Newsletter N° 1 2022 Treatment of Promotions

6 January, 2022 8:04 pm Leave a Comment

PROMOTIONS TREATMENT

During the meeting all type of offers made and the treatment that should be given to each of them were analyzed, with the aim of minimizing possible risks when facing a possible control of the Value Added Tax (“VAT”) by the Internal Revenue Service (SII).

Regarding the Consumer Protection Law, given that in these cases the advertising content in brochures or APP associated with promotions is reviewed, it should be kept in mind that the Consumer Protection Law imposes information duties on any supplier or commercial establishment that carries out promotions or offers.

A promotion is a commercial practice by which the respective commercial establishment offers the public its goods or services on more favorable terms than usual (i.e., “For the purchase of 2 products X gift product Y”). If the most favorable condition offered is a price reduction on a temporary basis, this practice is an offer.

All commercial establishment must inform the public of the following aspects in the case of all kinds of promotions or offers:

a) The term or duration of the promotion or offer (e.g., “Promotion valid from December 1, 2021 to December 3, 2021”).

b) The terms and conditions of the promotion or offer. The bases consist of the description of the mechanics of operation of a promotion or offer, including in an outstanding way the conditions or restrictions imposed to enjoy the benefit associated with the promotion or offer. In the event where there are certain geographic locations, days or items excluded from the promotion or offer, this must be expressly indicated in the dissemination of the promotion or offer (i.e., “Promotion valid only for metropolitan region” or “Offer valid only for purchases over $10,000”).

c) Specific Stock: In cases where the validity of the offer or promotion is intended to be associated with the run-out of stock of the respective products, it should be noted that a defined period of validity of the promotion must always be reported, and in case of being conditioned to the run-out of the stock, the number of units or products that make up the corresponding stock must be indicated.

In each of the advertising media (brochures, catalogs, APP, website, flyers, others) in which an offer or promotion is disseminated, the legal texts related to the information of duration and bases of the offer and promotion must be included.

PROMOTIONS TREATMENT OFFERS BY VOLUME

It consists of the sale of two, three or more products of the same nature and characteristics, at a preferential price. The marketing of this offer should be made with the phrase for example “Take three packs of Triton cookies for the price of two” or “For the purchase of 2 packs of Triton cookies take one for free”).

VAT is applied on the selling price of each of the products, but the taxable amount of this tax is lower.

In order to minimize a possible contingency resulting from the SII considering that the word “Free” refers to a free delivery for promotional purposes and not a volume discount, it is considered advisable to comply with the following copulative conditions:

a) Add an asterisk (*) after the word “Free” and a note indicating that:

i) This is a “Promotional Offer” consisting of a purchase volume discount, or

ii) “The bases of the promotion are before the public notary yyy (Any promotion of free delivery must go through a Public Notary). In the respective terms and conditions for the Notary it must be explained that it is a volume discount for an amount equivalent to the price of a product and not a free delivery for promotional purposes.

b) The sales documentation (dispatch guides, slip, invoices, etc.), must indicate the total amount of products sold and apply VAT on the unit price of each of them.

Regarding the Consumer Protection Act, the statement “Free” is a benefit for consumer in terms of receiving the product at no additional cost of any kind. Therefore, the value of the other products that make up the product pack that includes a “free” one for the consumer (“three Triton Cookie Packs”) must be maintained and unchanged, so that the assertion that the product benefiting from the promotion (“Third Free Package”) is actually free is met.

Care must be taken that the information describes the mechanics of the promotion is legible and understandable, in terms of making these legal texts available for the consumer. In this context, although the use of the asterisk is not prohibited, it is recommended to favor the inclusion of the information associated with the promotion in the best possible way. The size, location, and contrast of the asterisk and corresponding texts must be clear and legible enough to avoid a reproach of lack of legibility by the authority.

PROMOTION TREATMENT OF COMBINED OFFERS OR PACK OFFERS

It involves the sale of a product, which is the pack, and which is composed of two or more products of the same or different nature and characteristics, at a certain price (“Pack Offer”).

VAT is applied on the price of the Pack.

In order to minimize a possible contingency resulting from the SII considering that the word “Free” refers to a free delivery for promotional purposes and that, therefore, the free product is not included in the sale price of the Pack as a single product as a whole, it is considered appropriate to comply with the following conditions:

a) Add the phrase “Pack Offer” in the advertising.

b) The products must be packaged as one unit (within the same container with plastic paper, or joined through a tape or promotional strip, in example). In the case it is not possible, it is recommended that, at least, the promotion in the APP has to be presented as a Pack.

c) The sales documentation (dispatch order, sales receipt, invoices, etc.) must be managed with a valued “Master” Line number and an unvalued component line number.

Regarding the Consumer Protection Law, because it is an Offer, the term of validity of this commercial benefit for the consumer must be included in all these cases.

It should be noted that according to the needs of Merchandising, there is the possibility of showing the word “FREE” in the promotion, but this must be accompanied by an asterisk (***), which must be explained in a note where the word Free appears and the explanatory phrase must indicate that: “Pack Offer in which you take offered products together, for the amount indicated.”

Sales Receipt:

PROMOTIONS TREATMENT OF OFFERS FREE SAMPLES

The Free Sample Offer involves the free delivery of a sample of a product for the purchase of another product of the same or different nature and characteristics (“For the purchase of product xxx, take a free sachet of xxx or yyy”).

In this case, it is a free delivery for promotional purposes and must therefore be taxed with VAT.

Regarding the Consumer Protection Law, because it is an Offer, the term of validity of this commercial benefit for the consumer must be included in all these cases.

EXPIRED OR DAMAGED PRODUCT TREATMENT

The write-off or deduction as loss of the cost value for tax purposes of those foods that have been destroyed because their expiration date has expired or because their commercialization has become unviable due to defects in their manufacture, labeling, wrapping or others, will proceed in accordance with the general rules, this because they are losses of the business or company, in this case, the legal norm mentioned must be complied with, especially with regard to its reliable accreditation before this Service. For such accreditation, the procedure contained in document “Circular No. 3 of 1992” must be applied (in case of loss of stocks in the inventory from fortuitous event or majeure force, the taxpayer must give notice to the Service Unit corresponding to his address, within 48 hours of the occurred event. Such ullage or losses must be verified and qualified by an official of the Service, for the purposes of authorizing its reduction (economic loss) in the taxpayer’s accounting books.) Justifying the deduction as an expense of the cost value of the destroyed products, without prejudice to the rules that said instruction imparts for the purposes of Value Added Tax (VAT).

However, in addition to the write-off or deduction as loss of the cost value of expired or defective products that are destroyed, in the case of those foods whose expiration date has not expired, but which have lost their commercial value for the company because their commercialization has become unviable, it is necessary to establish the criteria of which this Service will understand that the respective loss has been reliably proven when they are delivered to non-profit institutions that distribute food free of charge to low-income people.

When the stocks cannot justify their exit from the taxpayer’s inventories, then, the special taxable event (equated to sales) by “withdrawal” referred to in article 8, letter d) of the Sales and Service Tax Law, except in unforeseen cases or majeure force (it is assumed that in this case the taxpayer gave written notice to the Service, recorded the fact in the accounts and has the documents that justify it). This taxed fact equates the shortage to sales, that is, we are in the presence of a sale, so on the date of its departure or withdrawal it is accrued and / or affected by the Value Added Tax (19%). The price that is considered in these cases is the own value that the taxpayer has assigned to the goods or their market value, if the last mentioned were higher, as determined by the Internal Revenue Service (SII).

For the above, every time you have expired or damaged products, and they have not been due to majeure force (fire, earthquakes etc.) you must reduce the inventory and at the end of the month invoice the products as losses or inventory difference or make proof of internal consumption if the products correspond to Yogurt, beverages etc. for a few units that can still be consumed because they are on the day of expiration and will be delivered to workers for their consumption in such a way as to lead to “reduction for internal consumption” and not pay VAT.

It should be kept in mind that you cannot simply destroy or reduce merchandise without the SII considering the difference in inventory as a withdrawal of a partner, taxing it with 19% VAT and 40% as a rejected tax.