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European Union

Briefing document: ECJ Rulings on Reductions of the Taxable Amount through Rebates

3 weeks ago
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Interpretation of EU VAT law (Directive 2006/112/EC, the ‘VAT Directive’) concerning reductions in the taxable amount, particularly in the context of discounts and payments within the pharmaceutical supply chain and intra-Community transactions.

Sources:

Key Legislation Cited: Council Directive 2006/112/EC (VAT Directive), particularly Articles 2, 13, 20, 33, 73, 78, 79, 90, 138, 184-186, and 273, alongside relevant national VAT laws and pharmaceutical legislation.

Main Themes and Ideas:

The Foundational Principle of VAT Neutrality and the Taxable Amount:

  • A cornerstone of the EU VAT system is that it should be neutral for businesses in the supply chain, with the final burden falling solely on the end consumer.
  • Article 73 of the VAT Directive defines the taxable amount broadly, encompassing “everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including any form of subsidy directly linked to the price of the supply.”
  • This principle implies that the amount of VAT collected should not exceed the amount of tax the supplier actually receives as consideration for the supply. The Boehringer Ingelheim Pharma (C-462/16) judgment states that Article 90(1) embodies “the principle… according to which the taxable amount is the consideration actually received and the corollary of which is that the tax authorities may not collect an amount of VAT exceeding the tax which the taxable person received”.

Reduction of the Taxable Amount (Article 90(1) VAT Directive):

  • Article 90(1) is a key provision, requiring a reduction in the taxable amount in specific scenarios including “cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place”. The specifics are left to Member States.
  • The Elida Gibbs (C-317/94) principle, frequently cited, extends the application of Article 90(1) beyond direct contractual relationships. It establishes that if a supplier reduces the price for a final consumer (or similar), this reduction must be accounted for by reducing the taxable amount for VAT purposes, even if the supplier did not directly sell to that consumer. This is seen as essential for upholding VAT neutrality. The Boehringer Ingelheim Pharma (C-462/16) judgment confirms that the application of Article 90(1) “must not undermine the achievement of that principle [neutrality]”.

Application of Article 90(1) in the Pharmaceutical Sector:

  • Discounts to Private Health Insurance: The Boehringer Ingelheim Pharma (C-462/16) judgment explicitly ruled that a pharmaceutical company granting a discount to a private health insurance company (as mandated by national law when the insurer reimburses patients) is entitled to reduce its taxable amount under Article 90(1). The Court reasoned that the company did not retain the full price, and neutrality required a corresponding adjustment.
  • Discounts/Payments related to Statutory/Public Health Insurance:The Firma Z (C-802/19) judgment addressed a pharmacy supplying prescription drugs intra-Community (VAT-exempt in the dispatching Member State) to a German statutory health insurance fund, while also granting discounts to the insured individuals. The Court ruled that the pharmacy could not reduce its taxable amount under Article 90(1) for these discounts because the supply to the health insurance fund was VAT-exempt, meaning there was no taxable amount on that transaction to adjust. This case highlights that Article 90(1) requires a VATable transaction with a taxable amount. The judgment explicitly states: “Article 90(1)… must be interpreted as meaning that a pharmacy established in one Member State may not reduce its taxable amount where it carries out intra-Community supplies of pharmaceutical products, those supplies being exempt from value added tax in that Member State, to a statutory health insurance fund established in another Member State and it grants a discount to those persons covered by that insurance.”
  • The Boehringer Ingelheim (C-717/19) and Novo Nordisk (C-248/23) judgments concerned Hungarian national law requiring pharmaceutical companies to make payments to the State health insurance agency, both under voluntary agreements and as a mandatory ex lege obligation, linked to sales of subsidised medicines. Both judgments held that national legislation preventing these payments from reducing the company’s taxable amount under Article 90(1) is precluded by the VAT Directive. The Court reasoned that these payments reduce the revenue effectively retained by the company, thus requiring a corresponding reduction in the taxable amount to maintain neutrality. The nature of the payment (voluntary vs. mandatory) or its stated purpose (e.g., promotional) was deemed irrelevant to the principle if the consideration received is less. The Novo Nordisk (C-248/23) judgment reiterated that Article 90(1) “precludes national legislation under which a pharmaceutical company… is not entitled to a subsequent reduction in the taxable amount under those payments by reason of the fact that those payments are made ex lege“.

Intra-Community Acquisitions and Adjustment of Initial Deductions (Articles 184-186 VAT Directive):

  • The World Comm Trading (C-684/18) judgment clarifies the rules for adjusting VAT deductions, particularly when discounts are received on goods supplied both domestically and intra-Community.
  • Article 185 of the VAT Directive governs the adjustment of initial deductions, ensuring that the final deductible amount aligns with the VAT on the actual consideration paid after events like price reductions.
  • In this case, a Romanian company received a single invoice for a global discount covering supplies from various Member States. The Romanian tax authorities required a separate adjustment for the domestic supplies.
  • The Court affirmed that national tax authorities must impose an adjustment of the initial VAT deduction when a discount on domestic supplies means the initial deduction was too high (Article 185).
  • Importantly, the Court ruled that this adjustment is required even if the supplier, having ceased operations in the Member State where the adjustment is made, cannot issue corrected invoices or claim a refund of VAT originally paid (Article 185). The supplier’s situation does not absolve the recipient of their obligation to adjust their deduction based on the reduced price. As the judgment states, “the fact that the VAT payable by the supplier of the taxable person would not itself be adjusted has no impact on the right of the competent national authority to require adjustment of the VAT deducted by a taxable person.”

Balancing Formal and Substantive Requirements for VAT Deduction/Adjustment:

  • The World Comm Trading (C-684/18) judgment touches upon the balance between formal national requirements (like invoice formats) and the substantive right to VAT deduction/adjustment. While Member States can impose formal rules (Article 273), these must not undermine the principles of neutrality and proportionality.
  • The Boehringer Ingelheim (C-717/19) and Novo Nordisk (C-248/23) judgments reinforce this, finding that national conditions precluding taxable amount reductions under Article 90(1) based on criteria unrelated to the reduced consideration received (e.g., not for promotional purposes) are contrary to the VAT Directive.
  • The Boehringer Ingelheim (C-717/19) judgment explicitly states that national measures under Article 273 “may not therefore be used in such a way that they would have the effect of undermining VAT neutrality, which is a fundamental principle…”. It also adds that if formal conditions cannot be met, the taxable person should be allowed to prove the transaction by “other means”. Novo Nordisk (C-248/23) reiterated this point, particularly “where… the transaction in question took place with regard to a State entity.”

Most Important Facts and Rulings:

  • Case C-802/19 (Firma Z): A pharmacy making VAT-exempt intra-Community supplies to a statutory health insurance fund cannot reduce its taxable amount under Article 90(1) for discounts granted to the insured persons, as there is no taxable amount on the supply to the fund to adjust.
  • Case C-717/19 (Boehringer Ingelheim) & C-248/23 (Novo Nordisk): National law is precluded from preventing pharmaceutical companies from reducing their taxable amount under Article 90(1) for payments (both voluntary and mandatory ex lege) made to State health insurance agencies, where these payments represent a reduction in the revenue from subsidised medicine sales. The taxable amount must reflect the consideration effectively received.
  • Case C-462/16 (Boehringer Ingelheim Pharma): Discounts granted by a pharmaceutical company to a private health insurance company (which reimburses patients) lead to a reduction of the taxable amount for the pharmaceutical company under Article 90(1), applying the Elida Gibbs principle.
  • Case C-684/18 (World Comm Trading): National tax authorities must impose an adjustment of the initial VAT deduction under Article 185 when a taxable person receives a discount on domestically supplied goods, resulting in a higher initial deduction than entitled. This is required even if the supplier in another Member State cannot make a corresponding adjustment or claim a refund. The substantive right to adjustment prevails over formal requirements if the transaction can be proven otherwise.

In Summary:

These judgments underscore the paramount importance of the principle of VAT neutrality in the EU. They confirm that Article 90(1) of the VAT Directive broadly requires a reduction in the taxable amount whenever the supplier effectively receives less consideration, even in complex supply chains or when mandated by national law (as seen with pharmaceutical payments to health agencies). However, this right to adjust is contingent on there being a VATable transaction with a taxable amount in the first place (as demonstrated in the context of VAT-exempt intra-Community supplies). Furthermore, national procedural rules for VAT adjustments must not disproportionately hinder the exercise of the substantive right to adjustment based on the actual consideration received, even if formal documentation is challenging to obtain.

 

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