VAT considerations on settlement agreements
The VAT Act does not provide for value-added tax to be accounted for on an agreement but rather the underlying nature of the supply.
In this regard, a pertinent aspect to consider with regards to a settlement agreement is whether the settlement arose as a claim for unpaid contractually agreed amounts for a supply which already took place, or whether the settlement arose as compensation for a contractually agreed supply which did not take place.
Furthermore, an assessment is also required on whether a supply of goods or services took place on the underlying aspects of a settlement agreement to ascertain whether consideration was received as a result thereof. Consideration, in relation to a supply, means the total amount in money or kind paid or payable for the supply by any person and accounted for at the time of the supply.
It is important to note that a supply is made for consideration if the supplier directly or indirectly receives any payment for the supply from the recipient or any other person, including any payment wholly or partly in money or in kind. This denotes a close connection between the existence of a supply of goods or services which warrants a payment.
Where a settlement agreement arises on a supply which already took place, which triggers an amendment of an agreement between parties following negotiations on a dispute, this may be regarded as a post-sale adjustment which takes place when a previously agreed price is altered due an offer of a discount or for any other reason.
Example
Company A sells equipment to Company B for N$100. Following conclusion of the sales agreement and payment, Company B discovers faulty parts with the equipment, the replacement thereof resulting in an added cost of N$50 for Company B. Following disputes, the parties agree to a settlement agreement whereby Company A would grant an equivalent credit of the replacement costs on the initial price.
Applying the above legislative considerations, the settlement agreement does not constitute a supply and the underlying transaction which is the equipment sale would need to be considered. In this regard, equipment constitutes corporeal movable goods as defined, the supply thereof falling within the ambit of a supply of goods.
In considering whether the supply was for consideration, the credit granted on the initial supply would satisfy this criterion as the definition is wide enough to encompass any form of payment linked to the supply. Seeing as the transaction results in an alteration on a previously agreed price, post-sale adjustment considerations would be triggered.
Although “settlement agreement” would only constitute a term for VAT purposes, the underlying transaction giving rise thereto could have far reaching VAT considerations which may become costly if not properly considered. It is therefore important to consult when entering into such an agreement to avoid any surprises from a tax perspective.
• Memory Mbai is the senior manager for VAT at PwC Namibia. This series on tax is published bi-monthly on a Monday in Market Watch.
In this regard, a pertinent aspect to consider with regards to a settlement agreement is whether the settlement arose as a claim for unpaid contractually agreed amounts for a supply which already took place, or whether the settlement arose as compensation for a contractually agreed supply which did not take place.
Furthermore, an assessment is also required on whether a supply of goods or services took place on the underlying aspects of a settlement agreement to ascertain whether consideration was received as a result thereof. Consideration, in relation to a supply, means the total amount in money or kind paid or payable for the supply by any person and accounted for at the time of the supply.
It is important to note that a supply is made for consideration if the supplier directly or indirectly receives any payment for the supply from the recipient or any other person, including any payment wholly or partly in money or in kind. This denotes a close connection between the existence of a supply of goods or services which warrants a payment.
Where a settlement agreement arises on a supply which already took place, which triggers an amendment of an agreement between parties following negotiations on a dispute, this may be regarded as a post-sale adjustment which takes place when a previously agreed price is altered due an offer of a discount or for any other reason.
Example
Company A sells equipment to Company B for N$100. Following conclusion of the sales agreement and payment, Company B discovers faulty parts with the equipment, the replacement thereof resulting in an added cost of N$50 for Company B. Following disputes, the parties agree to a settlement agreement whereby Company A would grant an equivalent credit of the replacement costs on the initial price.
Applying the above legislative considerations, the settlement agreement does not constitute a supply and the underlying transaction which is the equipment sale would need to be considered. In this regard, equipment constitutes corporeal movable goods as defined, the supply thereof falling within the ambit of a supply of goods.
In considering whether the supply was for consideration, the credit granted on the initial supply would satisfy this criterion as the definition is wide enough to encompass any form of payment linked to the supply. Seeing as the transaction results in an alteration on a previously agreed price, post-sale adjustment considerations would be triggered.
Although “settlement agreement” would only constitute a term for VAT purposes, the underlying transaction giving rise thereto could have far reaching VAT considerations which may become costly if not properly considered. It is therefore important to consult when entering into such an agreement to avoid any surprises from a tax perspective.
• Memory Mbai is the senior manager for VAT at PwC Namibia. This series on tax is published bi-monthly on a Monday in Market Watch.
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