- What is pro-rata in fiscal terms?
Pro-rata is a mechanism used in the fiscal field, mainly for VAT (Value Added Tax), to proportionally distribute expenses and deductions between activities that are subject to the tax and those that are not. It is applied when a company conducts both exempt and taxable transactions and cannot fully deduct the VAT on its purchases and expenses.
Taxable and Exempt Activities: What does it mean and what does it imply?
In the fiscal field, a taxable activity is one that is subject to VAT, meaning the business or professional is required to include VAT in their sales or services and can deduct VAT from expenses related to their activity.
On the other hand, an exempt activity is one that, by legal provision, is not subject to VAT, meaning the business or professional does not need to add VAT to their invoices. This can occur in cases such as certain financial, educational, or healthcare operations, among others.
- How is pro-rata calculated?
The pro-rata calculation is based on the relationship between the income the company earns from VAT-taxable activities versus the total income (both taxable and exempt). The percentage resulting from this relationship is used to determine the VAT deduction on purchases and general expenses.
Basic formula:
Pro-rata = (Taxable income / Total income) × 100
- What are differentiated sectors?
Differentiated sectors are those in which a company’s activities are divided into different groups, each of which can have a different fiscal treatment regarding VAT. For example, a company may operate in the taxable goods sector and also in VAT-exempt activities like education or healthcare.
- How do differentiated sectors affect pro-rata?
When a company conducts activities in different sectors with different fiscal treatments (e.g., some are taxable and others exempt), a differentiated pro-rata may apply. This means the company must calculate pro-rata separately for each sector, assigning expenses and deductions according to the type of activity in each sector.
- What are the most common differentiated sectors?
Some of the most common sectors where the concept of differentiated sectors is applied include:
- Education and training: VAT-exempt activities.
- Healthcare and medical services: Typically VAT-exempt.
- Real estate: Sale of real estate, which may be subject to different types of VAT depending on the transaction.
- How is pro-rata calculated in differentiated sectors?
When a company operates in differentiated sectors, it must calculate pro-rata separately for each sector, applying the corresponding VAT rate to each activity. This way, the VAT deduction is determined according to the percentage of taxable income in each sector, rather than globally.
- What happens if a company cannot clearly divide its activities into differentiated sectors?
If a company cannot clearly separate its activities into differentiated sectors, it will need to use the general pro-rata method. This means applying a single VAT deduction percentage on all the company’s general expenses, based on the total taxable income relative to the total income.
- What happens if taxable income is very low compared to total income?
In this case, the company will have a low pro-rata, meaning it can only deduct a small part of the VAT on its purchases and general expenses. This percentage can be adjusted if circumstances change, such as an increase in VAT-taxable activity.
- How is pro-rata and differentiated sectors managed in the VAT declaration?
In the quarterly or annual VAT return, companies must reflect the applied pro-rata percentage. If a differentiated pro-rata by sectors is used, each sector must reflect its own calculation in the return. Additionally, it is necessary to document how the pro-rata and sector income were calculated.
- How is the final pro-rata calculated and how is provisional pro-rata applied?
Provisional Pro-rata
During the year, a provisional pro-rata is applied to estimate the VAT deduction. It is calculated as the percentage of taxable activity income relative to the total income (taxable and exempt) during the period. This percentage is used to deduct VAT on purchases and expenses throughout the year.
Final Pro-rata
At the end of the year, the final pro-rata is calculated based on the actual income once the fiscal year is closed. The VAT deduction is adjusted according to the real percentage of taxable activities. At the end of the year, through form 303, which is submitted in the fourth quarter, an adjustment of VAT is made by either refunding or deducting VAT to reconcile the provisional pro-rata applied during the year.