The rules on foreign currency invoices and their conversion for VAT purposes often cause problems for entrepreneurs. When issuing an invoice in a foreign currency, the seller is obliged to provide information on the amount of VAT converted into Polish zlotys. If the amount of VAT in Polish zlotys is missing, the invoice is considered defective and, according to the tax authorities’ position in tax interpretation, the right to deduct VAT may be questioned.
A taxpayer who has received an invoice without the VAT amount converted into zloty may request the seller to issue a correction invoice. The defect in the invoice due to the lack of conversion into zloty cannot be remedied by the buyer by issuing a correction note. Therefore, taxpayers should know how to correctly convert invoices in foreign currencies for VAT purposes and what to do if a mistake is made in this regard.
According to the provisions of the VAT Act, taxpayers have two options for converting amounts in foreign currencies:
- the average exchange rate of a given foreign currency announced by the National Bank of Poland on the last working day preceding the day on which the tax liability arose; or
- the last exchange rate published by the European Central Bank (ECB) on the last day preceding the day on which the tax liability arose – it should be emphasised here that in the case of currencies other than the euro, the conversion is based on the exchange rate of the respective currency against the euro.
The above provisions seem to clearly define the rules for the conversion of currencies for VAT purposes. However, the situation becomes more complicated when invoices are issued before the transaction.
Invoice in foreign currency issued before the tax liability arises
There are situations in the market where contractors issue invoices before the transaction takes place. This may also be 30 days before the supply of goods or provision of services or 30 days before the receipt of all or part of the payment preceding the supply of goods or provision of services. In this case, an invoice issued in a foreign currency is converted at the average exchange rate for that currency announced by the National Bank of Poland (NBP) on the last working day preceding the date of issue of the invoice. It is also possible to use the exchange rate announced by the ECB on the same basis.
By way of example, if an invoice in foreign currency is issued on 3rd October 2020 and the delivery of goods took place on 2nd November 2020, the currency should be converted at the average exchange rate announced by the National Bank of Poland (NBP) or the ECB on the last day before the date of issue of the invoice. In this case, the conversion should be made using the exchange rate of 2nd October 2020.
Special types of transactions
The regulations also contain special rules for the conversion of invoices issued in foreign currency. Under the VAT Act, invoices relating to the import of goods are converted into PLN in accordance with customs regulations. The legislator has also created the possibility of applying the conversion in accordance with customs regulations when invoicing for admission services to mass events. However, in this case it is only an option, not an obligation. Therefore, the taxpayer can also apply the general rules to the conversion.
Incorrect conversion rate on the invoice
It happens that the seller converts the VAT at an incorrect rate. In such a case, the buyer cannot interfere with the conversion applied by the seller on the invoice and should enter the invoice in the purchase register with the rate applied by the seller, which will not result in any negative consequences. The tax authorities confirm that the application of an incorrect exchange rate does not result in a lack of right to deduct, but the buyer should request the seller to issue a corrective invoice in order to deduct the tax at the correct rate.
The worst situation for the recipient of a document confirming a transaction is when the VAT has not been converted into Polish zloty by the contracting party. In such a situation, the buyer may lose the right to deduct VAT if he does not receive a correcting invoice from the seller. It is not possible to issue the correcting invoice yourself and settle the VAT on its basis.
SLIM-VAT and conversions for VAT and income tax PIT and CIT purposes
The above rules do not always coincide with the rules for converting invoice values for income tax purposes. This leads to situations where an invoice has to be converted twice: for VAT purposes and for PIT and CIT purposes.
The government’s simplification package – the so-called SLIM VAT, about which we wrote [here] – introduced simplifications in this regard. From 01.01.2021, a trader will be able to choose whether to convert amounts expressed in a foreign currency for VAT purposes in accordance with the rules that apply to the settlement of a particular transaction under the income tax rules applicable to the taxpayer. However, the choice is not arbitrary each time. The taxpayer who has chosen the method of converting invoice values in accordance with the provisions on income tax is obliged to use this method for 12 consecutive months.
Aleksandra Philips, VAT-settlements specialist, LL.B.
Dominika Zbonik, attorney at law and tax consultant