5.10 Discounts and rebates: summary

The EU VAT rules for granting discounts and rebates, either at the time of the supply or after the supply, directly to the customer that purchased the goods or services are very straightforward. Discounts (granted at the time of the supply) should not be included in the taxable amount, and rebates (granted after the supply) should reduce the ‘original’ taxable amount.

Businesses, tax authorities and courts have struggled with the VAT treatment of ‘leapfrog’ discounts and rebates. The CJEU has tried to solve these issues by allowing businesses that grant these ‘leapfrog’ discounts and rebates the same treatment as businesses granting rebates: they should be allowed to reduce the basis for taxing their originally supplies (their taxable amount) with the amount of the ‘leapfrog’ discount or rebate that they pay. Even though this solution solved the issues from an economic and commercial perspective and fitted well within the system of EU VAT, aiming to only tax expenditure on local consumption, it created some other issues. I have presented an alternative VAT treatment of ‘leapfrog’ discounts and rebates that still meets the teste of my own research framework, but that also solves the issues created by the CJEU’s solution.

Leapfrog discounts and rebates should, in my view, be treated by allowing the business that grants the discount or rebate to claim VAT on the supply that he has funded from the local tax authorities of the jurisdiction where that supply takes place. The VAT paid on the remaining part of the consideration can be deducted by the customer, insofar as he has the right to deduct VAT. This solution reflects the economic and commercial reality under which businesses should be entitled to take these ‘leapfrog’ discounts and rebates into account for VAT purposes. Also, the purpose of EU VAT, i.e. the taxation of expenditure for local private consumption, is left intact by this solution. I call it a system of ‘joint payment and shared deduction’.