Arm’s Length and VAT Taxable: The CJEU confirms that intra-group services are subject to VAT even when priced using transfer pricing methods

In line with the Advocate General’s opinion issued on 3 April (see Arcomet: Are Transfer Pricing Adjustments Potentially Subject to VAT? | DLA Piper), the CJEU has now delivered its judgment on when transfer pricing adjustments may fall within the scope of VAT.

The issue raised before the Court

To recap: a Romanian subsidiary of a global crane rental group was involved in a tax dispute over transactions with its Belgian parent. The parties had entered into a mutual services agreement applying the OECD-recommended Transactional Net Margin Method (TNMM), under which annual invoices were issued to reflect transfer pricing adjustments to ensure the margins were adhered to. The Romanian company issued invoices for taxable services which needed to be adjusted, so the Belgian parent issued invoices back to the Romanian company to effect this adjustment. The Romanian company, receiving the invoices, treated two invoices as VAT taxable and one as outside the scope of VAT. However, the Romanian tax authority denied input VAT deductions, arguing insufficient documentation.

The national court referred two following questions to the CJEU:

1. When the Belgian company issued the adjusting invoices to comply with the TNMM could the amounts shown be considered consideration for VAT taxable services?
2. Does requiring documentation beyond the invoice breach the principle of proportionality?

The conclusion of the Court

The CJEU answered the first question affirmatively, confirming that the payments invoiced could be properly regarded as consideration for defined services. The Court stated that even if calculated in accordance with transfer pricing principles, the payments were subject to VAT insofar as there was a direct link between the service provided and the payment made. In this case, the Belgian company was supplying strategic and management services under the mutual services agreement, and the adjustment payments could be properly linked to those services. This applied regardless of whether the consideration was variable or performance-based, as long as it was contractually defined and quantifiable.

The second question was answered negatively, reinforcing the importance of maintaining proper contractual documentation to support VAT recovery and ensuring the invoices properly describe the goods or services provided.

Key takeaways and recommendations

Transfer pricing adjustments are  subject to VAT if they relate to identifiable  goods or services and as long as there is a direct  link between the goods and services in question and the relevant payment. Businesses must therefore make sure that they apply a consistent approach when it comes to transfer pricing and VAT.

The reasoning of the CJEU also extends to other services the consideration for which may not always be certain and can therefore have implications on other type of payments that present a contingent element.

Whatever approach is retained from a VAT perspective must clearly be substantiated. This require a clear and carefully drafted legal documentation, which should also serve as a safeguard for input tax recovery.