ECJ sets precedent for VAT calculation rebates in the pharmaceutical industry
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

ECJ sets precedent for VAT calculation rebates in the pharmaceutical industry

pills large

In the EU case involving global pharmaceutical company Boehringer Ingelheim, the European Court of Justice (ECJ) has set precedent on the long-debated matter of how rebates should be treated for VAT purposes when they are provided to parties not operating in the same distribution chain. Jan Sanders, who has been professionally analysing the matter for several years, discusses the impact of the ruling, which is significant for drug makers, health insurers and governments throughout the whole EU.

The ECJ ruling in case (C- 462/16) on Thursday 20 December 2017 is a victory for pharmaceutical companies, who will now be allowed to calculate VAT when providing rebates to private health insurers in the same way as when they do public health insurers. The German tax authorities did not allow pharmaceutical companies to do so, which created a huge financial burden for the sector.

German system

In Germany, pharmacies issue pharmaceutical products to persons with public health insurance pursuant to a framework agreement concluded with the national association of public health insurance funds. The pharmaceutical products are supplied to the public health insurance funds, which make them available to the persons insured. The pharmacies grant discounts to public health insurance funds  on the price of the medicinal products. Pharmaceutical companies must then reimburse pharmacies and wholesalers for this discount. For the purposes of VAT, the German tax authorities treat the discount as a reduction in remuneration.

Unlike public health insurance funds, private health insurance funds are not themselves seen as the customer for the medicinal products, but merely reimburse the persons they insure for the costs incurred when they purchase pharmaceutical products. Pharmaceutical companies are then bound, under national legislation, to grant private health insurance funds a discount on the price of medicinal products. So far, the German tax authorities have refused to treat the discount as a reduction in remuneration for the purposes of VAT. But following the ECJ ruling the German approach will no longer be allowed.

EU-wide impact

The relevance of the case is not limited to Germany. In fact, over the past years all EU member states have been struggling with this matter. As rising drug prices put an ever-increasing pressure on health budgets, governments and health insurers have introduced a variety of price control measures. Many of these measures involve significant discount structures which go beyond the traditional distribution chains that the EU legislator had in mind when designing the VAT system.

In the proceedings the UK had backed up the German tax authorities, arguing that ECJ case law supports the argument that if discounts are to be taken into consideration when calculating VAT, the final consumer must be part of the transactional chain. Like the German tax authorities, the UK was of the view that because individuals are reimbursed for discounts on sales to private health insurers, they cannot be considered the final consumers.

Opinion AG

In July this year Advocate-General Evgeni Tanchev, published his non-binding Opinion, in which he argued against Germany’s application of the VAT rules. According to the Tanchev, the reimbursements under the private health system should in principle not be treated differently to the national system for VAT purposes. This, he said, would avoid a situation in which the tax authorities charge an amount that exceeds the VAT paid by the pharmaceutical companies.

The ECJ has now followed the AG by taking an economic, rather than a technical, approach. It ruled that the fact that a private insurance fund is not the direct beneficiary of the pharmaceutical products supplied by the pharmaceutical company does not break the direct link between the supply of those goods and the consideration received.

This article was written for International Tax Review by Jan Sanders, an international VAT specialist who works as an indirect tax manager at RELX. 

more across site & bottom lb ros

More from across our site

Despite the relief, Brazil’s government has also presented a bill which seeks to re-impose a tax burden on companies’ payroll, one local tax specialist told ITR
Jeremy Brown arrives at the firm after a near 16-year career with Deloitte
PwC could elect a woman into the senior leadership position for the first time; in other news, KPMG Australia has extended its CEO’s term
The Senate report into PwC’s scandal is titled ‘The cover up worsens the crime’
Law firms that are conscious of their role in society are more likely to win work, according to a survey of over 23,000 in-house professionals
The firm’s tax business generated a quarter of HLB’s overall revenues in 2023
While successful pillar two implementation will require collaboration across all units, a combination of internal and external tax advice is at the centre of the effort
Binance has also been accused of manipulating foreign exchange rates via currency speculation and rate-fixing
Six individuals should have raised questions over information they received but did not breach professional standards, according to the firm
The partnership of KPMG UK has installed Holt for a second term as CEO and senior partner; in other news, a Baker McKenzie partner has sued the IRS
Gift this article