5.4.5.2 Because of the ‘leapfrog’, the payments may be considered discounts or rebates as well as third-party payments

In my view, part of the difficulty of the Elida Gibbs ruling is that the CJEU applies the same solution (treating a payment as a discount that lowers the taxable amount) to two different scenarios. In the money off scenario, a payment is made by the business bearing the cost of the ‘discount’ to the last supplier of a good in the chain (that makes the supply directly to the customer) ‘on behalf of the customer’. This payment is treated as a third-party payment by that last supplier. In the cash-back scenario, a (or: the same) payment is made by the business bearing the cost of the ‘discount’, but now it is made to the last customer of that good, invisible to the last supplier, so that it can’t be a ‘real’ (third party) payment in the sense that it is included in the actual payment made by the customer to the supplier for the supply. It’s a ‘third party’ payment because the business making the payment (to the customer) is not the recipient of the product.

Despite these differences, in both scenarios the payment is treated as a discount for VAT purposes. This can lead to a number of ‘problems’, as I will explain below.

Things get even more muddled up in the Boehringer Ingelheim case.1 This case is comparable to the Elida Gibbs case in the sense that goods are sold through a distribution chain where they remain unaltered, and where the first manufacturer in the production and distribution chain, the pharmaceutical company Boehringer Ingelheim, pays a ‘discount’ to the last entity in the chain that pays for (or funds) these goods (in that case, a private health insurance fund). The biggest difference with the Elida Gibbs case, however, is that the last entity in the chain paying for the goods, the private health insurance fund, never obtains ownership or legal title to these goods and cannot be considered a beneficiary of the supplied products. The only reason the insurance fund is included in this chain is because it has a legal obligation to refund the insured party the purchase price of the products. Under this scheme, it makes sense for Boehringer Ingelheim to pay the discount to the insurance fund, as it bears the ultimate cost of the (last) supply. This can be shown in a diagram as follows:

In the Boehringer Ingelheim case, the ‘leapfrog’ even jumps over the final consumer. In my view, the Boehringer Ingelheim case resembles a discount granted to a final customer through a third party (the insurance fund). This is different from the Ibero Tours case, because in that case the third party actually funded the discount without ‘passing it on’ to the ‘principal supplier’, which is what effectively happens in this case. However, in my view the insurance fund does not pay ‘in return for the supply of the product’ but as compensation to the insured under an insurance agreement, and the privately insured person has paid insurance premiums for being entitled to that compensation. Therefore, in my view, the payment made by the insurance fund is not made as consideration for the supply of the goods, and the insurance fund is not ‘at the end of the distribution chain’, as the CJEU suggests. In my view, it is not part of the distribution chain. However, under the economic and commercial reality of the scheme, the mechanics of this case could be described as a cash back system paid via a third party. Different from the Ibero Tours case, the insurance company, although lowering the price of the last supply to the final consumer, does not bear this cost but ‘passes it on’ to the manufacturer (Boehringer Ingelheim). Also, Boehringer Ingelheim does not have to pay the ‘discount’ if the insured person does not claim reimbursement from the insurance fund.2 To me, this indicates that these refunds by Boehringer Ingelheim are connected with ‘the amount paid by the final consumer’, because Boehringer Ingelheim only has to pay the insurance fund if the final consumer ‘claims his cashback’ (by claiming compensation from the insurance fund). Economically, the result of this case and the Elida Gibbs case are the same, and therefore, the rules as laid down by the CJEU in Elida Gibbs should also apply to the Boehringer Ingelheim case.3

Because the payments made by the (in my first example) manufacturer are made for a supply further down the distribution chain, under the economic and commercial reality of the scheme these payments can be considered ‘third-party payments’ that are part of the taxable amount for the supply made by the supplier (in my examples: the retailer) to the person benefiting the discount (in the ‘money off’ scheme) as well as a discount or rebate in the price payable by the person benefiting from the discount or rebate. As mentioned above, the ‘third-party payment’ is clear in the ‘money off’ schemes, where the ultimate supplier of the good (the retailer) is paid by the purchaser as well as the manufacturer. In the ‘cash back’ schemes, the manufacturer basically grants the rebate retrospectively, making the funding of part of the consideration invisible to the recipient of the consideration (i.e. the retailer).4 The ‘third party’ (manufacturer) does not actually/directly pay the supplier (the retailer).

Based on the above, the consideration received by the ultimate supplier (e.g. the retailer) for his supply to the final consumer should always be the undiscounted price, i.e. the price including the amount paid by the manufacturer. The supplier (the retailer) will either receive this full price from the final consumer, who will subsequently receive (part of) it back from the manufacturer under the cash-back schemes, or partly from the final consumer and partly from the manufacturer (often as reimbursement for redeeming a voucher that entitles the holder, i.e. the final consumer, to a discount) as third-party payment. This taxable amount is not affected by the discounts or rebates granted under either scheme.

A relevant characteristic of the discount payments in the ‘money off’ schemes (as well as in the ‘cash back’ schemes) is that, even though they are made to the (ultimate) suppliers (e.g. the retailers), they are aimed at discounting the (gross) price paid by the final consumer of the product. In the view of the final consumer, it does not matter whether the price for the product supplied to him by the ultimate supplier is reduced because of a payment made directly by the manufacturer to the ultimate supplier (i.e. a ‘money off’ transaction) or by a discount payment made directly to himself by the manufacturer (i.e. a ‘cash back’ transaction): he pays the discounted amount either way. To him, the payment represents a true ‘discount’ or ‘rebate’. This, to the final customer, is ‘economic reality’.

This can also be said for the business granting this ‘discount’ or ‘rebate’: even if the payment is a ‘third-party payment’ to the ultimate supplier, the aim of the payment is to reduce (discount) the price paid by the final consumer.5 The CJEU confirms this view by acknowledging that “although the manufacturer may in fact be regarded as a third party as regards the transaction between the retailer (…) and the final consumer, (…) [the] reimbursement entails a corresponding reduction in the amount finally received as consideration for the supply by him”.6 That’s why it is not surprising that the business granting the discount or rebate wishes to apply the provision in the EU VAT Directive that allows him to lower his taxable amount by the amount paid as a discount or rebate. And that’s why it is also not surprising that the CJEU agreed. But are they really discounts or rebates?

One scholar sees the ‘cash back’ payments by manufacturer to a retailer, in a distribution chain from a manufacturer to a wholesaler to a retailer and then to a customer, as a reduction of the price originally paid by the retailer.