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A municipal commercial entity inquired whether transfers received to finance sanitation and water purification infrastructure were subject to VAT. The DGT responds that there is no tax liability because there is no legal relationship involving the exchange of reciprocal consideration.
Question posed: Whether the payment of said monetary transfers is subject to Value Added Tax and, where applicable, whether it affects the deductibility of the tax amounts incurred by the inquiring entity.
Monetary transfers to finance sanitation infrastructure expenses do not constitute consideration for an operation subject to VAT. There is no legal relationship between the administration and the entity involving the exchange of reciprocal consideration, nor are they considered subsidies linked to the price. As they are not taxable operations, the receipt of these amounts does not affect the deductibility of the VAT incurred in the entity's activity.
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