ADJUSTMENTS OF DEDUCTION

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ADJUSTMENTS OF DEDUCTION
2
BASICS
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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

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Period of reference

• DATE OF REGISTRATION PERIOD 1 (TAX
  PERIODS) PERIOD 2, 3, 4, 5
• JANUARY 4 CALENDAR YEAR
• FEBRUARY 3 01/11 -gt 31/10
• MARCH 3 01/12 -gt 30/11
• APRIL 3 CALENDAR YEAR
• MAY 2 01/11 -gt 31/10
• JUNE 2 01/12 -gt 30/11

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Period of reference

• DATE OF REGISTRATION PERIOD 1 (TAX
  PERIODS) PERIOD 2, 3, 4, 5
• JULY 2 CALENDAR YEAR
• AUGUST 1 01/11 -gt 31/10
• SEPTEMBER 1 01/12 -gt 30/11
• OCTOBER 1 CALENDAR YEAR
• PERIOD 1, 2, 3, 4, 5
• NOVEMBER 01/11 -gt 31/10
• DECEMBER 01/12 -gt 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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EXAMPLES PERIOD OF FIVE YEARS
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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.
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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.

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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.

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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.

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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
  

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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

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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

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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

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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