When talking about advance payments, the concept itself brings the implication that the good will be delivered or the service will be rendered in the future. However, the Tax Administration, for clarification, calls Institutional Tax Criteria No. 01-2023 as: “Payments received in advance for services to be rendered in the future and the issuance of the corresponding invoice.”
There was a doubt as to which document was issued at the time an advance payment was received, since, as a rule, in the case of the rendering of services, the invoice is issued at the time the payment is received (art. 34 Value Added Tax Law). The assumption contemplated in the law refers to the fact that first the services are rendered, then the payment is made and, finally, the invoice is issued.
If an invoice was issued for each advance payment, this gave rise to a distortion for the determination of income tax, since an income had been generated that did not yet entail a cost or expense. This issuance of an invoice for an advance payment, according to the norm, is erroneous because it is untimely, since an advance payment is not a payment, but rather the money is received and recorded in an account payable.
Therefore, the Tax Administration issues a criterion indicating that it is not appropriate to issue an invoice when a service provider receives an advance payment for a future service, however, it must issue an electronic tax document called “advance payment receipt” (a document that does not exist in the law). After the provision of the service, the advances must be settled, determining the exact amount of the service, and issuing the corresponding invoice.
It is important that, possibly violating the principle of legality in tax matters, the Tax Administration decides to establish requirements for the proceeding of the tax treatment of the advances, since in such criterion it indicates that, in order to be able to account for them at the moment of receiving the payments, the following must be complied with:
- The existence of a contract indicating the initial amount of the service rendered, the agreed payments, the exact date of the rendering of the service and the fines or penalties incurred if the service is not rendered on the agreed date.
- The issuance of the advance payment receipt.
- The registration of the accounting sub-account with the advances and liquidation of the services.
- The existence of detailed settlements for each of the contracts for which advances are received.
Although the institutional criterion is aimed at companies that provide services in which food and beverages are provided to events, parties, presentations, congresses, and meetings in general, it is considered that, by virtue of the principle of equality, any taxpayer, company, individual or legal entity that provides services, should have the same tax treatment as others who are in similar situations.
Institutional Tax Ruling 01-2023, available here.