax payment, subject to the return of VAT refund for export goods.
Taxation on Compensation Goods at No Consideration Relating to Import-export Transactions
After completing the procedure for the return of import goods or surrendering the import goods to the customs, the consignee can import identical compensation goods at no consideration and tax-free, on condition that it has not claimed back the duty and VAT paid previously.
After the return of export goods, the consignor can export identical compensation goods at no consideration and tax-free.
The taxpayer shall exercise its right to apply for duty and tax exemption on the compensation goods within the warranty period under the contract, subject to a maximum period of three years from the import or export date of the original goods. In case that the taxpayer does not submit the application within the stipulated period, the customs shall not entertain the application for duty and tax exemption.
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