Under the previous practice, the receipt of subsidies to cover an operating deficit led to a reduction of the input tax deduction in relation of the subsidies to the total turnover.
However, in cases where the input tax reduction based on the ratio of subsidies to the total turnover does not adequately take into account the contribution to the financing of the expenses and investments, a different method should be used in the future. As an alternative, the FTA has proposed that the input tax reduction on expenses and investments is carried out based on the ratio of subsidies to financed expenses.
In addition, the FTA proposes the following simplifications with respect to the input tax reduction resulting from COVID-19 contributions, which classify as a subsidy to cover an operating deficit (provided that the proportion of the expenses and investments financed with subsidies is adequately taken into account):
- No input tax reduction is to be applied on the input taxes on the cost of goods.
- No input tax reduction is to be made on the input taxes on investments (capitalized goods and services).
- Instead of the turnover ratio, the input tax reduction can be calculated based on the ratio of subsidies to total expenses (excl. VAT). This is particularly intended for taxable persons for whom the turnover has collapsed due to the COVID-19 situation and the expenses therefore significantly exceed the turnover and subsidies. The expenses according to the profit and loss accounts (excl. VAT) including depreciation shall be taken into account. The cost of goods must not be included in the expenses, as no input tax reduction is necessary in this case.
The proposed alternative method on a cost basis opens the way for a more adequate result regarding input tax reductions and is therefore, in our view, to be welcomed. The deadline for comments on the draft publication expired on 13 April 2021 and the final adoption of the practice remains to be seen.
