Manufacturers can donate defective products
Throwing away is cheaper than donating
Kronen, at that time still a partner at the management consultancy Boston Consulting, had a better idea: The shampoo could be donated. So she phoned and offered the batch to nonprofits. Vain. She couldn't find a buyer for such a large amount. In the end, the goods ended up on the hazardous waste. But Kronen decided to do it differently - better - in the future.
She began to research and do arithmetic. “In Germany,” she says, “consumer goods worth two billion euros are destroyed every year because products are incorrectly labeled or removed from the range or because too much has been produced.” And that in a country where more than twelve Millions of people are at risk of poverty, three million are unemployed and around 300,000 are homeless. This is what it says in the federal government's poverty report.
So why not use the surplus of those who have too much to help those who need support?
That seemed logical to the management consultant. When she was thinking about how to implement the idea, she came across the British company In Kind Direct: It collects surplus goods from dealers and manufacturers and distributes them to non-profit organizations across the country. Founded in 1996 by Prince Charles, In Kind Direct has received goods worth almost 160 million euros from more than 900 companies and delivered them to around 7,000 charitable organizations.
What works in Great Britain should also be possible in Germany, thought Kronen. She developed a business model, quit her job and founded Innatura at the end of 2011 together with her two colleagues Martin Hecker and Raphael Graf von Hoensbroech, Germany's first company that distributes donations in kind to charitable organizations as good as new.
The company started work in August 2013. In the first six months she already brokered goods worth half a million euros. A respectable success. The donations offered are stored in Troisdorf, south of Cologne, and can be ordered from non-profit organizations. Innatura takes a commission for this. In order to break even, the company needs an annual turnover of two million euros. A realistic goal that the founders could achieve in the third year - if it weren't for the tax office.
Because donations in kind to charitable organizations are subject to sales tax. The result: In Germany, the destruction of new goods is in many cases cheaper for companies than donating them. "For tax purposes, a free taxation of value is actually treated like a sale," says Wolfgang Pfeffer. He is a lecturer in non-profit management and club accounting and has been advising non-profit organizations for more than 15 years. "The tax authorities assess a donation in kind like a turnover."
That means: In terms of tax law, a donation increases the company's earnings. This is irrelevant for income tax, as the donation receipt reduces sales by the same amount. It is different with sales tax. "It is true that the donating company receives a donation receipt for the value of the goods plus sales tax," says Pfeffer. “The company can only deduct part of the sales tax, so it has to sit on the largest part.” The legislator's argument: The entrepreneur bought the goods with input tax deduction.
In the case of the 80 tons of shampoo mentioned at the beginning, this means: Assuming the goods are worth 160,000 euros. In the case of giving away, 19 percent sales tax is due, i.e. 30,400 euros, which the company has to pay. For the donation, the company receives a donation receipt for the total amount, i.e. 190,400 euros. But only the sales tax paid can be deducted. The value of the goods is not included in the calculation. This means that with an average tax rate of 30 percent, the company can only get back 30 percent of the sales tax paid, i.e. 9,120 euros. The company remains seated on 21,280 euros. If the shampoo were destroyed, it would cost 3200 euros.
The excesses this can lead to is shown by the case of the Saxon master baker Roland Ermer, who gave away stale bread to the needy and was thereupon condemned by the tax office to heavy additional VAT payments in the course of a tax audit in 2012. "The Federal Ministry of Finance has now stopped this practice with a so-called equity decree," says Pfeffer, "but the decree only applies to baked goods."
“The willingness to donate is great,” says Kronen. “But if the entrepreneur himself has to bring money with him, that's a problem.” However, only part of the problem. The other is the correct valuation of donations in kind. According to the Value Added Tax Act, the replacement value is to be used as the assessment basis. This means that goods that are as good as new can either be valued at the purchase price (plus ancillary costs such as storage) or at the production costs. It becomes even more difficult when the goods are used. Because how can the correct replacement value be determined?
One of Innatura's first partners was the Beiersdorf company with the Nivea, Eucerin and Hansaplast brands. “Too many products have to be destroyed,” says Manuela Rousseau, head of the Corporate Social Responsibility department at Beiersdorf's corporate headquarters. "The reasons for this are complex, either incorrect production, i.e. different filling quantities or incorrect labeling or residual quantities from a relaunch of the products, i.e. a new logo or new packaging." In these cases, the goods are released for destruction. "In the event of destruction," says Innatura founder Kronen, "the goods can be written off completely." If the products are instead donated to third parties, they must be valued at production costs. This is how the legislator in Germany sees it.
There is another way. "In the UK, donations in kind are exempt from sales tax," says James William, In Kind Direct's chief strategy officer. "And in the USA you can even claim twice the amount of the production costs for tax purposes for donations in kind."
“It is unbelievable that in Germany it is cheaper to destroy goods than to donate them. Something is wrong there, ”says the Beiersdorf woman Rousseau. Nevertheless, your company has decided to donate instead of throwing it away. To ensure that the sales tax to be paid does not affect the income statement, the Group has set up an internal budget from which the tax liability is settled.
“So far we have had no alternative to destroying products from production. Innatura has given the industry a sensible and sustainable way of dealing sensibly with rejects. It's actually a win-win situation, ”says Rousseau.
If it weren't for the tiresome subject of taxes. Are there any signs that the Federal Ministry of Finance is rethinking the legislation? “No,” says Wolfgang Pfeffer. "On the contrary. In the so-called Voluntary Strengthening Act of March 2013, it was expressly made clear that sales tax is to be applied to donations. "---
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