C-427/98

OPINION OF MR JACOBS — CASE C-427/98

OPINION OF ADVOCATE GENERAL JACOBS delivered on 20 September 2001 1

1. This case concerns the way in which the Legal background basis of assessment for value added tax ('VAT') is to be determined where, as part of a promotional scheme, the original supplier of an item compensates a sub- sequent retailer for a price reduction granted by that retailer to his customer in exchange for a coupon or voucher issued by The VAT system in general the original supplier, but where one or more other traders are present in the chain between supplier and retailer and where the prices paid by and to those other interven- 3. The principle on which VAT operates is ing traders are unaffected by the reimburse- set out as follows in Article 2 of the First ment. VAT Directive: 4

The relevant provisions of the Sixth Direc- tive

4. The deduction system is designed to avoid a cumulative effect where VAT has also been levied on goods and/or services used in order to produce those supplied — 6. Under Article 11(A)(1)(a) of the Sixth that is to say, to avoid VAT being levied Directive, subject to certain detailed excep- anew on VAT already charged. By its tions which do not affect the issue in the operation, a chain of transactions builds present case, the taxable amount for trans- up, in which the net amount payable in actions within the territory of a country is respect of each link is a specified propor- to be tion of the value added at that stage. When the chain comes to an end, the total amount levied will have been the relevant propor- tion of the final price.

'everything which constitutes the consider- ation which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies'.

5. That approach also ensures the 'neutral- ity' of VAT as regards taxable persons — suppliers in the chain of transactions. They must account for tax in that they must charge VAT to the recipients of their 7. Article 11(A)(3)(b) specifies that the supplies but by the operation of the system taxable amount is not to include 'price discounts and rebates allowed to the cus-

5 — In discussions of the relationship between two transactions of which one is a cost component of the other, the former is 6 — With the apparently paradoxical exception of exempt commonly referred to as an 'input' and the latter as an transactions, which may m certain circumstances require a 'output', the VAT on each being referred to respectively as supplier to hear some non-deductible VAT burden. How- 'input tax' and 'output tax'. ever, exempt transactions are not in issue in the present case.

'In so far as the goods and services are used 11. Finally, under Article 21: for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

'The following shall be liable to pay value added tax:

(a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person; 1. under the internal system:

...'

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system, in particular its neutrality as person must be the amount corresponding regards taxable persons and the fact that to the price at which he sold the goods to the tax burden is borne by the final the wholesalers or retailers, less the value of consumer, with the result that the taxable [the] coupons. amount serving as a basis for the VAT to be collected cannot exceed the consideration actually paid by that consumer. 9

15. Bearing those principles in mind, and That interpretation is borne out by interpreting the concept of 'consideration' Article 11(C)(1) of the Sixth Directive in Article 11(A)(1)(a) of the Sixth Directive which, in order to ensure the neutrality of in accordance with its previous case-law 10 the taxable person's position, provides that, to the effect that such consideration is the in the case of cancellation, refusal or total value actually received in each specific case, or partial non-payment, or where the price the Court held that, in the circumstances of is reduced after the supply takes place, the either of the types of scheme in issue: taxable amount is to be reduced accord- ingly under conditions to be determined by the Member States.' 11

'It would not... be in conformity with the directive for the taxable amount used to calculate the VAT chargeable to the manu- facturer, as a taxable person, to exceed the sum finally received by him. Were that the case, the principle of neutrality of VAT vis-à-vis taxable persons, of whom the 16. The Court considered that the absence manufacturer is one, would not be com- of a direct contractual link between the plied with. manufacturer and the final consumer did not affect that finding, 12 and rejected objections put forward by the United Kingdom, German and Greek Govern- ments to the effect that the required adjust- ments to the taxable amounts of intermedi- ate traders would render the system Consequently, the taxable amount attribu- unworkable, pointing out that there was table to the manufacturer as a taxable in fact no need for those amounts to be adjusted. 13

17. In 1992, the Commission asked all the Member States whether under their legis- lation a manufacturer who reimbursed a retailer for a reduction granted to a final consumer in exchange for a voucher was 19. The French and United Kingdom Gov- entitled to reduce his taxable amount ernments both announced their intention to accordingly. The German Government intervene in support of Germany in this replied to the effect that under Paragraph case, but the French Government sub- 17(1) of the UStG such a reduction was sequently withdrew. 15 The United King- possible only where the amount of the dom has submitted observations in inter- transaction between the manufacturer and vention. At the hearing, oral argument was his immediate customer was affected; presented by the German and United King- where the reimbursement was made to dom Governments and by the Commission. another person further removed in the chain of supply the manufacturer's taxable amount could not be reduced.

Analysis

18. The Commission considered that situ- ation to be incompatible with the Sixth Directive and set in motion the procedure provided for in Article 169 of the EC Treaty (now Article 226 EC) but, after an The scope of the dispute exchange of correspondence, agreed to suspend that procedure pending delivery of the judgment in Elida Gibbs. When, following that judgment, the German Gov- 20. First, it is common ground that the ernment still did not amend its legislation German provisions in issue do indeed have but maintained its previous position, H the the effect which the Commission ascribes Commission issued a reasoned opinion on to them. The question to be decided is 23 March 1998 and brought the present whether that effect is compatible with the action on 26 November 1998, seeking a Sixth Directive. declaration that, by failing to adopt provi-

23. However, the situation of which the 25. Thus, despite the circumscribed nature Commission complains is Germany's fail- of the order formally sought, it is in my ure to provide for adjustment of the view acceptable, for the purposes of analy- original supplier's taxable amount when sis, to consider the situation of 'cash-back' he redeems a voucher by making a cash vouchers alongside that of 'money-off' payment to a retailer who accepted the vouchers. voucher in part-payment of goods sold to a final consumer, when the original supplier did not supply those goods directly to the retailer. There is no material difference — as regards the adjustment of the original supplier's taxable amount — between that situation and one in which the cash pay- ment is made directly to the consumer. 26. Third, the German and United King- What is at issue is the possibility of making dom Governments invite the Court to an adjustment to a supplier's taxable amount as a result of a payment (a price reduction or rebate) which 'leapfrogs' one 16 — That situation is currently under consideration by the Court in Case C-398/99 Yorkshire Cooperatives, in which or more links in the normal VAT chain. Advocate General Stix-Hackl delivered her Opinion today.

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28. This case may be addressed, therefore, as a reopening, before a Full Court, of the 31. We may assume that the transactions in issues in Elida Gibbs. question are successive sales of the same item, with an increase in price at each stage, although the essentials would in 17 — Although it appears that the United Kingdom has in fact principle remain the same for other types brought its legislation into line with the judgment and that Germany is now the only Member State not yet to have of chain. In fact, the nature of 'leapfrog- complied with it. ging' voucher schemes is such that they

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36. The first is where A issues a 'money- off' voucher (it will be simplest to postulate the face value of the voucher as being 11) to 34. In that chain the traders A, B and C D and at the same time promises that he have in fact not borne the burden of any will reimburse that face value of that voucher to C if C accepts it from D in part-payment of A's goods. In this variant, 18 — Less input tax on any items used for the purposes of his the net amounts paid and received by B are supply, but it will be simpler to assume for present purposes that there are none. not affected.

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42. In addition, where the final consumer has obtained a reduction or partial reim- bursement of the price paid, the total amount of VAT levied may not exceed the 39. As I have pointed out above, there is no proportion of the price actually paid (that essential difference between those two vari- is to say, after deduction of the reduction or ants for present purposes. The specific issue reimbursement) which represents VAT at in this case concerns the transaction the applicable rate. Thus, where a con- between A and B, and whether A's taxable sumer buys an item at a tax-inclusive price amount (and consequently the amount of of 330 (300 net) 19 against which he his output tax) may be reduced without receives a reduction or reimbursement of affecting the amount of input tax which B 11, making a definitive tax-inclusive total may deduct. of 319 (290 net), the total amount of VAT levied must be 29 (10% of 290). It is thus contrary to the Sixth Directive to levy a total of 30 in those circumstances.

The competing approaches

43. In contrast to the Commission, the German and United Kingdom Govern- 40. The Commission essentially takes a global view of the situation when assessing 19 — I am adjusting the figures used by the Commission to fit the effect of Elida Gibbs. my basic example given above.

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ments take a step-by-step approach to each in Kuwait Petroleum, 20 to extract 'a com- transaction in the chain of supply, arguing pletely coherent set of rules which it is that neutrality, certainty and effective con- possible to apply with total confidence to trol are ensured only when each trader in every promotion scheme devised by the the chain deducts from his output tax ingenuity of commerce'. exactly the amount of VAT which was passed on to him in the form of input tax; any adjustment made must thus concern both sides of a transaction. Where a sum of money changes hands outside a transaction in the chain, it can have no effect on the amount of tax accounted for in respect of that transaction. The competing principles

COMMISSION v GERMANY

Germany and the United Kingdom), it 51. This case concerns the taxable amount implies that the amount deducted in respect in respect of A's sale to B. That amount is, of each transaction must correspond under Article 11(A)(1)(a) of the Sixth exactly to the amount charged on the Directive, the consideration obtained by previous transaction. the supplier. As was stressed in Elida Gibbs, 21 that consideration is the value actually received in each specific case. The Court was not innovating when it made that statement, but recalling consistent case-law going back to 1981, and the rule has again been reaffirmed since. 22 In the present case, it is clear that, thus defined, 48. In the normal course of events (the the consideration obtained by A, once the basic chain I have described above) those promotional payment has been made, is two implications both hold true and are less than the amount initially paid to him totally compatible. by B.

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overall value of the chain of supply is less his output VAT by 1, but has no effect on than the unreduced value of the supply by the taxable amount or amount of tax in the C to D. second and third transactions — or, indeed, on the amount of input tax deduct- ible by B in respect of the first transaction; the total VAT levied is thus 9 + 1 0 + 10.

53. Bearing the above considerations in mind, I turn to the detailed objections put forward by the German and United King- dom Governments.

56. In the 'cash-back' variant, A pays D the sum of 11 in respect of D's purchase from C at a tax-inclusive price of 330. Again, in Germany's view, that has no effect on any Discrepancies in accounting and control of the three transactions. In the Commis- sion's view, the only effect is again to reduce A's taxable amount by 10 and his output tax by 1; there is no change to the amount of input tax deductible by either B 54. It may be helpful to return at this point or C. to the simplified model chains set out above, to examine exactly what happens if Germany's approach is followed and what happens if the Commission's approach is followed.

55. In the 'money-off' variant, D pays C 57. The reason the result is the same under the sum of 319 in cash, together with a each approach in both variants is that the voucher for 11, and A pays C the sum of 11 'leapfrogging' payment is simply moved in exchange for the voucher. In Germany's one stage nearer to or further away from view, that has no effect on any of the VAT the first transaction, but there is always at (10 + 10 + 10) levied at the three stages in least one trader in the chain who neither the chain, since it is separate from any of receives nor makes the payment. It seems to those three transactions. In the Commis- be common ground that without such sion's view, the payment reduces A's tax- 'leapfrogging' — if A sold directly to C able amount by 10 and thus the amount of who sold to D, and D paid in part with a

61. Three detailed arguments, however, 59. On the other hand, the Elida Gibbs must be dealt with under this heading. approach leads to a situation in which A, having originally charged VAT of 10 to B (which B has deducted, when accounting to the tax authorities, from the output tax he charged on his sale to C), is then allowed to reduce that amount to 9 retroactively without affecting B's entitlement to deduct 10. Germany and the United Kingdom consider that to be an unacceptable dis- crepancy, entailing a gap in the way in 62. First, the German Government argues which the tax is accounted for and col- that since, under Article 21(1)(c) of the lected. Sixth Directive, any person who mentions VAT on an invoice is liable to pay that tax, no adjustment can be made to a supplier's 23 — That is to say, in the situation under consideration in taxable amount without rectifying the Yorkshire Cooperatives; see note 16. invoice.

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63. However, I do not consider that that the provision does not preclude sub- Article 21(l)(c) should be read as requiring sequent rectification of the amount payable such a result. That provision is concerned by A on the basis of the invoice, provided with ensuring that when tax is invoiced tax that there is no risk of any loss in tax is accounted for, not with calculating the revenue. amount of that tax. The central aim is to ensure that amounts deducted as input tax on the basis of invoices balance back along the chain of supply with the amounts paid as output tax. That aim is not thwarted by an adjustment which, although not passed on to all the other transactions in the chain, 65. I shall deal more fully with the issue of has no effect on such overall balance. loss of tax revenue below 26 but I do not consider there is any risk of such loss in the hypotheses I have outlined above.

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is concerned. Either (in the 'money-off' 70. Third, the German Government points situation) D pays 319 to C together with a out that the reduction of taxable amount voucher for 11 which A then redeems to C, provided for in Article 11(C)(1) is subject or else (in the 'cash-back' situation) he pays to 'conditions which shall be determined by the full price of 330 and later receives 11 the Member States'. Does that entitle a from A. In the first case, A is a third party Member State to impose the condition that to the transaction between C and D, paying there can be no adjustment unless A's part of the consideration, in the second he invoice is rectified, and that in that case is entirely extraneous to the transaction. In B's input tax must be reduced? both cases, the correct amount of VAT to be levied in respect of the retail sale is 30 (10% of the final net sales price received by C) minus C's input tax of 20.

71. In Molenheide, 27 the Court held that

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principles of the common system of VAT adjustment to be made. I consider, how- and in particular the rules governing deduc- ever, that the type of condition envisaged tions which constitute an essential com- relates rather to ensuring that no reduction ponent of that system.' is granted unless it is justified, and might include, for example, requirements relating to proper documentary evidence of pay- ments made.

72. Those statements refer specifically to the right to deduct VAT, but I consider that the right to deduct is simply one aspect of the overarching right not to be required to pay more tax than should be levied having regard to the value of one's transactions. The right to have one's output tax estab- Loss of tax revenue lished on the correct basis (following retro- active adjustment where the basis has changed) is another aspect, at least equally important, and the same principles must apply. 75. Both Germany and the United King- dom claim that the Commission's approach entails a loss of tax revenue.

73. In the light of my view on the correct approach to the chain of transactions in schemes of the kinds in issue, I consider that a requirement that the retroactive adjustment be passed along the whole chain in order to qualify for a reduction does go 76. It must be borne in mind here that tax further than is necessary to attain the revenue is not lost merely because it is objective of protecting the rights of the lacking. Tax revenue is lost only where it tax authorities. It cannot therefore be should have been collected but was not. justified on the basis of the Member States' powers under Article 11(C)(1) of the Sixth Directive.

80. Under Article 15 of the Sixth Directive, a number of supplies made outside the 83. If, in the normal intra-Community Community are exempt from VAT. Under situation, A may be allowed to adjust his Article 17(3)(b), all input tax in respect of output tax downwards on making a pro-

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motional payment to or on behalf of D, Sixth Directive are appropriate and suffi- that is because the price paid by D is cient to prevent any unjustified claims or inclusive of VAT, so that any reduction in it loss of tax revenue. may also be deemed to include a propor- tion of VAT. Where on the other hand an item is exported from the Community free of VAT in accordance with Articles 15 and 17(3)(b) of the Sixth Directive, no Com- munity VAT is included in any price charged at that or any subsequent stage in the chain. Thus any payment made by A to 86. The German Government also claims a subsequent recipient outside the Commu- that the same problem would arise in the nity cannot be deemed to include any case of exempt transactions within the amount of VAT which could give rise to a Community — if, say, the supply by C to reduction in A's output tax. D were an exempt transaction, whereas the supply by A to B had been a taxable transaction.

89. The second type of situation to which the German Government refers is where D, who benefits from the price reduction offered by A, is not a true final consumer but a taxable person who uses the item acquired for the purpose of his own taxable outputs. In the scenario to which it objects, D acquires an item at a price of 330, 92. However, again it does not seem to me including tax, uses the item for the purpose to be unduly difficult to counteract the kind of his own outputs, and thus deducts input of loss of tax revenue envisaged. First of all, tax of 30 from his output tax. However, if I disagree with the German Government's he receives a promotional payment of 11 view that D is entitled to deduct the full from A and A is allowed to reduce his own input tax of 30 invoiced to him by C from output tax by 1 on that account, D will his own output tax. Once it is accepted that have been allowed to deduct an amount of A may reduce his output tax by 1, it must VAT which is neither due nor paid. also be accepted that D's input tax is deemed to be reduced by 1 when he receives A's promotional payment of 11. If D is a taxable person, he must keep proper accounts of his inputs and outputs, and failure to record such promotional payments will amount to a fraud.

90. Again, the scenario set out involves a true loss of tax revenue.

93. The German Government may fear that 91. Again, the Commission objects that such frauds will be difficult to detect, and such scenarios are extremely uncommon the requirement to account for promotional in practice and it may be right — up to a payments difficult to enforce. However, point. If D uses A's goods to more than a that will normally only be the case in fairly marginal extent for his own taxable exceptional circumstances. Taxable per- outputs, he is less likely to source them sons generally do not obtain their supplies through intermediaries — he will presum- item by item at retail outlets — a practice ably seek to obtain them at the lowest cost which is likely to increase their costs,

94. In addition, the German Government puts forward a further way in which, it claims, tax revenue is lost. In the case of Distortion of competition 'money-off' vouchers, it argues, the fact that the net value of the voucher cannot be included in C's taxable amount, as con- firmed by the Court in Boots and Argos, 29

29 — Case 126/88, cited above in note 10, and Case C-288/94 96. Finally, the German Government Argos Distributors [1996] ECR I-5311. alleges that the Elida Gibbs approach

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distorts competition in two types of case in a voucher scheme, he will be more likely to that the tax treatment of voucher schemes make that choice, thus distorting compe- (which use only A's own financial tition to the detriment of advertising resources) is more favourable than that of agencies. other promotional schemes from which other operators may benefit.

97. I am not convinced that any tax incentive to operators to use their own 99. The Commission points out that, with resources rather than to deal with others regard to the choice between a voucher would necessarily be a distortion of com- scheme and advertising, the German Gov- petition, but it might admittedly entail less ernment bases its argument on figures trade rather than more. In any event, it which confuse tax-inclusive and tax-exclus- seems to me either that no such incentive ive prices. exists or that its effect is likely to be negligible; where it exists, it appears justi- fied by the provisions of the Sixth Direc- tive.

101. The tax authorities will indeed receive fuel purchased. Once a certain number of slightly less overall if he chooses to use a stamps had been collected, they could be voucher scheme but, unless A's resentment exchanged for 'free gifts' from a special is so great that he systematically chooses catalogue. The Court held that the fact that the solution least advantageous to them no charge was made for the 'gifts' could not whilst maintaining his own position, there be regarded as constituting a rebate or price is no VAT reason for him to eschew the d i s c o u n t w i t h i n the meaning of services of advertising agencies. His Article 11(A)(3)(b) of the Sixth Directive, decision is far more likely to be taken on and that the supply of those 'gifts', unless the basis of the expected effects on sales. they were of small value, must be treated as a supply made for consideration and thus a taxable transaction. 31

— Comparison with free gift schemes

104. Thus, such a supplier is required to account for VAT on the value of the supply of the 'gifts', but is also entitled to deduct the input tax incurred on their acquisition. The result would appear to be neutral from the VAT point of view; since no value is added the two amounts will cancel out 102. The German Government argues that completely. allowing A to reduce his output tax as a result of promotional payments of the kinds in issue would give rise to a diver- gence of treatment between such voucher schemes and the type of 'free gift' scheme considered by the Court in Kuwait Petro- leum. 30

gift' scheme, he purchases the 'gifts' at a net different provisions, which explains the price of 10, on which he will be charged 1 difference in treatment. As the Commission in VAT. He then supplies them to D in a pointed out at the hearing, one scheme transaction which is deemed to be for involves supplying more goods at the same consideration. Since no value has been price, the other involves supplying the same added, the deemed consideration will still goods at a lesser price. be 10 and the output VAT 1. After deduction of the input tax, the net effect on A's VAT will be 0. If he decides on a 'cash-back' or 'money-off' scheme, he offers D a discount or refund of 11, made up of a net price reduction of 10 and a corresponding VAT reduction of 1. The net effect on his VAT, in accordance with Elida 107. Furthermore, I consider that the Ger- Gibbs, will be a reduction of his output tax man Government has not established that by 1. such difference in treatment will lead to any distortion of competition. It is true that if A were led by fiscal considerations to favour 'money-off' or 'cash-back' rather than 'free gift' schemes, suppliers of items used as 'free gifts' would do less business. How- ever, A will presumably choose between different types of promotional scheme in the light of their net cost to him and their effect on sales; he will choose the scheme which encourages D to buy most at the least cost to him (A). There is no reason to suppose that D will always find a scheme offering a tax-inclusive reduction or refund of 11 more attractive than one offering a 'free gift' whose tax-inclusive value is 11. 106. There is indeed a difference in fiscal treatment here, but as the Commission points out that difference in treatment is inherent in the provisions of the Sixth Directive. It is clear from 11(A)(3)(b) and (C)(1) that discounts and rebates are not to be included in the taxable amount, whether allowed at the time of supply or sub- sequently. It is also clear from those Final considerations provisions and from Article 5(6), as inter- preted by the Court in Kuwait Petroleum, that the supply of goods (such as 'free gifts') free of charge for business purposes is a supply for consideration, the taxable amount being their cost price, and there is no discount or rebate in such circum- 108. The arguments in this case are not stances. The two types of scheme fall under unevenly balanced. The Commission has

112. In those circumstances, it seems to me that the interpretation adopted by the Court in Elida Gibbs should not be over- turned without some overriding justifi- cation. The concerns put forward by Ger- many and the United Kingdom, while real, are not such as to convince me that the present situation is irreconcilable with the 110. First and foremost, I take the view fundamental principles of the VAT system that, in the event of an otherwise irreconcil- or gives rise to insoluble problems in able difference, the requirement that the preventing any unjustified loss of tax amount of VAT levied should be the revenue. That being so, I consider that it correct proportion of the actual value would in any event be wholly dispropor- finally received by the supplier (and, for tionate to require — as would be the case the chain as a whole, of the final price) if Elida Gibbs were overturned — all the should be given greater weight than struc- remaining Member States to amend anew tural requirements. In other words, achiev- their VAT legislation, which appears to be ement of the end is more important than operating satisfactorily.

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Conclusion

113. I am accordingly of the opinion that the Court should

(1) declare that, by failing to adopt provisions enabling a supplier's basis of assessment to be adjusted when he redeems vouchers accepted in part payment of his goods by a subsequent trader, even when he did not supply the goods directly to that trader, the Federal Republic of Germany has failed to fulfil its obligations under Article 11 of the Sixth VAT Directive;