Decision of the European Court of Justice of 20 December 2017: a new milestone reached in the current debate on the definition of the turnover of pharmaceutical companies, and tomorrow of companies marketing medical devices

The European Court of Justice (ECJ) has rendered its highly anticipated decision on 20 December 2017, in favour of the pharmaceutical company Boehringer (C-462/16), about the deductibility from the turnover of “rebates” (or so-called clawbacks) paid by pharmaceutical companies to private health insurances, based on the principle of neutrality of valued-added tax (VAT) and the “VAT Directive”.

In addition to public health insurance, the German health system has private health insurances which reimburse to their insured persons the price of pharmaceutical products. The German system of private health insurances is actually similar to the system of reimbursement of pharmaceutical products by the French national health insurance.

The German government had already allowed deductibility of “rebates” or clawbacks paid to the public health insurance from the taxable basis of pharmaceutical companies, for VAT purposes.

While relying on its consistent case law since the Elida Gibbs decision (C-317/94), the ECJ has taken an important step regarding the definition of the turnover of pharmaceutical companies, admitting that “rebates” or clawbacks paid to private health insurances are deductible from their taxable basis for VAT purposes.

The expected positive consequences of this decision, in the current French debate about the definition of the turnover of pharmaceutical companies

This decision is of significant importance with regard to the French debate about the deductibility of the “conventional rebates” or so-called clawbacks from the taxable basis of pharmaceutical companies in France, for purpose of calculation of taxes based on gross sales.

The pharmaceutical companies are today facing a contradiction in the approaches of the different French authorities.

On the one hand, the French health authorities require the pharmaceutical companies to pay back a portion of their gross sales, in the form of "conventional rebates" (or so-called clawbacks), in the context of negotiations of the "net" price of pharmaceutical products.

On the other hand, the tax and social security authorities refuse to admit the deduction of these "conventional rebates" or clawbacks from the turnover of pharmaceutical companies to be taken into account for the calculation of taxes and contributions.

This debate has been initially distorted by a “first wave” of unfavourable decisions based on a confusion of the actual "rebates" or clawbacks at stake, leading to an error in the legal characterisation of amounts which were required to be deducted from the turnover of pharmaceutical companies to different national jurisdictions (notably, in terms of contribution on turnover: French Supreme Court, 6 November 2014, Roche** 1, Social Security Court of Paris, 8 November 2016, Alexion 2**; in the matter of VAT: Administrative Court of Appeal of Paris, 30 December 2016, Celgene** 3**; in the matter of CVAE: French Administrative Supreme Court, 21 April 2017, Pierre Fabre** 4, French Supreme Court, 6 October 2017, AstraZeneca 5, Administrative Court of Appeal of Paris, 21 December, MSD Chibret Schering Plough 6**).

These first unfavourable decisions are based on confusion between (i) the so-called "rebate" paid instead of the "ONDAM Contribution" or "safeguard clause", which should naturally have the nature of the tax it substitutes, and (ii) the "conventional rebates" or clawbacks negotiated in the price agreements with the French health authorities, on behalf of the health insurance.

Nevertheless, the legal debate continues over the last few years on “new” factual and legal grounds with regard to all taxes based on sales due by the pharmaceutical companies

In this decision of 20 December 2017, the Court of Luxembourg has confirmed two (2) significant elements with regard to the legal debate on the definition of the turnover of pharmaceutical companies in France:

a)    a pharmaceutical company shall only be taxed on its gross sales actually received, and

b)    the sale of pharmaceutical products made within the framework of a tripartite relationship in which health insurance is not the direct client but is the paying institution, shall not prevent the deductibility of “rebates” or clawbacks from the taxable basis of the pharmaceutical company for VAT taxation.

This decision of the ECJ will very likely product positive effects in domestic law, that we have already been able to glimpse, even beyond VAT…

The future debate on the definition of the turnover of companies marketing medical devices

The debate on the definition of the turnover ("net of “rebates”" or so-called clawbacks) of companies marketing medical devices will arrive, according to us, in short or medium term.

The social security financing Act for 2018 has indeed considerably broadened and strengthened the powers of the French health authorities in the framework of the financial regulation of medical devices, through the "rebates" or clawbacks mechanism.

Tomorrow, the companies marketing medical devices will, as the pharmaceutical companies, have to pay back to the health insurance a portion of their gross sales in the form of "rebates" or clawbacks.

The objective of this strengthened financial regulation is always the same for the French health authorities, i.e., having the control of the expenses of the health insurance in view of meeting the national objective of social security’s expenses voted each year by the French Parliament.

This law strengthens the powers of the French health authorities to negotiate the "rebates" or clawbacks, or impose them.

Several significant differences with the existing mechanism of "rebates" or clawbacks due by the pharmaceutical companies can already be noted.

The "rebates" or clawbacks may be due by manufacturers or distributors, the sharing criteria between these potential payers not being clearly defined.

The "rebates" or clawbacks may be fixed by agreement with the French health authorities or by unilateral decision of the French health authorities, which gives them a "mandatory" character, expressly provided by the law. This "mandatory" character seems at first sight open to criticism, particularly in view of the imperatives of tax law and competition law.

This notion of "obligation" will have a significant impact on the debate about the definition of the turnover of companies marketing medical devices.

The "rebates" or clawbacks could be negotiated (the reality of this negotiation not being obvious) no longer exclusively in a bilateral framework (brand) but also in a multilateral one (generic description).

Finally, the "rebates" or clawbacks may concern "comparable products", which raise doubts about the comparison criteria that would lead to the financial regulation of the price of medical devices.

The procedures for implementing this financial regulation seem at first glance insufficiently precise, and open to criticism, particularly the notion of "obligation".

The issue of the "net" price of medical devices and the definition of the turnover of companies marketing these medical devices, with regard to this repayment of gross sales to health insurance in the form of "rebates" or so-called clawbacks, will therefore arise tomorrow also in this industry sector for purposes of all taxes based on sales.

1  French Supreme Court, 2ème civil chamber, 6 November 2014, Roche, n° 13-26.568

2  Social Security Court of Paris, 8 November 2016, Alexion, n° 15-02466

3  Administrative Court of Appeal of Paris, 30 December 2016, Celgene, n° 15PA02816

4  French Administrative Supreme Court, 21 April 2017, Pierre Fabre, n° 398246

5  French Administrative Supreme Court, 6 October 2017, AstraZeneca, n° 408115

6  Administrative Court of Appeal of Paris, 21 December 2017, 2ème civil chamber, Laboratoires MSD Chibret Schering Plough, n° 17PA00519