Indirect Tax & Income Statement Classification

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IFRSLearner
Posts: 9
Joined: 09 May 2022, 18:01

Indirect Tax & Income Statement Classification

Post by IFRSLearner »

Hi

I am pondering a couple things, and would love anyone else's take. We are working on becoming tax compliant for sales and use and various VAT and other indirect taxes where we have a tax liability to collect and remit but are not yet doing so.

For the current period, where we should be collecting and remitting the sales tax, while not generally technically correct from all tax authority's perspective, we are assuming that our sales price and hence revenue is inclusive of sales tax. In the current period we calculate the tax we should have collected, deduct it from revenue (which is not ideal) and record it to a sales tax liability account and then remove the liability when the payment is made to a tax authority as follows:

Dr. Revenue
Cr. Sales Tax Liability

Dr. Sales Tax Liability
Cr. Cash

For our historical periods, we are under going various tax audits (I know so fun!!) we will have to make payments on overdue taxes that would have been our obligation to collect and remit in previous years. It doesn't follow that we can use the same logic as above to deduct from revenue, as the liabilities arose on revenues in prior years. I am stuck where we could classify this in the income statement and haven't seen any guidance that is particularly helpful in determining it. For context, these historical amounts are material, and we have a functional P&L, where as if we had a natural P&L, I would be in favor of presenting as its own caption.

One last unique situation, we offer a particular service and as a result of offering this particular service exposes us to a new indirect tax requirement. In this case, the service we provide is exempt from sales tax itself, however as a result of offering this service we are required to collect and remit tax on our customers sales for them! In this situation, we don't have a current period revenue to deduct it from as our service is not taxable nor is it the basis the tax amount is levied on. I have considered two alternatives: one being classified G&A on the weak basis it is a misc expense and doesn't fit our other two functions and the second being cost of goods sold as we wouldn't have this tax expense if we didn't offer the specific service, and it is causing me to think it is actually a direct cost of the service's revenue.


Dr. G&A expense (sales tax we should have collected in current period)
Cr. Indirect Tax Liability

Dr. Indirect Tax Liability
Cr. Cash

Or

Dr. COGs
Cr. Indirect Tax Liability

Dr. Indirect Tax Liability
Cr. Cash

Anyone encounter any of these situations or seen any guidance they think would be helpful for analyzing and determining where the amounts could be classified on the p&l?

Thanks!!
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Marek Muc
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Re: Indirect Tax & Income Statement Classification

Post by Marek Muc »

Re. Point 1: this seems to be a prior period error where you overststed revenue, so a retrospective adjustment seems appropriate:

https://ifrscommunity.com/knowledge-bas ... ink-errors

Re. Point 2. If these taxes are collected on behalf of customers, why do you want to charge it to P&L?

https://ifrscommunity.com/knowledge-bas ... rd-parties

So:
Dr additional cash collected
Cr tax liability
IFRSLearner
Posts: 9
Joined: 09 May 2022, 18:01

Re: Indirect Tax & Income Statement Classification

Post by IFRSLearner »

Re - point 1 I can't see going down the path of a retrospective adjustment, but would like to find some guidance on how we could support recording in current period. I feel that we can't be unique, many must face tax audits that span prior years and I wouldn't supsect it would be practical to go back and retrospectively adjust all the prior periods.

Re- point 2 - that would be the entry IF we were actually collecting the tax, problem is we haven't a mechanism to collect it, yet we are still responsible for it, I want to accrue the liability (because we will ultimately have to pay it) but the expense classification has me questioning where it really should be presented.
Leo
Posts: 546
Joined: 05 Apr 2020, 22:31

Re: Indirect Tax & Income Statement Classification

Post by Leo »

Agree with Marek, if your errors is material, you must correct it in the retrospective periods. Meaning that you'll debit Equity and credit Liability in the opening balance sheet of N-1 for the part representing the cumulative errors before FY n-1, debit revenue and credit liability in FY N-1 for the part concerning FY N-1.

If it's not material, Refer to the link sent by Marek, you can do it in the current fiscal year by debiting revenue and crediting Liability, but this is only when it's not material.

For your point 2, as MAREK said, from your description, it's a VAT for me, why would you touch your P&L ? This is only balance sheet wise I'd say.
IFRSLearner
Posts: 9
Joined: 09 May 2022, 18:01

Re: Indirect Tax & Income Statement Classification

Post by IFRSLearner »

on one - ah I see we adjust opening equity and liabilities, ok that makes a bit more sense, as the liabilities were individually immateriality in the periods n-1 but taken together are material to the current period.

on point 2 - I agree, it should only be balance sheet, when we are actually collecting and remitting the tax, in this case we are not actually collecting the tax but need still need to remit it at our expense (as we haven't collected it) and we therefore have liabilities that need to be recorded. We can't deduct it from revenue b/c it isn't a VAT on our product or service, its a bit unique in that it isn't a tax or VAT on the sale of our product or service, but a tax on the sale between our customer and our customer's customer. The only reason we have the obligation to step in to the transaction and collect the tax at this level is because of the specific service we offer, this is why I am wondering if it should be COGs as it is a direct cost to us to offer this service, until the point in time we have a mechanism to actually collect it and then it would be fully balance sheet. Hopefully that makes sense. In the mean time I am left questioning what is best course!
Leo
Posts: 546
Joined: 05 Apr 2020, 22:31

Re: Indirect Tax & Income Statement Classification

Post by Leo »

I've never come across something like it. Would you mind giving us a practical example of one such operation ? Like, Customer A sells a product to B, what you do, and what's the accounting entry etc...
IFRSLearner
Posts: 9
Joined: 09 May 2022, 18:01

Re: Indirect Tax & Income Statement Classification

Post by IFRSLearner »

Hi Leo

Yes - its a new-ish area of indirect tax that many jurisdictions around the globe are enacting, in similar fashions.

For example an online marketplace like amazon marketplace offers a place for sellers (who may not be registered for VAT or sales tax anywhere) to sell products and services, these transactions were going largely untaxed and the governments do not like that! New legislations has been passed in many jurisdictions where by the party that is responsible for facilitating the transaction has to collect the tax.

For example, I purchase a e-book from a Market Place Seller on Amazon. Amazon facilitates this transaction by providing the platform and payment processing for this transaction to take place. Amazon is required to collect and remit the sales tax on the sale of the e-book from the marketplace seller to me. If in this case, Amazon doesn't have a means to collect the tax, they are still liable for it and therefore the liability has to get recorded, the other side of that entry is tricky when the cash is not actually being collected.

Ex:

Sale Transaction for e-book Revenue generated for Amazon
Customer --sales tax occurs here-- Marketplace Seller -- transaction processing services-- Amazon
(MP Customer) (Amazon's customer)


fee earned for processing the transaction for Amazon would be:

Dr. Cash/AR
Cr. Revenue

for recording the liability for tax for Amazon:

it should be
Dr. Cash
Cr. tax liability

since the cash is not collected

Dr. ???
Cr. Tax Liability


Any thoughts?
Leo
Posts: 546
Joined: 05 Apr 2020, 22:31

Re: Indirect Tax & Income Statement Classification

Post by Leo »

In France for example, in most of the case, it's the business (online shops) owner's duty to collect and pay VAT. But sometimes, companies like Amazon might offer delivery services, and in such case, they might collect VAT on behalf of the business owners. But in such case, I believe there must be a mechanism to reclaim these VAT to business owners after. It must be a timing thing. So I would suggest :

"since the cash is not collected

Dr. ???
Cr. Tax Liability"

Dr : Tax receivables (from business owners)
Dr : Tax Liability to government

And you sold each account with cash.
IFRSLearner
Posts: 9
Joined: 09 May 2022, 18:01

Re: Indirect Tax & Income Statement Classification

Post by IFRSLearner »

Hi Leo,

Thanks, sadly it is not the case, if we do not collect the tax at the time of the transaction, there is no recovery mechanism. Its a unique tax compliance requirement of online platforms, its called a market facilitator tax and they are springing up everywhere! If we set it up as a receivable, per your suggestion, unfortunately it would wind up being written off down line as we can't collect or recover it. It has to be an expense or P&L item until we are able to set up a mechanism to collect and be compliant. In the mean time hmmm where to record the dr.
Leo
Posts: 546
Joined: 05 Apr 2020, 22:31

Re: Indirect Tax & Income Statement Classification

Post by Leo »

If you can't reclaim it after, I can't see anywhere else than P&L. Above EBITDA, but I really don't know whether it's in COGS or other operating. Maybe you can ask to your auditors for the classification ?
IFRSLearner
Posts: 9
Joined: 09 May 2022, 18:01

Re: Indirect Tax & Income Statement Classification

Post by IFRSLearner »

Yea - likely have to run by the auditors *sigh. Thanks for kicking the tires with me :)
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