5.4.4 Rebates granted by another person than the party making the (direct) supply: leapfrogging.

In practice, rebates are not only granted by the actual supplier of a product to its own (direct, contractual) customers, but also – for example – by manufacturers of products to the ultimate buyers of these products at the end of a chain of distribution. The reason for this could be that a manufacturer wishes to make his own product more appealing to end consumers by lowering the retail price of the product, by granting the purchaser a ‘cash back’ or ‘money off’ (both species of rebates), because if he would grant the rebate to his own purchasers, he would not be certain that this rebate would (sufficiently) decrease the price charged by the retailer to the final consumer. This rebate system can be described as ‘leapfrogging’, because it looks as if rebate ‘leapfrogs’ one or more links in the production and distribution chain.1

The VAT issues related to these types of rebates are very specific. This is caused by the fact that the current provisions in the EU VAT system don’t provide for a specific treatment of these rebates. This inadequacy of the VAT system has, in turn, lead to questionable interpretation and application of the relevant rules.2 In an attempt to solve these problems, the Commission included a ‘solution’ in its original voucher-proposal.3 A large part of this proposal was focused on the VAT treatments of the types of rebates that I will focus on in this Section. This part of the original proposal was, however, not included in the final, new EU VAT voucher rules.

When a manufacturer grants a ‘leapfrog’ rebate to a buyer of its products further down the production and distribution chain (usually the final customer), this is usually done by providing the purchasers of such products with vouchers with a specific face value, which can be used in either of two ways. In the first scenario, the purchaser can use the voucher as (partial) payment for the supply of the product from a retailer. In this scenario, the retailer accepts the voucher as ‘payment’ from the purchaser because the value of the voucher will be reimbursed by the manufacturer of the product. I will refer to this discount system as the ‘money off scheme’, because to the purchaser, the voucher represents a price reduction when purchasing the product from his supplier (the retailer). To the customer, this is actually a discount rather than a rebate. It can be illustrated in a diagram as follows:

In this diagram (Diagram 3), the customer (C) uses a voucher representing 10% of the VAT inclusive retail price (240) to partially ‘pay’ the retailer (R), who supplies a good at the agreed (VAT inclusive) price of 240 (where 200 is the taxable amount and 40 the VAT due on the supply). The remaining consideration is paid in cash (to the amount of 216). R sends the voucher to the manufacturer of the goods (M) and receives the amount of its face value (24) in return. From the perspective of R, the payment by M (to R) is considered a ‘consideration obtained or to be obtained from a third party’,4 and therefore included in the taxable amount for the supply by R to C.5 This way, the amount received by R is not affected by the ‘money off scheme’, but the total amount received by M is reduced by 24. For M, from an economic perspective, it does not matter whether he reimburses W part of the sales price or whether he ‘leapfrogs’ some links of the chain, granting a party further down the chain a discount. Either way, the amount that M perceives as the consideration ‘finally received’ for his supply is affected.6

In the second scenario, the same manufacturer grants the ultimate purchaser of its product the same amount as a rebate under what I will refer to as a ‘cash back scheme’. In this scenario, the retailer is not involved in the actual granting of this rebate. The customer will send the voucher directly to the manufacturer, who will pay it the face value of the voucher in return. This scenario can be illustrated in a diagram as follows:

In this diagram (Diagram 4), the customer (C) pays the retailer (R) for the supply of a good at the agreed (VAT inclusive) price of 240 (200 as taxable amount, 40 being the VAT due on the supply). C sends the voucher directly to the manufacturer (M) and receives the amount of the face value of the voucher (24) in return. Again, the amount received by R is not affected. In this instance, similar to the ‘money off scheme’, the payment by M could possibly be regarded as ‘third-party payment’ because at the end of the day, M funds part of this transaction.7 As under the ‘money off scheme’, the final amount received by M for ‘his supply’ is reduced (by 24).8

Questions regarding the VAT consequences of both schemes (the ‘money off scheme’ and the ‘cash back scheme’) were first referred to the CJEU for a preliminary ruling in the Elida Gibbs-case.9^,10