1

ADJUSTMENTS OF DEDUCTION

2

BASICS

3

Periods of adjustment and method

• Periods of adjustment

– Five years (periods of reference in Malta) for capital goods other than immovable property

– Twenty years (periods of reference in Malta) for immovable property

• Method

– Adjustment each period (one fifth or one twentieth or one-off adjustment)

– First period is the period of reference in which the good was acquired, manufactured or first used

– Adjustment in favour of the State, but also in favour of the taxable person

4

Period of reference

DATE OF REGISTRATION PERIOD 1 (TAX PERIODS) PERIOD 2, 3, 4, 5

JANUARY 4 CALENDAR YEAR

FEBRUARY 3 01/11 -> 31/10

MARCH 3 01/12 -> 30/11

APRIL 3 CALENDAR

YEAR

MAY 2 01/11 -> 31/10

JUNE 2 01/12 -> 30/11

5

Period of reference

DATE OF REGISTRATION PERIOD 1 (TAX PERIODS) PERIOD 2, 3, 4, 5

JULY 2 CALENDAR

YEAR

AUGUST 1 01/11 -> 31/10

SEPTEMBER 1 01/12 -> 30/11

OCTOBER 1 CALENDAR YEAR

PERIOD 1, 2, 3, 4, 5

NOVEMBER 01/11 -> 31/10

DECEMBER 01/12 -> 30/11

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Adjustments of deduction and self-supplies

• Self-supplies and adjustments are both in the end a correction on the initial deduction

• First application of the rules with respect to self-supplies

• If no self-supply, application of the adjustments rules

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Cases for adjustments of deduction

• Total or partial use for private purposes or for operations in respect of which VAT is not deductible or in respect of which VAT is deductible in another proportion than that of the initial deduction

• Changes in the elements used for the calculation of deducted tax

• Supply or self-supply + VAT (adjustment in favour of the State with limits)

• Capital goods stop to exist in the enterprise

• Loss of right to deduct VAT

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EXAMPLESPERIOD OF FIVE YEARS

9

One-off adjustment for the rest of the period in favour of the State

A taxable person purchases a machine on 15 December 2004 for the price of 1,180 liri incl. VAT (18% = 180 liri). He deducts 180 liri. On 2 February 2007, he stops his taxable economic activity, but continues an economic activity without right to deduct VAT.

Assumption: the period of reference is 1/12 30/11

Solution

Period 1 ends on 30/11/2005 (taken into account). Period 2 ends on 30/11/2006 (taken into account). The loss of the right to deduct VAT appears in period 3 (not taken into account).

Adjustment in favour of the State: 180 liri x 3/5th = 108 liri.

10

One-off adjustment for the rest of the period in favour of the State

Remark:

In case due to the change of activity,the VAT registration art. 10 is effectively cancelled,the rules with respect to the self-supplies will apply

(and as a consequence the adjustment rules do not apply).

Where in the previous case the solution is dealing with adjustments,it is for the purpose of this case assumed that

the VAT registration art. 10 has not been cancelled.

11

One-off adjustment for the rest of the period in favour of the taxable person

A taxable person purchases a machine on 15 December 2004 for the price of 1,180 liri incl. VAT (18% = 180 liri). He uses the machine for business purposes (60%) and for private purposes (40%). Therefore, he only deducts 108 liri (72 liri are not deducted). On 2 February 2007, he sells the machine for 200 liri + 36 liri (VAT).

Assumption: the period of reference is 1/12 30/11

Solution

Period 1 ends on 30/11/2005 (taken into account). Period 2 ends on 30/11/2006 (taken into account). The right to deduct more VAT appears in period 3 (not taken into account).

Adjustment in favour of the taxable person: 72 liri (VAT not deducted) x 3/5th = 43,2 liri limited to 200 liri x 18% = 36 liri.

12

Adjustment per year: first period (1)

Assumption: the period of reference 1/12 30/11

A taxable person with a partial right to deduct VAT purchases a machine on 1 November 2006 for 2,000 liri, plus 18 p.c. VAT, that is to say 360 liri. As his definitive ratio for the four tax periods ending on 30 November 2005 was 40 p.c., he uses it as a provisional ratio for the four tax periods ending on 30 November 2006 and he deducts 40 p.c. of 360 liri, that is to say 144 liri.

13

Adjustment per year: first period (2)

Adjustment for the first period 1/12 30/11 2006

The definitive ratio calculated on the basis of the turnover of the period is actually 30 p.c. Taking into account this ratio, the taxable person could deduct only 108 liri (30 p.c. of 360 liri) and must pay the difference to the State, that is to say 36 liri.

This adjustment concerns the entire amount provisionally deducted at the origin and it consequently also covers the adjustment related to the first 1/5th for capital goods.

14

Adjustment per year: following periods

• The adjustments for the periods 2, 3, 4 and 5 will this time concern only one fifth taking into account what follows:

– VAT actually paid is divided by 5 360 : 5 = 72

– VAT actually deducted on basis of the definitive ratio of the first period is divided also by 5 108 : 5 = 21,6

– The result of 72 multiplied by the definitive ratio of each of the following periods will be compared with 21,6

– The difference will result in an adjustment either in favour of the State or in favour of the taxable person

15

Adjustment per year: second period

Adjustment for the second period 1/12 30/11 2007

The definitive ratio for the period calculated on the basis of the turnover is 50 p.c.

• Authorised deduction: 72 X 50 p.c. = 36

• Already deducted: 21,6

• Additional deduction allowed: 36 – 21,6 = 14,4

16

Adjustment per year: third period

Adjustment for the third period 1/12 30/11 2008

The definitive ratio for the period calculated on the basis of the turnover is 20 p.c.

• Authorised deduction: 72 X 20 p.c. = 14,4

• Already deducted: 21,6

• To be repaid to the State: 21,6 – 14,4 = 7,2

17

Adjustment per year: fourth period

Adjustment for the fourth period 1/12 30/11 2009

The definitive ratio for the period calculated on the basis of the turnover is 25 p.c.

• Authorised deduction: 72 X 25 p.c. = 18

• Already deducted: 21,6

• To be repaid to the State: 21,6 – 18 = 3,6

18

Adjustment per year: fifth period

Adjustment for the fifth period 1/12 30/11 2010

The definitive ratio for the period calculated on basis of the turnover is 70 p.c.

• Authorised deduction: 72 X 70 p.c. = 51,4

• Already deducted: 21,6

• Additional deduction allowed: 51,4 – 21,6 = 29,8

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Adjustment per year: sixth year and following

Any changes in the ratio during the subsequent tax periods will no longer influence the deductions carried out for this machine

But for self-supplies: no limitation in time