The Link Between Transfer Pricing Adjustments and VAT

In cases where companies are subject to corporate income tax in multiple jurisdictions, debates can arise concerning the allocation of profits and losses among these jurisdictions. To address this, international transfer pricing rules have been established. These rules mandate that internal pricing must mirror arm's length transactions, as if conducted between unrelated third parties. Consequently, when calculating profits in relation to affiliated companies or permanent establishments in different countries, companies must ensure adherence to these arm's length principles. Often, the assessment of compliance with arm's length standards occurs post-tax year, leading to corrections in profit allocations among countries. These corrections may involve issuing additional invoices to reallocate profits and costs in accordance with transfer pricing rules.

From a VAT perspective, questions arise regarding whether these supplementary invoices pertain to intercompany supplies and whether the invoiced amount constitutes remuneration for supplies or services, or merely represents a price adjustment. In the latter scenario, VAT obligations may arise.

Previous Case Law 

Transfer pricing primarily addresses corporate-level profits, whereas VAT pertains to individual transactions. Transfer pricing adjustments fall within the realm of VAT if a direct link exists between the fee and the goods or services supplied. In a 2020 ruling, the ECJ determined that if the price of goods or services is altered due to transfer pricing adjustments, these transactions fall within the purview of VAT.

Preliminary Questions

Recently, preliminary inquiries were submitted to the ECJ regarding a Romanian case. This case involves 'general' transfer pricing adjustments, where the profit of an operating company is aligned with its activities and risks under the margin method.

The dispute centers on three transfer pricing invoices issued by a Belgian parent company to its Romanian operating subsidiary following a transfer pricing investigation. Initially declared as intra-Community supplies, the invoices were later corrected to 'supplies of services' by the parent company. While the operating subsidiary recognized two of these invoices as services, the Romanian tax authorities disputed this classification and denied VAT deduction, despite the Belgian tax authorities recognizing them as services. In the appeal process, the Romanian court referred preliminary questions to the ECJ seeking clarification on:

1. Whether general transfer pricing adjustments between related companies should be treated as VAT-taxable transactions.
2. The criteria for a taxable person to be entitled to deduct VAT, specifically regarding the proof required for invoices related to economic activity.

Significance of Accurate Analysis

While transfer pricing adjustments primarily fall under corporate tax jurisdiction, their VAT implications can be substantial. Properly assessing the VAT consequences of transfer pricing adjustments requires meticulous factual analysis. Incorrect VAT assessments can result in significant retrospective VAT liabilities, particularly due to improperly deducted VAT or unremitted VAT. In the aforementioned dispute, the Romanian tax authorities denied VAT deduction despite VAT being indicated on the invoices (VAT reverse charged), underscoring the importance of precise analysis in VAT matters.

Want to know more?

The relationship between VAT and transfer pricing is a complex issue. It would benefit legal certainty if more clarity is provided on this when answering questions to the ECJ. At ABAB, we like to be of significance. By sharing knowledge, giving advice and providing insight. Would you like to know more about transfer pricing adjustments and their VAT implications or would you like advice and/or support on your VAT issues? Feel free to contact, Anne Kin, international VAT specialist , at phone number +31135915125 or send Anne an e-mail.