A discount, not for VAT

Recently the European Court of Justice (CJ EU) has ruled that a price reduction does not always lower the taxable amount. Price reductions are common practice for businesses, and the ruling is applicable for all businesses in similar situations.

The case

The case was as follows: a tour operator provides travel services to consumers, for which the consumers paid the tour operators. Ibero Tours, the intermediary service provider, supplied intermediary services to the tour operator. For these services the tour operator paid a commission to Ibero Tours. Furthermore, Ibero Tours gave travel clients price reductions/discounts by paying an amount to the tour operator (on behalf of the consumer). Ibero Tours financed this with a part of its commission received from the tour operator. So the final consumers had to pay only the lower amount after the discount.

On balance the result of Ibero Tours for its services was the consideration minus the granted price reduction paid to the tour operator.


This lead to the following considerations. It is a basic principle of VAT that only the final consumer is actually taxed with VAT. A business can deduct the VAT it pays to suppliers, and its customers pay the VAT amount that the business has to pay to the tax authorities . So on balance, the business does not pay VAT, only the final consumer does. Consequently, on balance the tax authorities should not receive by way of VAT a sum greater than that actually paid by the final consumer.

Based on these considerations, at first instance one might think that the outcome of the described case should be that the tax authorities should only receive VAT calculated over the consideration that the consumer paid. In this case on balance VAT was paid over both amounts the tour operator received (partly by Ibero Tours and the remainder by the final consumers). Hence Ibero Tours paid a part of the VAT and the tax authorities received more than the final consumer paid. So Ibero Tours requested a VAT refund since on balance it should not pay VAT and (translated freely) the tax authorities should not have received more VAT than the amount paid by the final consumer.

Reasoning of the EU Court of Justice

However, based on the judgement of the CJ EU in this situation no VAT should be refunded to Ibero Tours. Freely translated the reasoning of the CJ EU is as follows. It was the own initiative of Ibero Tours to pay an amount to the tour operator on behalf of the final consumer, therefore Ibero Tours paid as a „final consumer”. Since Ibero Tours paid on behalf of the final consumer, it can not deduct the VAT[1] despite it is a VAT taxable business.

This judgement shows that not every price reduction or discount leads to a lower payable amount of VAT. It is applicable for all VAT taxable persons in similar situations, also in business to business situations. It is particularly important for supplies regarding non-taxable persons, VAT exempt persons, and final consumers. It may lead to an actual VAT burden even if you are a VAT taxable Business. If you are in a similar situation, it might be possible to legally avoid such VAT ‘disadvantage’.

[1] More correct form a VAT point of view: Ibero Tours can not impute the price reduction to the commission received from the tour operator. Else the amount the tour operator received from the final consumer for the travel services would be considered lower. On balance the tax authorities would receive VAT only over the amount paid by the final consumer.

01 Feb 2013 at 11:56 am