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Promotions and discounts are fundamental to effective sales today, especially in highly competitive e-commerce. Incorrectly accounting for them, like mishandling returns and complaints, can cause unnecessary financial and legal problems. Understand how to manage them and settle them for tax and accounting purposes.
Types of e-commerce promotions: discounts, codes and more
Promotions and discounts are important marketing and motivational tools, particularly in competitive e-commerce, where platforms from China have accustomed us to many kinds of offers in recent years.
Common examples include:
- Percentage discounts on products or whole orders, often with codes;
- Fixed-amount discounts;
- Free shipping when specified conditions are met;
- Promotional bundles, encouraging purchase of more products for less, such as buy one, get one free;
- Loyalty programmes with extra discounts for regular clients.
There are many more. Below are the main rules for accounting for them.
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How to account for e-commerce discounts and promotions: PIT
Discounts granted before delivery lower a product's price and, under Article 14(1) of the PIT Act, reduce both the buyer's cost and the seller's corresponding revenue.
The provision states that “revenue from business activity […] includes amounts due, even if not actually received, excluding returned goods, granted rebates and prompt-payment discounts […]”.
Consequently, the income tax due is lower for discounts granted before the transaction ends because revenue falls with the reduced sale price.
Sometimes a discount is granted after a transaction, a post-transaction discount. Whatever the reason, subject to Article 14(1m) of the PIT Act concerning accounting errors or other obvious mistakes, issue a correction invoice and reduce revenue in the settlement period in which that invoice or another document confirming the reason for the correction was issued.
How to account for e-commerce discounts and promotions: VAT
The approach to VAT settlement is similar to PIT.
Under Article 29a(1) of the VAT Act:
“The tax base […] is everything constituting payment received or to be received by the supplier or service provider for a sale from the buyer, service recipient or third party, including grants, subsidies and similar payments directly affecting the price of supplied goods or services”.
As a seller, a discount before completion of the transaction therefore reduces VAT due, because it reduces the VAT tax base.
For a discount after the sale, issue a correction invoice and reduce the tax base in the period in which the discount was granted.
If this article interested you, explore our e-commerce accounting services and see how we can help:
Summary
We know that properly managing and accounting for promotions is important and may raise questions, especially tax and accounting questions. If you need help, explore the services of the TaxCoach accounting firm!
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