5.5.0 Inleiding

In my view, the specific cases where ‘leapfrog discounts/rebates’ are granted require a specific VAT treatment. The fact that a manufacturer is actually funding the purchase by the consumer of its own product as sold by the retailer, should be used as the basis of the VAT treatment of these scenario’s. In my view, the most relevant issue, addressed by the CJEU in the relevant cases, is that the manufacturer incurs costs that I think should be considered business costs and that should lead to a lower total amount of tax payable by it. This is something that the current provisions of the EU VAT Directive allow, but not through lowering the taxable amount. However, lowering the amount of tax payable is based on the ‘economic and commercial reality’ of the situations, because businesses incurring costs in relation to their business activities should be able to deduct the VAT incurred on those costs. In my view, the CJEU applied the same ‘economic and commercial reality’ to lower the amount of VAT payable, but through lowering the taxable amount. I will elaborate on this in Section 5.4.5.

Despite its name, VAT is not generally intended to be a tax on value added as such. Rather, it is usually intended as a tax on consumption, or rather on expenditure for consumption.1 From an economic perspective, four basic forms of VAT exist,2 two of which are relevant for this section: the ‘subtractive-direct method’ and the ‘subtractive-indirect method’.3

Under the ‘subtractive-direct method’, which is a method based on accounts and sometimes referred to as a business transfer tax, tax is levied on the business’ output minus its input.4 Under this ‘subtractive-indirect method’, the tax paid on the business’ input is (immediately) deducted from the tax due on its output. There are a number of reasons, which I will not discuss in detail, that explain why most of the countries that have implemented a VAT, have chosen to base it on the ‘subtractive-indirect method’.5 The most relevant reason is the fact that this method attaches the tax liability to the transactions.6 This method ensures, for example, that goods (and services) can leave a jurisdiction free of tax, to be taxed at the place of consumption. The ‘subtractive-indirect method’, or ‘invoice method’, also creates a good audit trail.

In theory, from an economic perspective, there should be no difference in result (in the sense of amount of tax levied) between a value added tax in the form of the ‘subtractive-direct method’ and one in the form of the ‘subtractive-indirect method’.7 This means that under both systems, the manufacturer paying VAT on its total output minus its total cost should pay the same amount of VAT as the manufacturer that deducts all input VAT paid on its input from the VAT due on its total output. Therefore, whether the ‘rebate’ paid by the manufacturer is a cost (an input) or an adjustment of the output should not make a difference: the total VAT amount payable should be reduced as a result of this payment. It just does not fit into the (more or less) harmonised legalisation of the turnover taxes that is the EU VAT Directive.8

The CJEU achieves its goal of lowering the amount of VAT due by the manufacturer by allowing the business that funds the rebate or discount to reduce the taxable amount for his supplies by the amount of the discount or rebate granted. As mentioned above, the CJEU confirms this method in a number of consecutive rulings. The European Commission agrees with the CJEU that these discounts and rebates should affect the VAT position of the initial supplier, but the Commission does not agree on the method applied by the CJEU. The Commission suggests implementing specific provisions in the EU VAT Directive to achieve the VAT consequences intended by the CJEU in its relevant jurisprudence,9 which I will elaborate on below in Section 5.7.

Even though I am of the view that the VAT position of the initial supplier should be adjusted, as a result of the rebate or discount, I disagree with the methods applied by the CJEU as well as the ones suggested by the Commission for achieving this adjustment of the VAT paid on the original supply, as I will explain later in this Section.

In its relevant case law, the CJEU holds that the manufacturer of a product can reduce the taxable amount for the supply of that product if he grants a rebate or discount on the supply of that product to a consumer further down the distribution chain. The CJEU applies two principles as a basis for these ruling:

First, the CJEU takes into account the basic principle of the VAT system that it is intended to tax only the final consumer. Consequently, 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.10 In my view, this is not a basic principle of VAT at all, as I will explain below. And even if it were a basic principle of VAT, I consider it irrelevant in deciding whether the VAT position of a business is affected if it funds part of the supply of its product by another supplier to a purchaser further down the distribution chain.

This is connected to the second principle used by the CJEU to substantiate its view that the supplier that funds the discount or rebate should reduce its taxable amount for the supply of the goods: the principle of neutrality. The CJEU expresses this as follows: “It would not therefore be in conformity with the directive for the taxable amount used to calculate the VAT chargeable to the manufacturer, as a taxable person, to exceed the sum finally received by him. Were that the case, the principle of neutrality of VAT vis-à-vis taxable persons, of whom the manufacturer is one, would not be complied with.”11

The CJEU seems to be of the view that the business that, in these cases, funds the discounts and rebates, finally receives less for its supplies. This would still be the case if the business would grant the discount or rebate to an entity in the distribution chain that is not the final consumer in that chain: it would still finally receive a lower total consideration whereas this would not affect the consideration actually paid by the final consumer would not be affected. I have shown this in the below diagram, where Elida Gibbs grants Wholesaler 2 a rebate. This rebate affects the total amount received by Elida Gibbs, but the price actually paid by the final consumer is not affected.12 This ‘leapfrog rebate’ is still a rebate, and because of the price reduction within the chain it is possible that the end consumer pays less in the end, but that should be irrelevant for allowing the business funding the discount to lower his taxable amount. In the below diagram, all prices paid between businesses and also by the end consumer are VAT inclusive amounts.

In my view, from the above it is clear that the VAT position of the business granting the discount or rebate does not rely on the principle that the amount serving as the basis for the VAT to be collected cannot exceed the consideration actually paid by the final consumer. The issue is not VAT related at all. Businesses further down the chain that, for example, enter a new market also often charge considerations for products that are below their purchase price. In those cases, the final customer may also pay less than the amount received by businesses at the beginning of the production and distribution chain. This does not mean that these businesses should lower their taxable amount because the final customer paid less than they have.

This leaves the principle of neutrality, in the sense that the taxable amount used to calculate the VAT chargeable to the manufacturer, as a taxable person, cannot exceed the sum finally received by him, as the basis for the CJEU allowing the manufacturer to reduce his taxable amount.

In the Commission v Germany case, the CJEU explains that in these specific cases, “the reason why the manufacturer (…) is authorised (…) to reduce his taxable amount is that the price paid by the final consumer includes VAT, and accordingly any reduction in that price likewise includes a VAT element”.13 The CJEU then explains that “(…) where, owing to an exemption [as a result of a cross-border supply of the goods, JB], the (…) [amount of the discount or rebate, JB] 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”.14

Here, the CJEU basically says that the ‘principle’ that VAT is only due on the amount actually received in these cases, does not apply in all cases. I find it hard to accept that a ‘principle of VAT’ only applies to certain transactions or in certain cases. I therefore propose that the CJEU, although trying to achieve a goal that serves a valid economic purpose, has chosen the wrong way of solving this particular VAT puzzle.

I think that the CJEU focused too much on the ‘familiar mechanics’ of decreasing of the price paid by the final consumer that is caused by the payment made by the manufacturer. From an economic perspective, the fact that less money is made on the sale of a good because the final price was reduced is the same as granting a discount or rebate. And that is how the CJEU treated the payments by the manufacturer. It seems that because the (mechanics of the) EU VAT rules allow for decrease of the taxable amount for the original supply of the good in case of rebates or discounts after the supply has taken place, this decrease was also granted to the manufacturers in the two cases I discussed above. However, in my view, there is a better way of solving this VAT puzzle. The focus should have not been on the decrease of the price of the product, but on the actual payment made by the manufacturer. I will elaborate on this below, but before I do, I will further elaborate on why in my view, the path chosen by the CJEU to find the correct way out of this VAT maze is not the best route.