On 6 October 2021, the Court of Justice of the European Union (CJEU) delivered its judgment in the Boehringer case involving Hungary. The judgment highlights that, despite continuous changes, the Hungarian VAT Act still regulates the VAT treatment of discounts and allowances granted by the seller in a manner contrary to community law.
In view of the judgment, pharmaceutical companies might be entitled to a VAT refund under Section 197 of the Act on the Rules of Taxation up to the amount of VAT charged on payments made to the state health insurance fund for social security subsidized medicines. Self-revisions may be submitted for tax returns that have not yet expired within 180 days of the publication of the above judgment. In addition to the VAT refund, the tax authority is obliged to pay interest on the refundable tax at a rate equal to two percentage points of the central bank base rate from the due date of the payment obligation specified in the self-revised returns or, if it is later, from the date of payment of the tax until the submission of the self-revision.
- Boehringer's VAT reclaim
- Anomaly of the Hungarian regulation
- The Boehringer judgement may introduce a new system for dealing with discounts
Boehringer's VAT reclaim
The basis of the new Hungarian case is the self-revision of the Hungarian branch of the pharmaceutical company Boehringer. Boehringer submitted a self-revision and reclaimed a significant amount of VAT because, in its view, it actually received less money for the social security subsidized medicines it sold on the Hungarian market than the state health insurance fund paid for the medicines. This is due to pharmaceutical companies' obligation to pay for their sales of social security subsidized medicines. According to Boehringer, that obligation to pay is in fact a discount, since it actually reduces the purchase price received and it should not have had to pay VAT on the discount.
The basic principle of the VAT system is that VAT must always be paid on the actual purchase price. If a company gives a discount on the price of a product or service, the amount of VAT is also reduced.
Anomaly of the Hungarian regulation
This seemingly simple problem — VAT to be paid on the purchase price actually received — has not been adequately handled by the Hungarian VAT Act for decades, as shown by the series of CJEU cases condemning Hungary. Without wishing to be exhaustive, the Almos Agrarian Foreign Trade Judgments of 15 May 2014, the Lombard Leasing Judgments of 12 October 2017 and the Porr Order of 24 October 2019, which also made waves, declared that the rules of the VAT Act on discounts are in conflict with EU law.
In each case, the question was whether the Hungarian VAT Act only allowed for a reduction in the VAT payable if strict conditions were met, if the Hungarian VAT rules were complied with, and if the seller gave a discount on the price of the product, service or otherwise actually received less money from the buyer, for example, because the buyer went bankrupt. This is because there may be a case where, although the buyer receives a discount afterwards and pays less, the strict rules of the VAT Act still prevent the seller from having to pay less VAT.
The Boehringer judgement may introduce a new system for dealing with discounts
The CJEU had to deal with the Boehringer case because the obligation to pay into the state health insurance fund could not be classified in any of the discount categories listed in the VAT Act and thus Boehringer was not able to reduce the VAT base payable by the discount. However, the payment obligation is a discount because it reduces the purchase price actually obtained.
The CJEU has made it clear that no conditions can be attached to the refund of VAT in the case of subsequent discounts. The Hungarian VAT Act cannot stipulate that only certain discounts belonging to specified categories reduce the amount of VAT payable. In each case, only the amount the seller actually received can be taken into consideration.
In light of the above statement of the CJEU, the part of the VAT Act concerning discounts should be completely rewritten. This has been necessary for a long time. The need for amendment is clearly illustrated by the fact that the VAT Act regulates in long paragraphs — essentially through several pages — Article 90 of the directive on which the VAT law is based, which could be worded in a single sentence: "In the case of cancellation, refusal or total or partial nonpayment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.".