EU court reexamines VAT treatment of rebates

By Daan Arends & Wouter Kolkman, DLA Piper Netherlands

On 28 May, the Court of Justice of the European Union, in the World Comm Trading case (Case C-684/18), addressed the VAT consequences of rebates for businesses receiving such rebates.

According to the CJEU, a rebate may trigger a VAT revision for the recipient, even if the supplier didn’t provide a proper (credit) invoice itemizing the supplies to which the rebate relates.

Furthermore, the revision must be made irrespective of whether the supplier has deregistered for VAT purposes and is no longer able to issue such a proper credit invoice.

World Comm Trading

The namesake of the case is World Comm Trading Gfz SRL, an electronics wholesaler located in Romania.

In 2014, World Comm Trading purchased from Nokia corporation telephone products from Finland, Germany, Hungary, and Romania. For the cross-border supplies, Nokia’s Finish, German, and, respectively, Hungarian VAT numbers were used to report the intra-Community transactions. The domestic supplies by Nokia were reported using its Romanian VAT number

Each quarter, Nokia granted World Comm Trading a rebate based on the volume threshold, which was calculated for all supplies made by Nokia to World Comm Trading (intra-Community and domestic supplies collectively). For the rebate, Nokia issued a single invoice “with a minus sign” using its Finnish VAT number. Even though part of the rebate was related to domestic supplies, World Comm Trading recorded the entire amount as being related to intra-Community transactions.

The Romanian tax authorities did not agree with World Comm Trading’s recording of the rebate as a single accounting item, asserting that World Comm Trading should have made a distinction between domestic and intra-Community supplies.

Consequently, World Comm Trading’s right to VAT deduction was challenged by the Romanian tax authorities for the rebates attributable to domestic supplies.

World Comm Trading argued that excessive formalism had been applied by the Romanian tax authorities.

In World Comm Trading’s view, the state budget had not been affected and World Comm Trading asserted that the application of the law in the manner adopted by the tax authorities would, however, irremediably affect its tax position, in terms of the principle of VAT neutrality.

Nokia had ceased its activity in Romania with the result that it was no longer possible for it to invoice separately the discounts for domestic supplies.

CJEU considerations

Referring to its earlier jurisprudence (Kreissparkasse Wiedenbrück, C-186/15), the CJEU reiterated that where an adjustment proves to be necessary because of the change in one of the factors used to determine the amount of VAT to be deducted, the amount of that adjustment must be calculated in such a way that the final amount to be deducted corresponds to that to which the taxable person would have been entitled if that change had been initially taken into account.

The foregoing boils down to a study of two comparables: what amount did a taxpayer initially deduct and what amount is the taxpayer entitled to deduct based on the change in factors.

Applied to the case at hand, the CJEU notes that World Comm Trading’s received rebate(s) which are attributable to domestic supplies and that, consequently, a reduction of the amount of initially deducted must be applied. The CJEU does not expand on this notion but simply refers to the circumstances presented by the referring court in the case.

The CJEU subsequently deliberates on the fact that World Comm Trading has but a single credit invoice covering both domestic supplies as well as intra-Community supplies. The CJEU notes that the absence of a valid credit invoice does not absolve World Comm Trading from making the abovementioned required adjustment. According to the CJEU, the adjustment is an integral part of the VAT deduction provisions, as laid down in the VAT Directive.

The CJEU goes on by stating that the foregoing adjustment of the VAT initially deduction by the recipient must be applied irrespective of whether the supplier makes any adjustments. The relevant provision in the VAT Directive derogates from the adjustment requirement only in a limited number of circumstances.

Furthermore, the CJEU reiterates that it held in earlier jurisprudence (FIRIN, C-107/13) that where a supplier has not itself adjusted its VAT payable, this fact does not affect the right of the tax authority to obtain repayment of the VAT deducted by the recipient based on the payment made on account corresponding to such a supply.

Key takeaways

Where price reductions occur, adjustments may need to be made for VAT purposes by both the supplier and/or recipient.

Common instruments to facility price reductions are rebates or discounts. The World Comm case focusses on the recipient and re-confirms the importance of properly documenting the rebate scheme and the issuance of credit invoices allowing the recipient to make the appropriate VAT adjustments.

Businesses receiving rebates or discounts should therefore always ask the supplier to issue credit invoices itemizing to which supplies the rebates or discounts must be attributed.

Even though the Nokia invoice (issued with Nokia’s Finnish VAT number) suggested the rebates were pertaining to intra-Community supplies only, World Comm Trading should have assessed whether an apportion needed to be made between its received intra-Community supplies and domestic supplies.