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.
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.
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.
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.
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