Aligning Transfer Pricing with the arm’s length principle
The arm’s length principle requires that transactions between associated entities within a multinational group are priced as if they were conducted between independent parties. When profit outcomes deviate from this principle, TP adjustments may be necessary for tax purposes. These adjustments can be made during the financial period or post-year end and must be properly documented to satisfy tax authorities in all relevant jurisdictions.
VAT implications of Transfer Pricing adjustments
From a VAT perspective, a TP adjustment falls within the scope of VAT when the actual consideration payable is made in respect of a supply of goods or services. For instance, when a TP adjustment is made, it may necessitate a corresponding adjustment to the VAT previously declared which may depend on several factors. Additional complexity could arise in scenarios involving profit-based remuneration models.
On 4 September 2025, the Court of Justice of the European Union (CJEU) ruled, in SC Arcomet Towercranes SRL v. Romania (C-726/23), that compensating adjustments made to align profits between associated companies can constitute a supply of services for consideration, and thus fall within the scope of VAT, if there is a direct link between the payment and a benefit received by the paying company.
In this case, a Romanian subsidiary and its Belgian parent company had a TP mechanism to keep profits within an arm’s-length range. If profits exceeded the threshold, the Belgian parent issued an “equalisation invoice” without VAT. After a tax audit, Romanian authorities denied the subsidiary’s right to deduct input VAT due to insufficient documentation. The CJEU ruled that such adjustments are remuneration for services and subject to VAT if pre-agreed.
This judgment reinforces the principle that intra-group transactions involving transfer pricing adjustments can be subject to VAT, and that VAT deduction rights are conditional on both formal and substantive criteria. It also confirms the tax authorities' right to request evidence beyond invoices to ensure compliance. Although there is no specific guidance on the VAT treatment of TP adjustments, recent cases decided by the Court of Justice of the European union on the subject have continued to highlight the ever-increasing importance of evaluating economic and contractual terms to assess whether the adjustment gives rise to a transaction falling within the scope of VAT.
The TP and VAT team at PwC Malta can help review your intercompany agreements and TP policies to ensure compliance from both a TP and VAT perspective.
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