Provisioning for subsequent costs in the case of tool manufacturing

Provisioning for tools as the object of dispute

In the case in question, a supplier (the claimant) developed and produced parts for an industrial company. In addition, the supplier also manufactured the customer-specific tools required for the production of these parts. It had been contractually agreed that, upon completion, ownership of the manufactured tools would be transferred to the customer and that the volume of the parts that were actually produced should not affect the price that had to be paid for the tools. The tool agreements stipulated that the supplier had to insure the tools and bear the costs of regular service, maintenance and repairs without any separate payments to cover this.

The supplier created a provision for tool costs for the anticipated expenses. The local tax office disallowed this provision on the grounds that, under Section 5(4b) sentence 1 of the Income Tax Act (Einkommenssteuergesetz, EStG), provisions may not be created for expenses that have to be capitalised in future financial years as purchase or production costs for capital assets.

The BFH determined the expenses for which provisions may be created ...

The tax court however was of the opinion that these were expenses for which provisions may be created because this was a case of performance arrears. The BFH, in its ruling of 2.7.2021 (case reference: XI R 21/19, not published), confirmed that, on account of the performance arrears, provisions had to be created for the subsequent costs of the tools. The future costs and the expenses accrued by the supplier had arisen for economic reasons prior to the balance sheet date. An economic reason that had arisen in the past resulted in an accessory obligation once the agreement on the sale of the tools had been concluded. The sales revenue had already covered the expenses for these obligations.

... also include those anticipated to arise from maintenance obligations

Moreover, the provision for expenses that will be incurred in the future does not conflict with the regulation under Section 5(4b) sentence 1 EStG according to which provisioning would not be allowed if the expenses were purchase or production costs in future financial years for another capital asset. As per the sales agreement, the accrued expenses would have had no impact on the calculation of the amount charged for the production of the parts and were, therefore, not included in the determination of the production costs of the parts. In fact, the costs had been covered in the calculation of the consideration for the tools.