VAT and discounts – position clear?


VAT and discounts – position clear?

Deloitte Perspective

On 20 December 2017, the European Court of Justice (‘CJEU’) ruled in the Boehringer Ingelheim Pharma case and judged that Boehringer Ingelheim Pharma GmbH & Co. KG (‘Boehringer’) could deduct the discounts it had granted to private healthcare insurers from its VAT taxed sales. This CJEU judgment is rather special, because the pharmacy transferred the sold medicines in question to the insured person. The insured person subsequently asked his private healthcare insurer for a reimbursement of the costs. Thus, the healthcare insurer, the referring court mentioned, is not part of the same supply chain as Boehringer.

19 January 2018


Boehringer is a Germany-based manufacturer of pharmaceutical products at the head of a supply chain that is obliged by a statutory provision of German law to pay price rebates to public health insurance funds and private health insurers after supplies takes place which is indexed to the price of its products.

Pharmaceutical products intended for persons with public health insurance funds are supplied by the pharmacies to the health insurance funds and subsequently made available to persons insured by them. Pharmaceutical products intended for persons with private health insurance are supplied by the pharmacies to those persons. The private health insurance company does not purchase the products, but merely reimburse the persons insured by it, upon request by them, for the costs they have incurred. In such cases, Boehringer must grant the public health insurance funds and private health insurance company a discount on the price of the medicinal product.

The German Tax Authorities decided that Boehringer is allowed to reduce the taxable amount for rebates to public health insurance funds. However it was not allowed to adjust its output tax position in relation to rebates paid to private health insurers, as they were insufficiently linked to the supply chain.

According to the CJEU, Boehringer could deduct the discounts provided to private health insurers from its taxable amount too.

Two lines of reasoning

The CJEU reached its judgment based on two lines of reasoning from previous case law. The first was initiated in the Glawe case (CJEU 5 May 1994, C-38/93) and stipulates that the amount that is not at the free disposal of an entrepreneur should not be part of the taxable amount for VAT purposes. The CJEU in this respect refers to the statutory duty of Boehringer to grant the discounts. As a result, it only has the power to dispose of the selling price of the medicines less the discounts granted.

The second line follows from the Elida Gibbs judgment (CJEU 24 October 1996, C-317/94). Elida Gibbs is a manufacturer that pursues several sales promotion campaigns for which discount vouchers are issued. It applies two types of discount systems. The money-off system allows consumers to exchange vouchers with retailers selling Elida Gibbs products. In exchange for their vouchers, consumers get discounts as they purchase items from these retailers. Elida Gibbs compensates the retailers for the amount of the discounts afterwards. On top of that, Elida Gibbs applies a cash-back system: consumers pay the regular selling prices to the retailers and can send their vouchers to Elida Gibbs to have part of the purchase price refunded.

The CJEU judged that the Tax Administration cannot collect more VAT than the final consumer pays. As a result, a manufacturer that does not have a direct contractual relationship with the final consumer who receives the discount - but is the first link in a chain that ends with the final consumer - can treat this discount as a discount on its own previous supply of the goods in question. Subsequent case law confirms that it is essential for a party to be a link in the chain in which the product is supplied. The CJEU argues that entrepreneurs who act as intermediaries in transactions but are not part of the production and distribution chain are not allowed to deduct discounts from their taxable amounts (CJEU 16 January 2014, C-300/12 (Ibero Tours)).

Healthcare insurers introduced into the chain

I believe paragraph 41 of the judgment is the key consideration in the judgment of the CJEU: the Court considers private healthcare insurers to be regarded as the final consumers of the supply of medicines. With that legal ground, the Court of Appeal places the healthcare insurers into the chain. As a result, the legal grounds of the Elida Gibbs judgment can also be applied in the situation of Boehringer. The CJEU regards the initial payment for the medicines made by consumers as they first go to a pharmacy as a payment by a third party.

Paragraph 41 is, however, difficult to understand. Eventually, it is the consumer who disposes of and uses the medicine. In itself I can go along with the Court’s reasoning that consumers pay on behalf of the insurers, because the insurers eventually bear the costs. But a payment on behalf of a healthcare insurer does not provide sufficient ground for labelling that insurer as the final consumer; a supply should also be made to the healthcare insurer. Although this does not clearly follow from legal ground 41, I assume that the CJEU also believes the consumer is to be considered to receive the medicines on behalf of the healthcare insurer. Since the CJEU labels the healthcare insurer as the final consumer, it believes the supply of medicines to the consumer by the healthcare insurer not to qualify as a supply by the healthcare insurer to the consumer for VAT purposes. We probably should consider that supply to be part of the performance of the insurance contract between the insured and healthcare insurer.

Link with Auto Lease Holland

This raises the question how the judgment in the Boehringer case relates to the Auto Lease Holland judgment (CJEU 6 February 2003, C-185/01). In this judgment, the CJEU ruled that when a lessee of a car refuels using a fuel pass in the name of the leasing company, the fuel is supplied to the lessee and not to the leasing company. The CJEU considers the following: 1. The lessee fills up directly at a petrol pump and Auto Lease Holland never has the possibility to decide how or for what the fuel is used; and 2. the lessee eventually bears the costs of the fuel.

In the Boehringer case, it is also the insured person who decides what to use the medicines for, but - as indicated above - a supply should apparently be assumed to be made to the insurer. I have a problem with that. An important difference with Auto Lease Holland though is that it is not the insured who eventually bears the costs.  

Practical relevance

The recent judgment is of great importance to the pharmaceutical sector in several EU Member States. Pharmaceutical companies will have to consider whether they can deduct the discounts they have granted from their sales. This may well involve both the statutory discounts the law requires them to grant, and the discounts pharmaceutical companies have agreed upon with healthcare insurers.

The Boehringer judgment seems to settle the argument for statutory discounts. I think that it should also be possible to deduct from the taxable amount any discounts obtained by negotiations. Though the CJEU uses two lines of reasoning from previous case law to conclude that the discounts can be deducted from the taxable amount, I believe the line of reasoning in the Elida Gibbs case alone would suffice to reach this judgment. Elida Gibbs was not required by law either to grant discounts but did so of its own accord. This did not interfere with deducting the discounts from the taxable amount. The only condition the CJEU stipulated in Elida Gibbs is that the party granting the discount and the one receiving it are part of the chain. This is also the case in the judgment in the Boehringer case since the CJEU labels the healthcare insurer as the final consumer.

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