5.6.4.0 Inleiding

Things become more complicated, and distortive, when the chain of transactions crosses a border between two autonomous tax jurisdictions, even though the CJEU ruled that no adjustments to the taxable amount can be made in these situations, as I will elaborate on below.1 In this section (Section 5.6.4) I will focus on cross-border transactions and their VAT treatment under the current EU rules. In Section 5.6.4.1 I will describe how the proposed VAT treatment of the cross-border supply of goods2 may affect the VAT treatment of leap-frog price reductions.

For this subsection, it is relevant to keep in mind that the purpose of the EU VAT system is taxing local private consumption by levying tax on the expenditure made for that purpose,3 which means that, where possible, taxation of such transactions should occur in the country of consumption.4 In the below two diagrams, I will demonstrate why the application of the rules as set out by the CJEU in its relevant case law does not lead to the desired result in cross-border transaction chains. I will explain these diagrams and elaborate on the relevant issues that arise. In the two examples, I will focus on the ‘money off schemes’, but the issues equally apply to the ‘cash back schemes’.

In these examples I have assumed that the applicable VAT rate in both countries is 20%. The double arrow represents an amount payable that is balanced against the same amount that is deductible.5

In the first example, shown in Diagram 10a, the exempt cross-border transaction is the supply by the first manufacturer (M) to the wholesaler (W). This means that M will not have to charge or remit any local VAT on this supply.6 Under the relevant CJEU case law, M is not allowed to adjust the taxable amount for this supply by reducing it with the amount of the rebate paid to R, as held by the CJEU in the Commission v Germany case, because “(…) where, owing to an exemption, the value stated on the money off coupon is not chargeable to tax in the Member State from which the goods are despatched, no price invoiced at that stage of the distribution chain, or at a later stage, includes VAT, which means that a reduction or a partial reduction of that price cannot in turn include a VAT element capable of giving rise to a reduction of the tax paid by the manufacturer(…)”.7 Under the specific UK rules discussed in subsection 5.6.3, the manufacturer would also not be allowed to adjust its taxable amount in the case of ‘money off schemes’.8 At a first glance, this seems irrelevant for the manufacturer’s VAT position, because the transaction that would have been adjusted was not taxed anyway.

However, this is relevant for businesses that also perform VAT exempt supplies that do not allow (full) input VAT recovery. The deduction of VAT incurred by these businesses on costs that are not attributable to specific output transactions, also called ‘general costs’ or ‘overhead costs’, is based on the deductible proportion. As a general rule, the deductible proportion, or pro rata, is made up of a fraction comprising, as a numerator, the total amount, exclusive of VAT, of turnover per year attributable to transactions in respect of which VAT is deductible and as denominator, the total amount, exclusive of VAT, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which VAT is not deductible.9 Determining the correct amount of turnover that is included in the denominator, and therefore determining the correct basis for the calculation of the deductible proportion of input VAT incurred on general costs, is affected by whether or not an adjustment to the taxable amount is made. Therefore, in my view, if the adjustment of the taxable amount is the ‘adjustment method of choice’ (which it shouldn’t be, as I demonstrate in this section), this adjustment should also be applied in cases where no tax was actually charged or remitted.

In the second example, shown in Diagram 10b, the transaction between the manufacturer (M) and the wholesaler (W) is a local, taxed transaction and the transaction between the wholesaler (W) and the retailer (R) is the cross-border transaction that is not taxed in the country of the supplier and taxed in the country of the retailer (R), who can offset this amount against the same amount of deductible input VAT.10

In this scenario, VAT is charged and remitted to the tax authorities by the retailer (R) on the full (VAT exclusive) transaction price (200), which is in line with the purpose of EU VAT as described above: the taxation of expenditure for local private consumption. Through the deduction system and the application of the 0% VAT rate to the cross-border supply, ultimately, all expenditure is taxed in the country where the final customer (C) is established.

However, as a result of the relevant CJEU rulings, the manufacturer (M) in the other country cannot deduct the face value of the vouchers from its taxable amount for the supply of the goods to the wholesaler (W). This means that, even though M finally receives a smaller amount for his supply than the amount on which he remitted VAT, he is not entitled to a partial refund. This goes directly against one of the two ‘principles’ that form the basis of these same CJEU rulings.

On the other hand, if M were to be allowed to reduce his taxable amount on the grounds that he finally received a lower consideration for his supply, M would (in the above example) be entitled to a refund of 4.8 (assuming his taxable base is reduced by the amount of 24). The result for the treasury in M’s country would then be negative: the treasury of this country would have basically funded part of the consumption in another country (through partial funding of the ‘third-party payment’ by M for the consumption in the other country). This effect would be even more obvious in case the two countries apply different VAT rates. In the most extreme situation under the current VAT rates in the EU, where (in January of 2019) Hungary applies a standard rate of 27% and Luxembourg a standard rate of 17%, the Hungarian treasury may have to fund 27% VAT for partial payment for consumption in a country where the actual consumption is taxed at 17%. This, to me, demonstrates that the ultimate answer to the question about the VAT consequences of these money off and cash-back schemes does not lie in the lowering of the taxable amount of the business funding part of the purchase by the final consumer.