Price reductions in the supply chain

• Germany

• Tax planning and consultancy

19-06-2015

Following the recent decisions of the Federal Fiscal Court (Bundesfinanzhof) a purchaser of goods and other products in Germany may receive a VAT benefit if they receive subsequent volume price discount direct from a supplier of the goods based outside Germany. The case applies to a supply chain that consists of at least three companies and that the German purchaser itself purchases the goods from a German intermediary. The case provides that the subsequent price discount granted by the foreign supplier does then not lead to a reduction of the German purchaser's VAT input tax relief claim, giving the purchaser a VAT benefit. Current supply arrangements should therefore be reviewed to determine if they are or can be restructured to benefit from this change in the interpretation of the law. Although the decision applies to German buyers only, the case has potentially wider implications to purchasers based in other EC jurisdictions. If discounts are substantial approaching tax authorities in other jurisdictions to determine the approach of the relevant tax authority may be worthwhile.

There are many cases in a supply chain in which a manufacturer directly grants a purchaser a price reduction without involving any intermediate distributors/wholesalers. Until now, the tax authority has treated such cases as follows: the VAT payable on the price reduction led to a reduction of the purchaser’s input tax relief and the manufacturer could in turn reduce the VAT payable on his supply. In this way, the parties who were directly concerned from an economical point of view were relieved (manufacturer) and charged (purchaser), respectively. According to the new decision this no longer applies if the manufacturer supplies from another EU country. In such case, the purchaser will benefit from additional income as a result of the discount as it is not required to make any input VAT adjustment.

The new and old rules are illustrated below.