Transfer Pricing and VAT: Distinct principles, overlapping implications
Transfer Pricing rules are designed to ensure that transactions between related entities within a multinational group are conducted at arm’s length, mirroring the terms that would be agreed upon by independent parties. Adjustments may be required if transactions deviate from this standard, either voluntarily by the taxpayer or because of tax authority intervention. These adjustments are primarily relevant for direct tax purposes, affecting the allocation of profits among jurisdictions.
VAT, on the other hand, is an indirect tax generally levied on the actual consideration paid or payable for goods or services. While the VAT system is primarily concerned with the amount actually paid or payable, and not with whether the price is at arm’s length, there are specific circumstances, such as those involving related parties or potential tax avoidance, where the VAT Directive allows or requires the use of the open market value as the tax base for calculating the VAT due on a transaction.
When TP adjustments alter the consideration for a supply, questions arise as to whether corresponding VAT adjustments are required, and if so, how these should be undertaken.
EU VAT committee and expert group: Guidance and limitations
Both the EU VAT Committee and the VAT Expert Group have examined the VAT implications of TP adjustments. Their discussions have generally converged on the principle that if a TP adjustment can be directly linked to a specific supply of goods or services, it should be reflected in the VAT treatment of that supply. In other words, if the adjustment changes the consideration for a supply, a VAT adjustment may be necessary.
However, these bodies have also acknowledged the complexity of the issue and the limitations of their guidance. Their opinions, while influential, are not legally binding and do not provide definitive answers for all scenarios. The lack of harmonised rules across Member States further complicates the landscape, leaving businesses exposed to divergent interpretations and potential disputes with tax authorities.
Recent and pending CJEU cases: Clarifications
As a result of several high-profile cases, some of which are highlighted below, the CJEU has recently addressed, and is expected to further clarify, the VAT consequences of TP adjustments.
- Högkullen AB (C-808/23)
- SC Arcomet Towercranes (C-726/23)
- Stellantis Portugal (C-603/24)
Högkullen AB (C-808/23)
The case involves a Swedish holding company, Högkullen AB, which provided management and administrative services to its subsidiaries using a cost-plus transfer pricing method. The company excluded certain shareholder-related expenses from the VAT taxable base, but the Swedish tax authorities argued these should be included. The CJEU held that, for VAT purposes, each service must be assessed individually, and the taxable amount should reflect the open market value as per Article 72 of the EU VAT Directive.
Importantly, the Court also addressed the concepts of composite and single supply. It clarified that when a transaction consists of several elements, it is necessary to determine whether these constitute a single supply for VAT purposes or should be treated as a separate (composite) supply. The true nature and value of each service, rather than transfer pricing methods or internal classifications, are decisive for determining the correct VAT base in intra-group transactions. This means that the VAT treatment depends on whether the services are so closely linked that they form a single supply, or whether they should be taxed separately as distinct supplies.
SC Arcomet Towercranes (C-726/23)
In this case the Advocate General has provided an opinion offering clarification on the VAT implications of transfer pricing adjustments in the context of intra-group services. The case examines whether fees set pursuant to a transfer pricing policy, utilising the transaction-based net margin method (TNMM) in accordance with OECD guidelines, constitute the actual consideration for VAT purposes, even where such amounts differ from those initially agreed between related parties.
According to the AG, when intra-group services are rendered and remuneration is subsequently adjusted to reflect the arm’s length principle under transfer pricing regulations, the revised amount should be regarded as the true consideration for the supply. Consequently, properly documented and substantiated transfer pricing adjustments have a direct impact on the VAT base. The AG stressed that the VAT base should not be confined to the originally agreed price but must instead correspond to the value established through recognised transfer pricing methodologies.
Furthermore, the AG clarified that the mere occurrence of a transfer pricing adjustment does not, in itself, constitute a new or separate supply for VAT purposes. Rather, such an adjustment serves as a correction, ensuring that the consideration for the original supply accurately reflects the arm’s length value. This interpretation aligns the VAT base with the commercial realities of the transaction, as determined by transfer pricing rules.
Stellantis Portugal (C-603/24)
This pending case concerns a Portuguese car distributor making TP adjustments to ensure a minimum profit margin, with the tax authorities arguing that these adjustments constitute remuneration for services and should be subject to VAT. The outcome of this case is expected to provide further guidance on when TP adjustments trigger VAT obligations.
Key takeaways – Current considerations
Direct link is critical: The central question is whether a TP adjustment can be directly linked to a specific supply of goods or services. If so, a VAT adjustment may be required.
Documentation and substance: Robust documentation is essential to demonstrate the nature of intra-group transactions and the rationale for any TP adjustments. This is particularly important in the event of a challenge by tax authorities.
Evolving jurisprudence: The CJEU’s evolving case law is gradually clarifying the circumstances under which TP adjustments affect VAT. Businesses with in-scope transactions should monitor these developments closely and be prepared to adapt their compliance processes accordingly.
Divergent national approaches: In the absence of harmonised EU rules, Member States may interpret the interaction between TP and VAT differently. Multinational groups should be aware of local practices and potential risks.
Conclusion
The interaction of TP and VAT remains a complex and evolving area of EU tax law. While recent guidance from the EU VAT Committee, the VAT Expert Group, and the CJEU provides some clarity, significant uncertainties persist. As new CJEU decisions are issued, businesses must remain vigilant, ensuring that their intra-group transactions are not only compliant from a TP perspective but also appropriately reflected in their VAT reporting. Proactive management, thorough documentation, and ongoing monitoring of legal developments are essential to mitigate risks and ensure compliance in this challenging area.
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