Rebates for chain supplies in the pharmaceutical industry - BFH ruling V R 4/21

Dutch pharmacy delivers to Germany

In 2013, a Dutch pharmacy supplied prescription medicines to customers in Germany having either statutory or private health insurance. The company paid an "expense allowance" to the customers for answering a questionnaire about their respective illnesses. For insured persons required to make co-payments to obtain prescription drugs, the pharmacy offset the expense allowance against the co-payment.  Insured persons who were exempt from co-payments could offset the expense allowance against a future purchase.

For supplies of medicines to customers with private health insurance, the pharmacy treated the transactions as a direct supply to these customers, taxable under the German distance sales regulations applicable at the time. For these supplies, it claimed the expense allowance as a reduction of the taxable basis, which the tax office accepted.

If the supplies were to persons with statutory health insurance, the pharmacy declared a VAT-exempt intra-Community supply of goods in the Netherlands to the health insurers, and the health insurers then declared an intra-Community acquisition in Germany. The fact that, for persons with statutory health insurance, the health insurer is considered the recipient of the pharmacy's supplies is in compliance with German case law. However, the pharmacy also claimed a reduction of the taxable basis when supplying goods to persons with statutory health insurance and deducted the VAT amount from the taxable supply of goods to privately insured patients in Germany.

The tax office did not accept this, and the case brought before the financial court was also unsuccessful.

ECJ preliminary ruling: Must all "supplies" be taxable? Is this a violation of neutrality?

The BFH had referred the case to the ECJ (European Court of Justice) for a preliminary ruling. The ECJ had already ruled several times that a reduction of the taxable basis can also be considered if a rebate is not granted to the direct recipient of the supply but rather to a subsequent person in a chain of supplies. The BFH now wanted to know whether this is, in principle, also possible if the supply of goods by the health insurer to the customer does not fall within the scope of VAT because the health insurer does not have a civil-law obligation, but rather a public-law obligation. In addition, the BFH asked for clarification as to whether it was contrary to the principles of neutrality and equal treatment in the internal market if, in scenarios such as this, domestic pharmacies could claim rebates, but foreign pharmacies could not. In this context, the plaintiff had submitted to the BFH a "solution approach based on the assumption of a taxable supply", in which a domestic supply of goods that does not actually exist is feigned in order to be able to reduce its taxable basis.

ECJ and subsequently the BFH:  a reduction is not possible

In its reasoning, the ECJ distances itself from the logic of the two questions referred for a preliminary ruling and focuses instead mainly on the fact that the supply’s taxable basis can only be reduced if the supply is actually taxable. However, the potential reduction referred to supplies taxable in the Netherlands and VAT-exempt as intra-Community supplies. It was not possible to allocate the expense allowances for persons with statutory health insurance to the supplies of goods to privately insured persons that are taxable in Germany and to claim them as a reduction there. The ECJ did not address the question of neutrality and equal treatment.

With regard to insured persons who were exempt from paying a co-payment and for whom the allowance could be offset in the case of a future purchase, the BFH, in its follow-up decision, additionally points out that even the term’s definition indicates that there is no reduction in fees. If during the first supply of goods, a rebate is promised for a later second supply, this could essentially be considered a reduction of the taxable basis for the second supply. However, this assumes that the rebate is granted "free of charge", which is not the case here.  Rather, the so-called “rebate” concealed the fact that the insured person had supplied something of value to the pharmacy, namely, the completed questionnaire. This was an economic benefit to the pharmacy. The BFH did not accept the pharmacy's argument that the questionnaire was actually only a pretence for providing the discount.

Practical implications also for manufacturer rebates

The case at hand, in which a pharmacy provides discounts to patients, is not typical of the pharmaceutical industry.  However, legally mandated manufacturer rebates to health insurers are of great importance, leading to considerable financial losses for pharmaceutical companies.  The manufacturers would be only too happy to mitigate these losses through VAT reductions. In this respect, the present ruling is transferable:  the discount, even if it is not granted to the immediate recipient of the service but rather to a subsequent recipient of the service, is only to be considered a reduction if the specific supply of goods by the manufacturer is a taxable supply.

(Dated: 16 March 2022)