Claim more deductible input tax

The regulations on entrepreneurial status and input VAT deduction for research institutions were supplemented in the letter from the Federal Ministry of Finance (BMF) dated 27 January 2023 in section 2.10 para. 10 of the VAT application decree. In doing so, the BMF broke - surprisingly for many - with the previous legal practice of the tax authorities regarding the scope of the business activities of a research institution.

Until this new regulation, the tax authorities considered a research organisation's business activities to consist of in-house research, contract research and technology transfer, provided that the intention was for the research results to generate sustainable income. Now, basic research can also be categorised as business activities for the purposes of input tax deduction if it serves to increase the company's sales activities and strengthen its market position due to a factual connection. The BMF circular does not set high requirements for this connection if basic research and entrepreneurial sales activities are part of a single organisational unit.

As research institutions, numerous universities should be able to benefit from the extended possibility of input tax deduction in the area of basic research, especially as the new regulation is applicable to all outstanding cases. This means that an input VAT deduction made possible by the new administrative view may even be possible for assessment periods for which VAT returns have already been submitted.

In our newsletter of 17 October 2023, we already presented the challenges and practical experiences regarding the status of implementation of the new regulation. We would now like to report on our experiences with regard to the possibilities of mapping a procedure for determining and recording deductible input tax in the process and system landscape of partially tax-exempt organisations.

As most universities and non-university research organisations in Germany now use an enterprise resource planning system from SAP SE, there is growing interest in a standard SAP solution for mapping a holistic and fully integrated input tax deduction process. In particular, the input-side mixed turnover of partially tax-exempt organisations can lead to major tax risks and a high administrative burden without a regulated, system-supported process.

The SAP business function "FIN_ACC_PEO - Partially tax-exempt organisations" can provide a remedy. It is able to determine the correct input tax deduction on the basis of a suitable tax code concept and predefined fully or partially tax-exempt areas of activity of the organisation, especially in the case of mixed transactions. It can also record the input tax deduction by means of correction documents on the relevant accounts and tax codes in line with the account assignment. This means that the same account assignment objects are debited or credited as in the original posting.

With the programme for subsequent input tax correction, you can react quickly and flexibly to subsequent changes to the input tax deduction rates for the respective reporting periods using variable deduction rates. In addition, special tax reports are available in the system as proof of the input tax corrections made to the tax office. This provides transparent and comprehensible documentation of how much provisional input tax was recognised, how much input tax was corrected and how both values affected the respective input tax deduction rate. Correct presentation of the input tax corrections in the report for the advance VAT return is also ensured.

Thanks to our comprehensive and interdisciplinary expertise and wide-ranging practical experience in the public sector, KPMG has valuable insights and knowledge that help us to better understand your challenges and requirements and to offer you the best possible solution.

With our solution approach tailored to your needs, we support you in the design and implementation of an efficient and fully integrated procedure for the audit-proof determination and recording of deductible input tax in your organisation's process and system landscape. This not only contributes to the TAX compliance management system, but can also save costs.