VAT and price reductions

The ECJ has held that it is a fundamental principle of the VAT Directives that VAT is levied only on the consideration actually received by the taxable person: Boehringer Ingelheim RCV GmbH (Case C-717/19). As such, it was contrary to EU VAT law for payments made by the taxpayer to the Hungarian health authority (NEAK) based on its sales of pharmaceuticals for distribution to patients not to be deducted from the consideration on which it accounted for VAT.

The decision is suggestive of the argument that “price reductions” should be given a wide interpretation going beyond, perhaps, the natural meaning of the term and covering a range of situations where the taxpayer does not have the full amount of consideration at its disposal, even where that situation arises from agreements with a separate third party.

Background

Boehringer Ingelheim marketed and distributed medicines in Hungary. Under the Hungarian health system, these medicines were sold to pharmacies which then provided them on to patients. Under agreements with NEAK, the amounts paid for medicines by patients was subsidised by the NEAK, so that the amounts received by pharmacies came partly from patients and partly from the Health authority.

Under an agreement between Boehringer and NEAK, Boehringer agreed to make payments to NEAK based on the amount of medicines sold in Hungary to pharmacies to be deducted from its turnover resulting from the sale of those products. The amount of the contributions was set as a percentage of the gross amount of the subsidy provided by NEAK on those products. The judgment suggests that these agreements guaranteed that its products would be subsidised by NEAK and also allowed NEAK to ensure access to new products, whilst maintaining its budget.

Boehringer sought to reclaim VAT it had accounted for on its sales of medicines to pharmacies. It argued that the amounts it paid to NEAK fell within Article 90 of the VAT Directive as a price reduction after the sale had taken place. The Hungarian tax authorities rejected that claim and this position was upheld on appeal. In particular, the payments did not meet the conditions for a reduction in the consideration under local Hungarian law. Boehringer appealed and the case was referred to the ECJ.

ECJ decision

The ECJ noted that this case was very similar to an earlier case involving Boehringer under German law (Case C 462/16). In that case, Boehringer was required to grant a discount, under German law, to a private health insurance company on sales of prescription medicines to pharmacies/wholesalers where those private health insurance companies later reimbursed patient costs. The court held that Germany was required to allow for that discount, for the purposes of Article 90, as a reduction of the taxable consideration received by Boehringer. This was despite the fact that the private health company was not a direct part of the supply chain from seller (Boehringer) to patient. However, the earlier case involved a statutory requirement to provide the discount, whereas in this case the agreement between Boehringer and NEAK was voluntary.

In this case, the ECJ has again emphasised the fundamental nature of the principle enshrined in Article 90 that the taxable person should only be required to account for VAT on the amounts actually received for its supplies, taking into account any discounts or reimbursements. Hungary argued that there was no “direct link” between the consideration receive for supplies by Boehringer and the payments made to NEAK and as such they were not a “price reduction”. That argument was, however, rejected on the basis that the fundamental question is whether the taxable person has not received all or part of the consideration for the products. In this case, Boehringer only had at its disposal part of the amount of the consideration for its sales due to the sums paid to NEAK.

Furthermore, the Court went on to say that the fact that Boehringer did not have an invoice in respect of those payments it made to NEAK should not prevent it obtaining the reduction in the taxable amount provided that there was sufficient alternative evidence of those payments. Whilst it was possible for Member States to put in place measures to ensure the efficient administration of VAT, including the obtaining of reductions under Article 90, these must not have the effect of making it impossible or excessively difficult for a taxable person to obtain the reduction. Although in this case Boehringer held no invoices from NEAK, the principle of neutrality and proportionality required Hungary to allow Boehringer to establish by other means the payments had been made. That was all the more so where the transaction is actually carried out with the State in question!

Comment

The decision is not yet available in English, but it is clear that the ECJ regarded the principle of neutrality as fundamental to the correct operation of the VAT system. As such, discounts provided not simply to those in the chain of supply, but also to the State as part funder of the medicines, should be taken into account in determining the correct taxable amount.

However, what is not entirely clear from the judgment is the nature of the agreement between Boehringer and NEAK. There is a suggestion that Boehringer was obtaining some other service from NEAK as part of the agreement (a guarantee of some sort) and so it is not altogether clear why the payments were not simply consideration for that agreement by NEAK. Whilst the requirement to make payments in the earlier Boehringer case were statutory, this appears to have been a voluntary, commercial decision and as such it would seem odd if Boehringer did not receive something from NEAK of value in return for the payment. Nevertheless, it is the decision of the ECJ that the arrangements amounted to a price reduction allowing Boehringer to reduce the consideration received for its supplies to pharmacies/wholesalers.