Effect of discounts and price reductions on taxable amount

Many businesses offer various types of discounts/price reductions in order to entice volume sales, promote swift payment of invoices, give customers reassurance on the effectiveness of the supply chain etc. As a consequence of this, the final amount receivable by the supplier can become a variable dependent on factors such as pricing adjustments, volume-based rebates, various other discounts and fines/benefits based on performance of contractual terms (e.g., penalties for late delivery), just to name a few.

As these arrangements are not always straightforward and can involve various parties in the supply chain, it is important to consider the effect of these elements from a VAT perspective from the very outset.

Although there may not be an immediate effect on VAT, as the adjustments are not included on the initial invoice when issued, it is important to establish the VAT consequences of these adjustments and the documentation requirements to ensure that the resulting reduction in consideration will be considered a valid adjustment of the taxable amount for VAT purposes. This is especially so, given that the VAT consequences of the adjustments can be quite material at times, as evidenced by a recent domestic Irish case whereby the taxpayer was denied a VAT refund amounting to over €1 million by the Revenue Commissioners which related to rebates granted by the pharmaceutical giant to private health insurers. The entitlement to the refund was subsequently confirmed by the Tax Appeals Commission and later by the Irish High Court at the end of 2022, but it had taken many years to achieve the result with the funds tied up in the process.

Trend across the EU

The VAT provisions governing an adjustment of the taxable amount contained in Article 90(1) of Council Directive 2006/112/EEC (“Article 90”), which have also been transcribed in the Irish VAT law under Section 39(2) of the VAT Consolidation Act 2010. The provisions are quite broad and potentially allow for an adjustment to taxable amount where some or all of the consideration for the supply has not been received. This area is open to interpretation and often dispute.

In addition to the Irish case mentioned above, this is also be evidenced by a large number of the Court of Justice of the European Union (CJEU) cases relating to adjustments of taxable amounts. Recent cases are Boehringer Ingelheim in Germany (C-462/16) and Hungary (C-717/19) which considered rebate payments made to certain parties to ensure accessibility of medicines to the patients and a reduction in the taxable amount resulting from same. On the reverse side, the World Comm Trading case in Romania (C-684/18) dealt with receipt of discounts and the effect of same on the initial VAT recovery position of the purchasing party. Although the cases all have a common theme, it is evident that various tax authorities tend to heavily rely on the specific fact pattern of each particular case when contesting the VAT refund claims.

Main determinations of the case law

From the existing CJEU caselaw it is evident that the judgements do not interpret the entitlement to reduce the taxable amount under Article 90 restrictively. The basic entitlement provided under Article 90 to reduce the taxable amount when some or all of the consideration has not been received stands at the heart of all relevant judgments and has been interpreted by the CJEU judges in many different ways, with the most significant analysis summarised as follows:

• The fundamental principle of the VAT system is the intention to solely tax the final consumer, hence the VAT to be collected by the tax authorities cannot exceed the VAT actually paid by the final consumer.

• The taxable amount used as the basis for VAT calculation by the taxpayer should not exceed the sum finally received by them.

• The economic and commercial reality applicable in the particular circumstances must be considered – e.g., is the taxable person truly capable of benefiting from the entire amount of the price at will or is the taxable person solely a momentary custodian of this amount.

• The discounts (and other types of reductions) mandated by legislation should not be distinguished from the discounts awarded subject to optional private agreements or ex gratia.

• Article 90 does not restrict the manufacturer or supplier granting a discount to the party next along the supply chain and it is conceivable to award a discount to a party in circumstances where no direct contractual relationship exists under the relevant supply chain.

• Care must be taken where the discounts concern independent/distinct contractual relationship lateral to or the exterior of the relevant supply chain as the reduction of the taxable amount under Article 90 may not arise in these circumstances.

• In addition to the above, the reduction of taxable amount under Article 90 would not be available where the arrangements giving rise to the discount are such that the resulting discount may be viewed as consideration for a supply rendered by the party receiving the discount.

• It has been recognised that the party being awarded the discount may not always be the party benefiting from the supply. For example, in circumstances where the supply is paid by a party other than the beneficiary. Per se, it is more accurate that the party who pays for the supply is identified as the final consumer.

Conclusion

The existing caselaw has looked at and interpreted Article 90 extensively, providing further guidance that can be considered in future tax authority disputes when it comes to a reduction of the taxable amount where the consideration received is less than the amount on which VAT was initially charged. That being said, the emergence of more complex supply chains and contractual arrangements would suggest that it is now more important than ever to think carefully about the VAT implications of any price reductions awarded to parties along the supply chain. These should be discussed and an agreed position reached to ensure that it is clear for all parties involved in order to avoid potential disputes with tax authorities and, in worst case scenario, VAT becoming an unnecessary cost.

For more details on any items mentioned in the article or for assistance with Article 90 related queries, please contact Sandija McCann or any of the team below. Our team has extensive experience assisting with Article 90 related claims and the underlying contractual arrangements and will be happy to assist with any individual queries.