VAT deduction on pharmaceutical “pay back” Amounts – Ruling reply no. 73/2020

newsalert 130320201

Prepared by Davide Accorsi and Luca Ghelli

The Italian tax authorities with the ruling no. 73/2020, dated 22 February 2020, have clarified when the VAT related to “pay back” payments executed during 2018 can be recovered, in respect to a specific case raised by a taxpayer.

As known, the Budget Law for 2018, paragraphs from 394 to 402, has introduced some provisions in order to interpret and standardize the VAT treatment of “pay back” payments, which pharmaceutical companies are required to carry out in order to contribute to the pharmaceutical spending in case of overruns of the expense ceiling for medicines dispensed by the National Health Service (for further details, please see our previous Newsalert on this topic).

In particular, with reference to the art. 26, paragraph 2 and 5 Presidential Decree no. 633/1972, the Legislator has clarified that the above-mentioned provisions shall be interptreted in the meaning that for payback payments executed in case of exceeding the ceiling for territorial and hospital pharmaceutical expenditure, pharmaceutical companies may deduct the VAT determined by separating it from the amount of the payments carried out.

The paragraph 395 provides that the right to deduct VAT arises at the time the payments are made, according to a cash basis principle.

The paragraph 396 provides the obligation to issue a specific internal accounting document  that indicates the details of the deed through which the AIFA definitively determined the amounts to be paid, in order to exercise the right to recover the VAT.

The following paragraph 397 has stated that for the payments already carried out up to the date of entry into force of the Budget Law 2018 (i.e. before 1st January 2018) the right to deduct could

be exercised, at the latest, with the annual VAT return for the year 2018.

In order to complete and simplify the settlement of territorial and hospital pharmaceutical spending and in order to fix the significant number of administrative disputes started by the pharmaceuticals companies challenging the method of calculation of the AIFA, the art. 9-bis of the Law Decree no. 135 of  December 14, 2018 (so-called “simplifications decree”) provided that, if within 15 February 2019 the full recovery of the financial resources related to the pharmaceutical expenditure settlement procedures for the years 2013 to 2017 were not been finalized, the AIFA’s general Director, by the 30 April 2019, should have had ascertained that the pharmaceutical companies had paid at least the amount of €2,378 million. In case of a positive outcome, AIFA would not have carried out any further claims to the pharmaceutical companies.

With the resolution no. 1150/2019 dated 5 July 2019, the AIFA confirmed that such amount had been reached, thus confirming the “definitiveness” of the amounts paid in respect of pay back payments for the period 2013-2017 executed by pharmaceutical companies.

With the ruling in question, the taxpayer asks to the Italian tax authorities which moment should be considered as the one in which the right to recover the VAT incorporated in the pay back amounts arises.

In the case commented by the Italian tax authorities, briefly described in the published version of the ruling, the taxpayer asks to the tax authorities when the deadline to issue the internal credit note (aimed to recover on pay back amounts paid during  July 2018 related to 2016) starts to accrue. The ruling specifies that such amounts were paid spontaneously, pending the administrative litigation with the AIFA.

After having summarized the main events concerning the VAT treatment of pay back, the Italian tax authorities confirm that “the requirement for the issue of the credit note is met not at the time in which the payment of the amounts were provisionally carried out by the taxpayer in …. 2018 […], but only at the time upon the final determination carried out by AIFA on 5 July 2019”.

In other words, the Italian tax authorities confirmed the interpretation provided by the taxpayer who deemed that the paragraph 395 of the Budget Law concerning 2018 could not be applied if the pay back payments were executed provisionally, pending the administrative litigation with the AIFA. 

According to the applicant, the above circumstances could not jeopardise the exercise of the right to deduction, once the amounts already paid had became final.

In the light of the above, the Italian tax authorities confirms that the taxpayer will be able to exercise the right to recover VAT on the pay back amounts paid on July 2018, at the latest, with the Annual VAT return related to the year in which the right to recovery arose, i.e. “when AIFA definitively ascertains the amounts due by each pharmaceutical company (AIFA’s resolution dated 5 July 2019)”, according to the timing provided by article 19(1) of the Presidential Decree no. 633/1972. In other words, the right can be exercised through the Annual VAT return relating to the year 2019, whose deadline is 30 April 2020, at the latest.

Even if the ruling reply is tailored on the specific case of the applicant, the Italian tax authorities provide an interesting interpretation regarding the deadlines provided by the Budget Law concerning 2018 for the VAT recovery on pay back amounts. Even if the reply of the tax authorities is quite straightforward both in the reasons and the conclusions, it still remains unclear (and to be further analysed in-depth) how to (i) consider any VAT already recovered with Annual VAT return related to years before 2019; (ii) recover VAT on pay back amounts paid in respect of years subsequent to 2017, provisionally paid during 2019 and 2020, pending any administrative litigation with the AIFA, which indeed would not make such payments as “definitive”.