5.5.1 The CJEU entangled in a VAT web?

The EU VAT system is based on the taxation of specific transactions between parties that have agreed on a supply for a consideration.1 Under the relevant provision of the EU VAT system, where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly.2 In these provisions, reference is made to ‘the price’ and ‘the supply’. These clear provisions can and should, in my view, only be interpreted as meaning that where payments are made or received outside the well-defined relationship between the supplier and its direct customer, i.e. the parties to a legal agreement defining a transaction and the consideration for that transaction, these payments do not affect the original taxable amount or the original basis for input VAT deduction.3 The Advocate General in the Elida Gibbs case is of the same view, and recommends the CJEU to rule that the payments made by Elida Gibbs for redemption of the vouchers in both schemes (i.e. the cash back as well as the money off scheme) cannot lead to a reduction of the tax base at Elida Gibbs.4

In its ruling in the Elida Gibbs case, the CJEU starts off by briefly describing what it calls some basic principles of the VAT system and how it operates.5 As mentioned above, one of these ‘basic principles’ is the following: “the taxable amount serving as a basis for the VAT to be collected by the tax authorities cannot exceed the consideration actually paid by the final consumer which is the basis for calculating the VAT ultimately borne by him”.6

As I mentioned above, in my view, this is not a basic principle of the EU VAT system, or at least not based on the legal system embodied in the EU VAT Directive. The taxable amount is not defined as “the amount paid by the final consumer” but “the amount obtained or to be obtained by the supplier”.7 The reason for that is that the EU VAT is levied on the total expenditure for private consumption. This is substantiated by the fact that under the relevant provision in the EU VAT Directive, the taxable amount for the supply of goods and services includes payments received from a third party (not being the customer) and certain specific subsidies.8 Another reason to doubt this ‘basic principle’ is the fact that the CJEU has ruled on other occasions that the final consumer does not even have to be aware of the actual price of the goods or services it acquired.9 However, in the Elida Gibbs case (and its subsequent rulings) the CJEU relies on the aforementioned basic principle.10 In the Elida Gibbs case, it held that the payments made in these specific schemes should reduce the taxable amount on which VAT was paid, allowing Elida Gibbs the refund it applied for.

In my view, the relevant provisions in the EU VAT Directive are sufficiently clear not to allow the interpretation given to it by the CJEU, even if the CJEU wished to rely on a basic principle that could not be applied within the framework of these legal provisions. This is based on the principle of legal certainty that prescribes that when a text is evident it should be applied literally.11 Even though I will not go as far as some by saying that the CJEU’s decisions are based on sloppy argumentation and legal principles of its own invention,12 I disagree with its ruling in this case (even though I accept that in some specific cases, funding a discount or rebate on the supply of one’s own product further down the distribution chain should affect a business’ overall VAT position, as I mentioned above). So did the German government,13 who refused to adapt its local VAT rules to (part of) the outcome of the case.14 As a result, Germany was taken to court (the CJEU) by the European Commission in an attempt to force Germany to comply with the outcome of the Elida Gibbs case. The Advocate General to the CJEU considered this case as a reopening of the issues in Elida Gibbs.15 Surprisingly (to me, at least), both the Advocate General and the CJEU insisted in this case that these kinds of payments (i.e. the payments made by the manufacturer to the retailer or the final customer) should reduce the taxable amount of the business paying them,16 even though the CJEU in that same case considers these payments as ‘third-party payments’.17

Even though I do not agree with the rulings, because in my view they are not compatible with the legal system as laid down in the EU VAT Directive, I do understand why the CJEU wanted to use this method for reaching this outcome and, as mentioned above, I also think that under the specific circumstances of these cases, the relevant payments should affect the VAT position of the business making them, but not in the way the CJEU deems appropriate. Economic reality, in my view, requires that the relevant payments are taken into account from a VAT perspective. Before I explain what I consider to be the correct VAT treatment of these specific discounts and rebates, I first investigate the practical problems that are the result from the CJEU’s case law on ‘leapfrog discounts’, as well as some alternative methods of dealing with the relevant issues.