5.6.1 Practical issues arising in a domestic chain of transactions

In this subsection, I will assume that the final customer is not a business that can deduct VAT unless explicitly stated otherwise.

Under the relevant CJEU rulings, the taxable amount for the sale by the manufacturer (M) is reduced by the amount paid by it as a rebate, under either scheme (as a ‘cash back’ to the final consumer and also as ‘money off’ to/via the retailer). This is what the CJEU literally rules: “(…) the taxable amount is equal to the selling price charged by the manufacturer, less the amount indicated on the voucher and refunded (…)”.1

For money off schemes, the issue that arises from this rule is that the amount of the rebate is in fact a VAT inclusive value (because it is used to pay for the VAT inclusive price).2 This is clear from the fact that the VAT position of the retailer (R) is not affected in the money off scheme: VAT is remitted on the full net value of the transaction, and the full VAT inclusive price is paid for in cash and the value of the rebate received from M. This means that the adjustment of the taxable amount for M’s supply should not be made to the amount value of the paid discount, but to that amount less the applicable VAT that’s included in it. Otherwise the tax authorities would lose money on this transaction – unless any adjustment made of a deduction at the consumer’s (C’s) side is made to the same (incorrect) amount. Even if the latter would be the case, this does not mean that incorrect rules should be applied just because they do not cost the tax authorities any money. Although one can easily argue that it is obvious that the CJEU means that the taxable amount should be lowered by the net part of the (gross) refunded amount, that is not what the CJEU says in its ruling, which in itself is clearly worded. And this can lead to even more issues, as I will demonstrate below.

Even though the CJEU may have not exactly meant what it ruled, this issue, which I will refer to as ‘gross-net-issue’, is in my view a relevant practical issue that arises from the relevant CJEU rulings with regard to domestic chains of transactions (besides the fact that, in my view, the principles underlying the rulings are irrelevant for those rulings or incorrect, as mentioned above). I will now have to point out that the amounts I used in my examples in Diagram 7 and Diagram 8, more specifically the 24 voucher and redemption value and the 4 VAT adjustment value (at the manufacturer and the consumer level) are incompatible with the literal text of the CJEU’s rulings as a result of this ‘gross-net-issue’.

Another issue regarding the ‘status’ of the refunded amount is, in my view, caused by the fact that the ‘gross-net-issue’ does not occur in a domestic chain where the reverse charge applies to the transaction for which the rebate is funded by the manufacturer. In this scenario, C qualifies as a taxable person with the right to fully deduct VAT. In that case, the payment is made by the manufacturer for funding/discounting a net amount, because that is what the supplier (R) charges his customer (because the customer is liable for the VAT due). This means that in this case the manufacturer makes ‘third-party payment’ (at least in the eyes of the retailer) that effectively is a net amount, which means that this amount is indeed the amount by which the taxable amount of the retailer should be decreased (under the Elida Gibbs mechanism). This can be shown in two diagrams as follows:

And

The ‘gross-net-issue’ also does not apply to exempt cross-border transactions, as I will demonstrate below.3,4

Another practical issue that may arise in cases where, in my example, M is unable to exactly allocate payments with regard to money off or cash back schemes to specific sales of products. If a cash back voucher is printed on the box of a product and has its own unique serial number, M should be able to link the payment made to the person redeeming the voucher to a specific supply made earlier to the wholesaler. Under the relevant CJEU case law, the taxable amount for this earlier supply should then be reduced. However, if M decides, for example, to distribute free money off vouchers by including them in local papers, were these money off vouchers can be used as payment (or: for obtaining a discount) for M’s products at designated retailers, and where M produces and sells goods that are subject to different VAT rates, it may be difficult to link the (payments for the redemption of the) vouchers to specific earlier sales, which would make it hard to determine which tax base to reduce – the one used as a basis for calculating the VAT due under the normal VAT rate or under the lower VAT rate. This issue of course does not occur where the purchaser of the good has to identify the good purchased, e.g. by sending a copy of the receipt, which should also include the applicable VAT rate.

Before elaborating on some of the practical issues that arise in cross-border application of the CJEU case law, I will first describe how some EU Member States have tried to solve the particular piece of the VAT puzzle that I described above.