In Germany duplicate payments are subject to domestic VAT

Every year we notice that some of our customers overpay our invoices by either transferring erroneously too much money or accidentally pay twice. In such cases, we normally transfer the overpaid amount back to our customer.

There might, however, be situations in which companies refuse to return this money for various reasons and wait for the customer to ask back the overpayment. In the course of the year-end closing the question may arise of how to deal with these duplicate and overpayments.

From an accounting point of view, these payments are neutral for corporations because a corresponding liability needs to be booked. The situation may vary for smaller businesses that determine their profits by way of comparison of revenue and expenses pursuant to the net income method. Following this method these payments have to be captured as income.

Besides the accounting, companies often forget the proper value added tax (VAT) treatment that comes along with the overpayment. In its decision of 19 July 2007 (V R 11/05) the German Federal Tax Court has outlined that these payments are subject to VAT since the total amount of all payments has to be considered as tax base pursuant to sec 10 of the German VAT Act. It is therefore essential to report the VAT accordingly in order to avoid interest and other negative consequences in a subsequent tax audit. If the money is paid back to the customer, VAT can be corrected because the tax base has been reduced according to sec 17 of the German VAT Act.

If – for some reasons – a refund will not be made after the expiry of the limitation period, the liability item can be derecognized as extraordinary income. A subsequent increase of the VAT base is not necessary as the VAT was already determined on the total amount in the year of actual payment.

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