Dispute over obligation to remeasure advances at year-end
The Supreme Administrative Court addressed the question of whether a taxpayer is obliged to remeasure recognised advances for the purchase of fixed assets denominated in a foreign currency as at the balance sheet date. During a tax inspection, the tax administrator decided that this obligation applied and assessed additional tax on the unrecognised foreign exchange difference. However, the affected taxpayer disagreed with this procedure, and so did the administrative courts.
Customers normally commit to provide suppliers with advances for the purchase of fixed assets (e.g., a production line) before the delivery of the fixed assets. The advance payment amount, usually stated in the currency the supplier uses for invoicing, is then used to reduce the purchase price after the fixed asset is delivered. This was also the situation encountered by the tax administrator in the case at issue. The tax administrator assumed that until the purchased asset was delivered, the advance paid was a regular foreign currency receivable between the customer and the supplier and, consequently, like any other receivables in foreign currency, was subject to revaluation at the end of the accounting period. Any revaluation gains must be taxed.
The taxpayer disagreed with this interpretation and appealed to the regional court, according to which the tax administrator's reasoning was contrary to the essence of providing advance payments. When a fixed asset is delivered, the advance payment is not returned to the customer but is credited against the purchase price of the asset. Thus, unlike other receivables, the advance payment amount does not increase the taxpayer's asset amount and, as a result, its periodic revaluation does not improve the presentation quality of the taxpayer’s financial statements.
The tax administrator disagreed, and the dispute went all the way to the Supreme Administrative Court. In judgment 4 Afs 170/2021, the SAC drew attention to the purpose of keeping accounting records, which is to provide as true a picture as possible of the accounting entity’s financial performance. The SAC also relied on the opinion of the National Accounting Council (I-43), concluding that accounting legislation provides for the obligation to remeasure receivables only where exchange rate movements affect their future value (i.e., exchange rate risks arise). In the case of an advance made in a foreign currency that will be set off against a purchase price paid in the same currency, no exchange rate risk arises. The SAC therefore disagreed with the tax authority's view and its expectation that the parties will breach their obligations and the advance will be refunded rather than assuming that both the customer and the supplier would want to complete the sale properly. If the tax authority wanted to apply this approach, it would first have to prove that the advance payment was unlikely to be offset (for example, upon withdrawal from the contract).
According to the SAC, it is not necessary to remeasure advances made in foreign currency for the purchase of fixed assets at the end of the accounting period unless there is a reasonable assumption that the assets will not be delivered and the advance will be refunded. For year-end closure activities, we recommend paying close attention and approaching the issue in the context of the specific situation.