5.7 The Commission’s original (or first) proposal for changes to the VAT Directive and why this proposal doesn’t solve all the issues

On 10 May 2012, the European Commission published a proposal for a Council Directive, amending the EU VAT Directive, as regards the treatment of vouchers (‘the original proposal’).1 The proposal, in an entirely different form, was adopted in 2016. This definitive adjustment to the EU VAT Directive does not contain rules about the VAT treatment of money off and cash-back schemes, which were included in the original proposal. That’s why I will discuss the original proposal, since it gives an insight into the Commission’s ideas on how to tackle these issues.

In the Explanatory Memorandum to the original proposal, the Commission specifically remarks that with regard to the ‘money off schemes’ and the ‘cash back schemes’, the existing rules, as interpreted by the CJEU, are cumbersome and difficult to apply in practice and that a better approach is badly needed. The objective of the original proposal is “to deal with these issues by clarifying and harmonising the rules in EU legislation on the VAT treatment of vouchers”.2 The Commission also mentions the practical consequences of cross-border (voucher) transactions, which include double taxation and non-taxation.3

The first issue that the Commission addresses is the fact that, under the current rules in the EU VAT Directive, adjustment of a taxable amount only seems to apply to discounts granted between the same parties that were involved in the original supply. In order to achieve an adjustment of the manufacturer’s VAT position, the Commission proposes to split up the supply that is partially paid for with the voucher (under the ‘money off scheme’) into two separate supplies: one by the retailer to the consumer and, by proposing a new provision that provides for the supply of a ‘redemption service’, one by the retailer to the manufacturer.4 This creates a VAT relevant transaction between the retailer and the manufacturer, which can be used as the basis for lowering the total amount of tax payable by the manufacturer. This is not done by lowering its tax base (output adjustment), but by allowing the manufacturer to deduct the VAT due on the (new) redemption service supplied to it by the retailer (creating input),5 insofar as the supplied goods or services give rise to deduction.6 The taxable amount for this redemption service shall be equal to the price reduction granted to the customer and reimbursed by the issuer, less the amount of VAT related to the supplied redemption service.7 This can be illustrated in a diagram as follows:

By proposing the introduction of a ‘redemption service’, (the moon (☾) in Diagram 11) the Commission, in my view, seems to narrow down the solution to solving ‘leapfrog’ rebates to cases where the rebate is granted to parties that use vouchers for demonstrating their entitlement to the rebate. In my view, a ‘redemption service’ can only be performed by someone that takes care of some form of ‘redemption’, and from the proposal it is clear that this refers to the redemption of a voucher. Assuming that the Commission would aim for a principle-based solution, I find it strange that the ‘leapfrog’ rebate issues are only addressed in a ‘voucher situation’. However, the definition provided for ‘voucher’ in the Explanatory Memorandum to the originally proposed rules could be interpreted as being broad enough to include every type of ‘leapfrog’ rebate: “(…) a voucher is an instrument which gives the holder a right to (…) receive a discount or rebate in relation to a supply of goods or services. The issuer assumes an obligation to (…) give a discount or pay a rebate”.8 Therefore, below I will assume that this originally proposed solution also applies to ‘leapfrog’ rebates where no actual (physical or electronic) vouchers are used.

The above example shows that the effect of the originally proposed rules on the total amount of VAT received by the treasury is the same as the total amount of VAT due under the current rules (compare Diagram 11 with Diagram 5). However, it is not explicitly clear from the originally proposed provisions that the taxable amount for the supply made by the retailer to the consumer, and for which the consumer pays with a ‘money off voucher’ as well as in cash, would no longer be the agreed price of the supply. This fact can be found in the Detailed Explanation of the (original, JB) Proposal,9 in which it is stated that a free discount voucher is no longer to be treated as (third party) consideration for a supply. I would have preferred this fact to be explicitly included in the actual original proposal, by adjusting the provision determining the taxable amount for the supply made by the retailer, which also affects the amount of VAT that can be deducted if the retailer’s customer is a taxable business. After all, the purpose of the original proposal was to create more clarity.

The original proposal therefore solved the issues concerning the incompatibility of the current EU VAT rules with the CJEU’s rulings, as well as part of the ‘gross-net-issue’. However, the original proposal only solved these issues with regard to the ‘money off scheme’, where the retailer is actually involved by receiving the amount of the cash-back directly from the (in my earlier examples) manufacturer as part of the payment for his supply. Under the ‘cash back scheme’, the retailer is not ‘involved’. The retailer can, therefore, not perform the (originally) proposed ‘redemption service’ for the manufacturer, and neither can the consumer. This means that under the original proposal, different VAT treatments would apply to two similar promotional schemes where a manufacturer pays money to the person redeeming free face value vouchers that it distributed, thereby funding the purchase of goods that it manufactured, and possibly also depending on whether or not ‘vouchers’ were used to grant and obtain the ‘leapfrog’ rebate. I see no valid reason for the creation of a new service to solve the VAT issues for only one of these promotion schemes, and possibly not even for all of those specific schemes.

Also, under the originally proposed rules for the ‘money off scheme’, the taxable amount at the level of the manufacturer is not adjusted, which would affect its pro rata if the manufacturer would also perform exempt supplies. Under the original proposal, a new pro rata ‘issue’ would also be created at the level of the retailer in case the vouchers are used to pay for VAT exempt supplies by it, because the retailer would perform an exempt supply (the supply of the star (٭) in Diagram 11) to a lower amount as well as a taxed ‘redemption service’ (the supply of the moon (☾) in Diagram 11).

The cross-border supply chain issue, where under the CJEU rulings no adjustments are allowed if the goods are consumed in another EU Member State, even though the manufacturer has to remit VAT and finally receives less for his supply, is not solved by the originally proposed rules for the ‘money off scheme’ either, as I will demonstrate in the example illustrated in below diagram, even though it seems like it is actually solved at a first glance.

Beside the comments that I wrote myself about the original (or first) proposal,10 in which I included many of the comments that I also include in this research, I’ve only come across one other publication on this proposal in English,11 and it does not cover the issues I describe in this Section (Section 5.7)

By transforming the payment by the manufacturer (M) from a discount for its supply to the wholesaler (W)12, to a ‘redemption service’ performed by the retailer (R) to M, different VAT rules apply to (the reason for) this payment. Under the relevant EU VAT rules, this (proposed) redemption service is subject to VAT (“taxable”) in the country where the recipient of the service, i.e. M, is established.13 M is liable to account for the VAT on this service as payable.14 M can deduct this same VAT amount,15 which it will do by offsetting it to the payable amount. Therefore, the net VAT effect of this payment is nil. This is the same result as under the CJEU rulings (Elida Gibbs and Commission v. Germany), but – as I explained before in Sections 5.5 and 5.6 – I do not agree with that outcome.

Another issue created by the proposed measures is the fact the profit margin of retailers may decrease if they participate in money off schemes for the supply of goods or services that are subject to a lower VAT rate, because they will have to account for VAT using the lower rate only on the non-discounted part of the payment received for their product, and apply the standard VAT rate to the supply of the redemption service. The opposite applies to the margin of the manufacturer: he can deduct the VAT (to the normal VAT rate) due on a redemption service whereas he paid VAT to the lower rate on his initial supply. Basically, in local transactions, under the rules originally proposed, the retailer would pay/fund the additional margin of the manufacturer, which has nothing to do with ‘adjusting the VAT consequences of the original supply made by the manufacturer’.

I will demonstrate this with the following example, where all parties involved are established in a random jurisdiction that uses 21% as the standard VAT rate and 6% as the lower VAT rate. The amounts used for this specific example are different from the amounts used in the examples so far. In this example, the manufacturer (M) wishes to promote sales of its products by retailers (R). The retail price of the products in this example is 3.00 (inclusive of VAT) per product. M issues free vouchers to potential customers (C) of its products, which they can use to buy three certain products for the price of two. C will pay R the amount of 6.00 (inclusive of VAT) and a voucher. R will redeem this voucher, for which M pays R an amount of 3.00 (inclusive of VAT). Under the current rules, R will have to remit 6% from this amount, leaving R with a net turnover for this transaction of 8.50. Under the originally proposed rules, the payment by M to R is considered a separate ‘redemption service’ which is subject to the normal VAT rate (21%). R will now have to remit 21%VAT of the (VAT inclusive) payment it received from M to the tax authorities, which amounts to 0.52, and 6% VAT of the (VAT inclusive) amount it received from C, which amounts to 0.33. The total VAT amount that R will have to remit under the originally proposed rules is therefore 0.85. This means that under the originally proposed rules, R’s net turnover regarding this transaction is 8.15 as opposed to the turnover under the current rules which is 8.50.

In a diagram, this can be illustrated as follows:

and

Summarising the above, the originally proposed rules only apply to ‘money off schemes’ and not to ‘cash back schemes’, and possibly not even to all ‘money off schemes’. By not addressing the VAT issues regarding ‘cash back schemes’ in this original proposal, the Commission did not provide a solution for a number of relevant issues regarding the VAT treatment of vouchers. Also, a potential pro rata issue is created by the proposed rules and the original proposal was, in my view, insufficiently clear about the taxable amount for the supply made by the retailer to the consumer. And lastly, the proposed rules could lead to an additional cost at the level of the retailers, if these retailers sell products that are subject to a lower VAT rate where these products are sold under the ‘money off scheme’. The proposed rules did solve the ‘practical allocation’ issue, because they are no longer based on the adjustment of the taxable amount. In the end, I am not sad that the proposed new rules were never adopted. In my view, in many cases it is better to have no rules than bad rules.