A recently passed ruling of the European Court of Justice declaring the Hungarian VAT Act to be in conflict with Community law was made in relation to a Hungarian-related concession arrangement. According to the court's ruling, the approach of the Hungarian tax authority that does not provide certain pharmaceutical companies with the opportunity to reduce their VAT base subsequently in respect of the subsidy paid to health insurance funds is unfounded.
The target was on the VAT of sales volume based subsidy concession
In the case under review, a pharmaceutical company selling goods to wholesalers concluded a subsidy volume agreement with the National Health Insurance Fund of Hungary (NHIF). Based on the agreement, the company had to pay a specific part of its revenue to NHIF. The pharmaceuticals were ultimately purchased by consumers at the end of the supply chain in pharmacies with NHIF financing, i.e. a part of the purchase price was paid by the consumer, and the other part was reimbursed to the pharmacies by NHIF subsequently.
The Hungarian tax authority denied the right of VAT reclaim from the pharmaceutical company claiming that the arrangement applied did not comply fully with the concept of business policy money refund concession arrangements regulated in the Hungarian VAT Act.
The Hungarian court requested the ruling of the European Court of Justice in relation to the case from two aspects.
- On the one hand, guidance was requested as to whether the pharmaceutical company's right to reclaim VAT can be denied due to the fact that the payment did not take place as pre-defined in the business policy and for the purpose of promoting sales, i.e. as to whether the fact that the arrangement is not identical with the case of VAT base reduction specified in detail in the VAT Act justifies denial or not.
- On the other hand, the question was raised whether the right to reduce the VAT base can only be supported in the form prescribed in the legal regulation with an invoice, or whether it can be supported otherwise also.
ECJ made a clear stand on the VAT aspect
The ECJ ruling states that in such cases, NHIF, not being in a direct sales relationship with the pharmaceutical company, has to be regarded as the final consumer. As a result, in contrast to the former approach of the Hungarian tax authority, the refunded amount paid by the pharmaceutical company to NHIF cannot be considered part of the VAT base.
In addition, the court also declared that there may be cases when the obtaining of the material condition of eligibility for VAT base reduction prescribed by national law would represent a disproportionate difficulty for the party wishing to reduce its tax base. In this specific case, in the absence of an invoice issued by a third party, ECJ found that eligibility for the VAT reclaim can be proven in a suitable manner other than the one prescribed by the legal regulation.
The theoretical content of the ruling is independent of the parties to the arrangement (e.g. state vs. private fund) and also from whether the concession is granted on the basis of a statutory obligation or the agreement of the parties.
The ruling of ECJ in this VAT case can be summed up saying that the party supplying goods or services cannot be obliged to pay more VAT than what it ultimately collected from its buyers. In terms of the material conditions of eligibility for VAT reclaim, in special cases and on a limited basis, the strict burden of proof prescribed by the VAT Act may be relaxed.
The principle of tax neutrality, which was also upheld by ECJ in the cases relating to irrecoverable receivables, was once again confirmed as one of the pillars of the ruling.
Who is concerned by the VAT-reclaim opportunity?
This specific case concerns, above all, certain companies operating in the pharmaceutical sector.
- From the companies in contract with NHIF, this represents an opportunity for pharmaceutical trading companies that concluded subsidy volume agreements,
- In addition, it also concerns companies that are obliged to make other industry-specific payments based on statutory requirements or agreements.
The question arises that in the cases when, for example, the enterprise dealing with the final consumer is exempt for any reason (e.g. if prompt payment systems are used) from the obligation to issue invoices, how can the taxable person applying a money refund for purchase promotion purposes certify its right to reduce its VAT base.
How can the companies concern reclaim VAT?
As the ECJ ruling was made on a specific case, it does not represent a binding ruling for all similar cases. For this reason, satisfaction/non-satisfaction of the statutory conditions of VAT-reclaim should be clarified for each specific case and potential ways of enforcing claims should be considered with the help of a tax expert.
In the past, VAT refunds had to be requested from the Hungarian Tax Authority in a special application within 180 days from the date of publication of the ECJ ruling (in the official journal of the European Union).
However, an amendment of the VAT is also expected as a result of the ECJ ruling through which other opportunities for the enforcement of claims may open to taxpayers that are not exactly clear at the moment (self-revision, reduction of tax payable in the period of the money refund without self-revision, etc.).