The Hungarian ‘medicine tax’ is to be treated as ‘discount’ for VAT purposes
The European Court of Justice (CJEU) in the Hungarian-related case C-248/23 Novo Nordisk A/S has ruled that the statutory payment made by medicine distributors under the medicine-distribution act, commonly known as the ‘medicine tax’, qualifies as a discount for VAT purposes resulting in the reduction of the taxable amount. The judgment may open the door for the taxable persons to reduce their VAT base by the amount of the medicine tax payment liability or to reclaim the VAT already paid on the medicine tax. In this newsletter, we briefly present the judgment.
The Danish pharmaceutical company Novo Nordisk, which distributes pharmaceuticals in Hungary as well, is subject to the medicine tax and has also concluded a so-called price volume agreement with the Hungarian social security authority (NEAK), under which it makes an additional payment in proportion to its domestic sales. Following the Boehringer Ingelheim judgment C-717/19, Novo Nordisk self-revised its VAT return for January 2016, in which the company deducted both the payment made under the price volume agreement and the medicine tax from the tax base. The first instance directorate of the national tax authority rejected both deductions, while the second instance tax authority accepted the deduction with respect to the payments made under the price volume agreement but refused the deduction of the medicine tax. The second instance tax authority took the view that the medicine tax may not be treated as a discount for VAT purposes because it is a tax payment liability, given that it is payable to the tax authority and it is intended to achieve budgetary and health objectives.
Novo Nordisk brought an action for judicial review of the tax authority’s decision before the Budapest High Court which has referred the case for a preliminary ruling to the CJEU.
In judgment C-248/23, the CJEU confirmed the common principle that the tax authorities may not collect an amount of VAT exceeding the tax which the taxable person received. The court concluded, on the basis of the judgments in Elida Gibbs (C-317/94) and Boehringer Ingelheim Pharma (C-462/16), that the medicine tax is to be classified as a ‘discount’ for VAT purposes on the ground that the supply of goods is the event which gives rise to the medicine tax payment liability, furthermore the amount payable is to be calculated on the basis of the turnover of the subsidised medicines and the amount paid is due to NEAK, which is to be regarded as the final consumer, as it pays part of the price of the subsidised medicines. The discount function also follows from the fact that the purpose of the medicine tax is the same as that of a contractual payment under a price volume agreement, i.e. to provide a price subsidy for medicinal products. In addition, the Hungarian legislator also classifies the pharmaceutical tax as a price reduction in the explanatory notes to the proposal introducing the medicine tax. The court pointed out that, by paying the medicine tax, a portion of the consideration obtained from the sale of the medicinal products by the pharmaceutical company has not been received, and that it would therefore be contrary to the principle of fiscal neutrality if the company were also liable to pay VAT on the consideration not received. According to the judgment, the classification as a discount is not affected by the fact that the medicine tax is a statutory payment liability. It is also irrelevant that both the payments made under a price volume agreement and the health-related R&D costs are deductible from the medicine tax.
Full English text of the judgement
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