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Case Study: Learning about Bulgarian VAT Rules on Destroyed Goods

In some sectors, understanding the taxation rules of destroyed goods is essential for operating smoothly. A case in Bulgaria shows that oftentimes it is worth focusing on the implications of input tax adjustments.

A recent European count of justice ruling highlights some of the most problematic areas of destroyed goods reporting. A telecommunications company that acquired electronic devices for its business reported that some of these devices were unsellable due to wear and tear, defects, or other issues. By claiming that these devices are damaged goods, the company wrote them off, destroying some items or selling them as waste. And the Bulgarian tax authorities decided that such actions were enough to trigger the reduction of the input tax.

According to the first provision of the Article 185 of the VAT directive in Bulgaria, adjustments must be made when changes occur after the VAT return is submitted, affecting the factors used to determine the deductible amount. This includes instances where purchases are canceled, or prices are reduced. However, the second provision specifies that no adjustment shall be made in confirmed destruction, loss, or property theft.

The first issue to consider when writing off damaged goods is whether the subsequent sale of the goods as waste leads to a decrease in input VAT. The initial deduction of input VAT is determined by the intended use of the items at the time of purchase. The purpose of input VAT adjustment rules is to enhance the accuracy of deductions, requiring adjustments when relevant factors change since the VAT return was filed. In this case, the goods were sold as waste, which qualifies as a VAT-taxable activity. It is irrelevant that waste sales are not the taxpayer’s usual business activity or that the value or nature of the goods has diminished.

The second issue revolves around the taxpayer’s decision to destroy the goods and whether it results in a decrease in input VAT. The destruction of goods leads to their annihilation, eliminating their potential use in taxable transactions. Consequently, destruction severs the direct link between the right to deduct VAT and VAT-taxable activities, suggesting the absence of the right to deduct. However, an exception to this rule is provided in Article 185.2 of the VAT directive. It states that no adjustment of the deducted input VAT is necessary in the case of the destruction of goods.

According to experts, the term ‘destruction’ is open to interpretation, too. From a common language standpoint, destruction can be an action either dependent or independent of the owner’s intentions. Therefore, destruction, as used in Article 185.2, includes situations where the taxpayer chooses to destroy the products when they are no longer useful for their operations. The conclusion is that regardless of the voluntary intention, it does not lead to a decrease in input VAT.

However, certain conditions must be met for the destruction to be exempt from input VAT adjustment. The destruction should be proved or confirmed, and the goods must have lost all usefulness — objectively. The same applies to scenarios when goods are disposed.

The described case shows that writing off the goods does not necessarily leads to a reduction of input tax. However, a strong basis to prove the useless nature of the goods should be provided. If you want to navigate similar cases in your business with confidence, reach out to 1stopVAT’s team and get professional help in your tax compliance.