SAC once again restrains tax administrators from collecting tax, cost what it may
The Supreme Administrative Court has published a long-awaited judgment in the case of the pharmaceutical company ELI LILLY ČR, s.r.o., which concerned the invoicing of marketing and distribution costs. The company sought to achieve minimum profitability in line with transfer pricing in a price-regulated environment.
In the Eli Lilly case, the tax administrator concluded that marketing and distribution services that the company provided to one of the foreign companies within the group should be included in the tax base from the sale of pharmaceuticals in the Czech Republic. The reason was that, purportedly, the services were in fact provided to customers in the Czech Republic, not to companies abroad.
According to the SAC, however, the tax administrator and the municipal court both confused the term service recipient, i.e., the one who ordered the service and benefited from it, and the term recipient of marketing information, i.e., the one whom the content of the marketing service is meant to affect. The tax administrator also failed to reflect the complexity of doing business in a strictly regulated market in pharmaceuticals, in which other participating entities may also be influenced by the marketing information.
In this respect, it cannot be argued that the recipient of the marketing service is the last link in the chain (i.e., the end customer). The end customer is often unable to assess the marketing information due to its highly technical nature. Additionally, pharmaceuticals are covered by public health insurance, and there is de facto no payment for consideration. Finally, due to the price regulation of pharmaceuticals, Eli Lilly has very limited options to transfer the marketing costs onto the end customers. It is therefore obvious that payments for marketing services cannot be included in the tax base, as the tax base would thus exceed the amount of consideration received from the customer.
The SAC further opined on the question of the indivisibility of a taxable supply. The court referred to the established case law of the Court of Justice of the European Union, under which each transaction shall be regarded as independent and should not be artificially split. What is crucial is how the supply is perceived by a typical consumer: if a typical consumer perceives the supply as several separate supplies, it must be viewed as such also from the VAT perspective.