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Italy: New rules, VAT on pharmaceutical “paybacks”

Italy: New rules, VAT on pharmaceutical “paybacks”

The Budget Law 2018 introduced new rules applicable for pharmaceutical companies concerning value added tax (VAT) and the “payback” regime. The effective date of the measures is 1 January 2018.


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Pharmaceutical companies in Italy are subject to a “payback” system. This allows the Italian national health service to address overspending and reduce budget overruns by requiring all of the entities in the pharmaceutical supply chain to pay back a certain amount if nationally set ceilings on expenditures for drugs in community pharmacies (community budget) and hospital settings (hospital budget) are not met. The payback system has operated since 2008 for expenditures through private distribution channels (community pharmacies) and since 2013 for expenditures in hospitals. 

There are various forms of payback that are governed by different regulations—5% payback, 1.83% payback, payback by product, community budget payback, and hospital budget payback. The different payback systems are all based on ratio and payment methods; however, they have different rates, criteria, and calculations. The first two forms of payback (5% payback and 1.83% payback) are exclusive of VAT while the other two (community budget payback and hospital budget payback) are inclusive of VAT. 

In all forms of payback, regardless of the calculation system, the payments (gross of VAT) are made directly to the regional authorities facing deficits because of overspending. Before the Budget Law 2018, the VAT treatment of certain forms of paybacks from pharmaceutical companies to regional authorities was unclear.

New rules for VAT and paybacks

The Budget Law 2018 introduced a new system that allows for recovery of VAT included in paybacks. More specifically, paybacks are deemed to decrease the tax base of drug sales; in other words, there is a sort of compulsory reduction in the sale price. Consequently, pharmaceutical companies are now able to recover the VAT paid on paybacks, by deducting that amount from subsequent payments.

The new law provides that, effective 1 January 2018, the different forms of payback must be inclusive of VAT. For remittances made before 1 January 2018 for community budget and hospital budget paybacks, the new law stipulates that VAT can be recovered by the deadline for the filing of the VAT return for 2018. 

The Budget Law 2018 also clarifies the direct tax implications of these measures. Concerning the deductibility of payback costs and related VAT, payback costs are deductible on a cash basis, and recovered VAT will give rise to a windfall gain that would be subject to direct taxes under the ordinary income tax rules. If VAT had been unduly recovered in the past, the new rules (for the 5% and 1.83% paybacks) state that a corresponding adjustment must now be made in the VAT ledger, resulting in an equivalent extraordinary cost that would be deducted for direct tax purposes in the tax year in progress on 1 January 2018.


Read a January 2018 report [PDF 159 KB] prepared by the KPMG member firm in Italy

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