Arcomet: Are Transfer Pricing Adjustments Potentially Subject to VAT?
On 3 April 2025, the Court of Justice of the European Union (CJEU) published the Advocate General’s (AG) opinion in case C726/23. Should the Court eventually reach the same conclusions, this could bring more transfer pricing adjustments within the scope of VAT.
Background
A Romanian subsidiary within a global crane rental group was subject to a tax dispute over transactions with its Belgian parent. There was an agreement for mutual services between them, and the transfer pricing methodology adopted, consistent with OECD Guidelines, was the net transactional margin method, which seeks to ensure that the profits made by the parties are consistent with arm’s length transactions. The agreement provided for adjustments to be made via annual invoices. The Romanian entity received three invoices from the Belgian parent for adjustments in accordance with the methodology.
The first two invoices were treated by the Romanian company as being payment for a supply of services and the third invoice was treated as outside the scope of VAT. The Romanian tax authority denied input VAT deductions, arguing that the company had not substantiated the invoiced supply of services or demonstrated their use for taxable transactions, due to a lack of supporting documents.
This dispute led the Romanian tribunal to raise two questions to the CJEU via a request for a preliminary ruling:
- Whether the amounts invoiced by a parent company, in accordance with a TP method recommended by the OECD (specifically, the transactional net margin method), could be considered as consideration for a service within the scope of VAT.
- Whether a tax authority’s request for a taxpayer to produce documents other than an invoice to substantiate that the service in question was used for taxable transactions exceeds the principle of proportionality.
Position of the Advocate General
This alert focuses on the first question, and the Advocate General confirmed that the payments were consideration for a supply.
The Advocate General acknowledged that the relevant OECD guidelines were developed for direct taxation purposes. He considered nonetheless that the fact that this was a transfer pricing adjustment was not sufficient to take it outside the scope of VAT when there was a contract which provided for services to be made, and the question was, ultimately, whether the payments could be treated as consideration for these services.
As a result of the above mentioned considerations, the Advocate General nuanced his response by stating that whether a transfer pricing adjustment could lead to a VAT adjustment should be considered on a case-by-case basis. Here, his view was that there was a direct link between the adjustments and the services provided.
Conclusion and Recommendations
The conclusions of the Advocate General are not binding, and it remains to be seen whether the CJEU will reach a judgment that aligns with them. Regardless of the judgment, a case-by-case analysis will likely always be recommended. It will be interesting to see if the Court takes the view that there is only a VAT implication when the adjustments can be treated as consideration for underlying supplies of services, whatever methodology is chosen, or goes even further to say that the agreement to adjust profits itself can give rise to consideration for a supply.
Given these uncertainties, businesses may decide to review inter-company agreements now to ensure that there is provision for VAT to be charged on transfer pricing adjustments as applicable. Where the transfer pricing adjustment is linked to a cross border supply of services, this would lead to accounting via the reverse charge which could give rise to irrecoverable VAT for exempt and partially exempt taxpayers.
