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Background

VAT and transfer pricing have always had an ambiguous relationship, which has led to uncertainty for businesses and stakeholders with regard to what are known as the Transfer Pricing Adjustments (TP Adjustments). Although there is currently no binding guidance on the VAT treatment of TP Adjustments, efforts have been made by the EU Commission’s VAT Committee and VAT Expert Group to offer clarification.

In its working paper from 28 February 2017 on the Possible VAT implications of Transfer Pricing, the VAT Committee highlighted the clear need for guidance on the VAT implications of transfer pricing rules and, in particular, TP Adjustments. The VAT Committee provided further reflection on the interaction between the two subjects and suggested various considerations for evaluating the relevance of a TP adjustment in VAT assessments.

In 2018, the VAT Expert Group provided further opinion on the subject and took the view that these TP Adjustments should be seen as falling outside the scope of VAT, on the condition that both parties benefit from a full input VAT deduction right, unless explicitly agreed otherwise.

Given the non-binding nature of the above considerations, businesses are actively seeking binding guidance to rely on, which may be provided by the most recent CJEU referrals on the subject.

CJEU referrals

• C-726/23: A Romanian crane rental company that is part of an international group received an invoice of EUR 695,000 for TP Adjustments from its Belgian parent company. This was due to the Romanian company having exceeded its expected profits forecast by a transfer pricing study. The Romanian company self-assessed VAT under the reverse charge mechanism on this invoice by reasoning that it qualified as consideration for services received. The Romanian VAT authorities took the view that the VAT due on the TP Adjustments was not deductible on the grounds that such Adjustments were not needed for carrying out taxable transactions.

The CJEU was thus asked whether TP Adjustments constitute a supply of services for VAT purposes and, if so, whether evidence is required to support the link between such supplies and the economic activity carried out.

• C-808/23: This referral involves a Swedish parent company which provides services to its subsidiaries but excluded certain specific costs from its overall costs based on the OECD TP Guidelines. The Swedish VAT authorities disagreed and were of the opinion that such costs should have been included in the services supplied to the subsidiaries.

The questions referred in this instance are centred around the interpretation of the open market value concept provided for by Article 80 of Council Directive 2006/112/EC and the interplay between VAT and transfer pricing computation methods.

New developments

Considering the current climate of uncertainty around VAT and TP Adjustment, the CJEU decisions to follow these referrals are expected to have significant impacts on VAT practices involving affiliated companies. Arendt’s VAT and TP teams are working together closely and monitoring these upcoming developments to assist you on how to best adapt and implement any necessary changes.

How we can help

Our VAT_ and Transfer Pricing_ teams are here to help you with any VAT or TP questions that you might have.