Neutralized the negative effects of the VAT treatment of donations in kind

Our regulations on patronage provide tax incentives associated with the pure and simple donation of goods, often acquired or produced by businessmen.

This donation format is usually linked to emergency situations in which non-profit entities collect products to send to the affected people.

These are, specifically, deductions in the IRPF quota, the Non-Resident Income Tax or the Corporation Tax, for a percentage of the book value of the donation, a tax deduction that does not represent a very notable incentive and that , of course, does not motivate the altruistic gesture of the companies that collaborate with these campaigns.

We could debate whether the incentive should be higher or lower, or whether the value to be taken into account for the deduction base should be the book value or the market value of the donated goods. However, what has really hindered this type of operation up to now is a very different matter, and it is none other than the VAT taxation of this type of donation.

And it is that, at the moment in which a company donates products (food, medicine, etc.), from the perspective of VAT, self-consumption is generated. This means that the company will have to pass on the amount of these donations to itself as if it had made a sale of the products at cost, since otherwise a tax advantage would be understood to have been produced by deducting the VAT paid on its acquisition. or production, and not having destined those goods to the market. In short, what it entailed is a limitation of the right to deduct input VAT.

Calculating what the production cost of some goods has been is a really complex task, so many companies, faced with the problem generated by VAT, preferred not to donate their products. The situation reached the point where it was usual to see how donations were made in money to then sell the products to the entity that had received the donation with a significant discount, all to avoid the uncertainties that were generated with the calculation of self-consumption in VAT.

Despite the fact that we had been denouncing this situation for many years, nothing had been done to solve it. However, it seems that the crisis generated by the war in Ukraine has awakened other sensitivities in the Ministry of Finance, which has introduced in the Third Final Provision of Law 7/2022, of April 8, on waste and contaminated soil for a circular economy, a modification, both in the way of determining the tax base of self-consumption, and in the rate applicable to these when they are linked to a donation in kind to a non-profit entity.

Since last April 10, when an asset is donated to a non-profit organization covered by the Law 49/2002 regime, so that it is used for its general interest purposes, it will be understood that the asset has completely deteriorated for the purposes of determining the base of self-consumption in VAT. And, in addition, a 0% tax rate will be applied to deliveries of goods as a donation.

Combining a zero tax base, plus a 0% tax rate, it is possible to completely neutralize the effect of self-consumption linked to donations in kind in VAT, since it will not be necessary to calculate the cost of production of the goods, nor will there be no limitation to the deductibility of the VAT incurred in its manufacture or acquisition, which will be fully deductible as there has been a repercussion at zero rate.

The existence of a zero VAT rate for activities carried out by non-profit entities is something that has already been used in other countries around us. In VAT, the zero rate has a very different effect from the exemption, since it allows the deduction of input VAT.

Once this path has been opened in Spain with donations in kind, it would be desirable that it also be extended to deliveries of goods and services carried out by non-profit entities, which until now are exempt, due to the incentive effect it would have for the same.

And perhaps this is the right time to consider this initiative in line with the recent Directive (EU) 2022/542 of the Council of April 5, which modifies Directives 2006/112/EC and (EU) 2020/285 with regard to VAT rates, since it allows each Member State to choose where to apply reduced rates below 5% or even exemptions with the right to deduct the VAT paid in the previous phase.

We must congratulate ourselves for this much-needed initiative to favor donations in kind and we trust that the next reforms will continue along this very positive line, promoting incentives for non-profit entities, which will undoubtedly serve to strengthen our civil society.

José Pedreira Menéndez, Professor of Financial and Tax Law. Responsible for non-profit entities at Garrido Abogados.