Cost pass-on – BMF letter dated 20 June 2023

If an entrepreneur passes on costs, there is always the question as to whether this is a remuneration for supply that is subject to VAT. The BFH (German Federal Fiscal Court) took a position on this question last year in connection with market fees for agricultural producer groups and with advance costs for slaughterhouses. The BMF (German Federal Ministry of Finance) has now adopted these positions by including them in the administrative guidelines to the German VAT Code (UStAE).

The BFH cases

An agricultural producer group bought products from farmers in order to later sell them under its own name. It settled its accounts with the farmers using the self-billing procedure. When determining the remuneration, it deducted what is referred to as “market fees” from the prices it obtained from the buyers in addition to the fixed deductions. These fees were intended to cover, among other things, packaging costs, advertising expenses, and refrigeration costs. The BFH ruled (decision of 13 September 2022, XI R 8/20) that the producer group did not provide taxable marketing services to the producers because they received no economic benefit from these. This was already clear because the producer group marketed the products in its own name. The marketing activities were therefore in its own interest and the economic focus of the producer group's activities involved merely the resale of the products. The market fees were therefore to be treated as a reduction in the tax base of the producers' supplies to the producer group.

The second case concerned a slaughterhouse that bought slaughter animals from farmers and deducted “advance costs” from the purchase price settled in the self-billing procedure (decision of 11 October 2022, XI R 12/20, as we reported here ). These were costs for quality management, auditing the operations of the slaughterhouse's customers, complying with the stricter hygiene regulations, and ensuring the animals’ traceability. Here, too, the BFH considered that these activities were in the interest of the slaughterhouse and did not confer any benefit to the farmers. The legal ownership to the animals under civil law at the time of these activities, or whether the activities took place before or after the time of supply in terms of VAT, was irrelevant. Here, too, there was no supply provided by the slaughterhouse to the farmers, but rather a reduction in the tax base of the farmers' animal supplies to the slaughterhouse.

BMF letter

In its letter of 20 June 2023, the BMF adopts these decisions quite meticulously in section 1.1 paragraph 26 UStAE without generalising the principles. Nevertheless, these examples can certainly be applied to other situations: To answer the question of remuneration for supplies, it is therefore always necessary to ask whose interest the invoiced activities serve.

There is a certain similarity to the advertising subsidies that a supplier gives to its buyer. This is often found in large supermarket chains, where the food producer grants such a "subsidy" to the supermarket so that the question arises whether the supermarket is providing an advertising service to the food producer, or whether the "subsidy" reduces the tax base of the food supply. Even if the payment here is in the opposite direction compared to the market fees of the producer group, the question is: Who benefits when a supermarket advertises the products? According to the principles of the ruling on market fees, it appears that it is at least primarily in the supermarket's own interest to achieve high sales figures. In this case, the Federal Ministry of Finance still refers to a ruling from 1965 in section 10.3, paragraph 2, sentence 4 UStAE and does not yet consider who actually benefits. Rather, it focuses exclusively on whether the customer has contractually committed to advertising. So, given the more recent BFH rulings, the question now arises as to whether the contractual agreement can still be the decisive criterion.

Dated: 20 July 2023


Nadia Schulte
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