The Inland Revenue was asked to express its opinion following a question submitted by a retail clothing company that entrusts production to third parties.
The company believes it is essential to involve its employees in the sales of marketed products. Accordingly, it undertook a series of initiatives involving staff to strengthen its brand and market presence.
The company’s question
The company wanted to give its employees a “discount card” (or “card”) which allowed them to buy products at a discount compared to the list price. The card would be registered in the person’s name, non-transferable, usable only by the employee and not combinable with similar initiatives adopted on the market (for example, when the company carries out discount campaigns for all customers).
The discount would be about 25 per cent of the product final sale price.
– the products would be sold to the beneficiary employees at a price higher than that charged by the company to others, and higher than the cost incurred by the company;
– at certain times of the year, the discount granted to employees could be equal to that given to other customers.
With this question, the company asked the Inland Revenue whether granting the “card” to its employees could represent a taxable payment in kind and subject to taxation.
The Inland Revenue’s opinion
The Inland Revenue, in its answer to question no. 221 of 29 March 2021 – noted that Art. 51, paragraph 1 of the Consolidated Law on Income Tax (TUIR) defines the employee income as “all sums and valuables in general, received for any reason during the tax period, including in the form of donations, related to employment.”
In the Agency’s view, this provision establishes the principle of all-inclusiveness of employment income, i.e. the general taxation of everything that the employee receives during employment.
The Agency pointed out that this legislative provision includes, in addition to normal remuneration, those “financial benefits” that employees may receive as a supplement, such as compensation in kind consisting of works, services, and goods, including those produced by the employer.
On this point, the tax authority said that the same art. 51 of the TUIR clarifies, in paragraph 3, that “to define the values referred to in paragraph 1 in money terms […] the provisions to establish the normal value of goods and services shall apply […] Accordingly, the normal value of goods in kind produced by the company and sold to employees is determined to an extent equal to the average price charged by the same company in sales to wholesalers.”
The tax legislation requires that “to define the normal value, reference shall be made to the price lists or tariffs of the party who supplied the goods or services and, failing that, to the market statements and chambers of commerce lists and professional tariffs, taking into account customary discounts” (art. 9 of the TUIR).
Based on this, the Inland Revenue – given the reference in the legislation to “customary discounts” – stated that any income deriving by the employer marketing and selling goods or services to its employees at a discounted price, must be calculated based on the all-inclusiveness principle. As clarified by the Ministry of Finance in Circular 326/1997 – the Agency explained that the income to be taxed is equal to the normal value “only if the goods are sold free of charge. However, if the employee pays for the sale of the goods, the value to be taxed is equal to the difference between the goods normal value and the sums paid.”
The tax authority noted that the price paid by employees for goods purchased with the discount card is higher than that paid by parties linked to the employer, for example, under franchising or supply agreements. The price paid by the employee cannot be regarded as a symbolic consideration that “disguises” the provision of remuneration.
The discount granted to employees does not exceed the discount applied, at certain times of the year, to other customers and cannot be cumulated with other similar commercial initiatives adopted in favour of customers.
Based on these considerations, the Inland Revenue did not see any tax-relevant “discount” or taxable matter since the employee pays the normal value of the goods net of the customary discounts. According to the tax authority, “the tax relevance of the discount applied to the price of the clothing purchased by the company employees would generate […] a disparity in treatment between the customers who could purchase the goods at a discounted price and the employees of the same company who would see the financial benefit taxed.”
Finally, the fact that the discount is granted to the employee using the card does not constitute a “financial benefit” since the “card” features – i.e. registered in the person’s name, non-transferable, usable exclusively by the employee and not combinable with similar initiatives adopted on the market – allow it to be configured as a “mere technical tool through which the use of the discount is permitted.”
In conclusion, it can be said that the “discount card” does not constitute a benefit that generates taxable income where the final price paid by them for the purchase of the good (or service), net of customary discounts, is not lower than that practised on the market.