The Advocate-General has advised the European Court that transfer pricing adjustments that are contractually agreed within the framework of intra-group services may result in a consideration for a supply of services which is inside the scope of VAT. In his much-anticipated opinion, the Advocate-General discusses the potential VAT aspects of transfer pricing adjustments.
Key insights
- TP adjustments which are contractually agreed within the framework of intercompany services can be within the scope of VAT as a consideration for a supply of services according to the advice of the Advocate-General. Businesses may be confronted with additional compliance obligations if this advice will be followed by the European Court.
- Businesses should carefully consider the VAT aspects and in particular the compliance aspects.
Background
The VAT treatment of transfer pricing (TP) adjustments is an important topic for multinational businesses. The question is whether TP adjustments should be seen as (a correction of) the consideration for supplies of goods or services or rather as payments outside the scope of VAT. If TP adjustments attract VAT, this may result in substantial compliance requirements for businesses (credit invoices and VAT return corrections). For companies that are not (fully) entitled to reclaim the VAT on costs, TP adjustments on the 'cost side' may also result in additional VAT leakage.
In the absence of specific VAT rules for TP adjustments, some time ago, the EU VAT Committee and the VAT Expert Group have shared their views on the VAT aspects of TP adjustments. Some EU countries have published their own guidelines on the interaction between TP adjustments and VAT in their jurisdictions. There are also various other cases pending at the European Court about the interplay between VAT and TP.
Arcomet case (C‑726/23)
The case concerns an international group that is involved in the lease and sale of tower cranes. The functions performed and the risks assumed by the group are spread across different entities in different jurisdictions. Arcomet Belgium bears the main economic risks associated with the group's business. Its activities include (among others) the strategy and planning of the activities, the servicing of the tower cranes and the negotiation of contracts with suppliers. The tower cranes are purchased or leased by Arcomet Romania and are subsequently sold or leased by Arcomet Romania to external customers. Arcomet Romania is bound to the instructions and procedures set out by Arcomet Belgium. A TP agreement was concluded between Arcomet Belgium and Arcomet Romania that arranged for a guaranteed profit margin for Arcomet Romania. The profit margin was based on the 'transactional net margin method' as provided for in the OECD TP guidelines and was supported by TP documentation. Arcomet Belgium issued various settlement invoices to Arcomet Romania to ensure that Arcomet Romania's operating margin was in line with the profit margin agreed.
In dispute is (among others) whether the TP adjustments as invoiced by Arcomet Belgium constitute a remuneration for the services provided by Arcomet Belgium to Arcomet Romania.
Advocate-General's advice
The VAT taxable amount for services is generally based on the consideration actually received by the service provider for the provided services (Member States may prescribe the 'open market value' in exceptional cases). The OECD TP guidelines and the 'at arm's length principle' were developed solely for direct tax purposes and are therefore in principle not recognized for EU VAT purposes.
The Advocate-General has now advised the European Court about the VAT aspects of (year-end) profit settlement invoices based on a guaranteed profit margin. The Advocate-General takes the view that the VAT implications of TP adjustments should be analyzed on a case-by-case basis. The Advocate-General is of the view that the TP adjustments in the Arcomet case should be seen as a remuneration for the services provided by Arcomet Belgium to Arcomet Romania and consequently be within the scope of VAT. In that regard, the Advocate-General considered that the TP adjustments were contractually agreed between parties, the modalities to determine the TP adjustments were objectively defined in the contractual arrangements and the TP adjustments could be directly linked to the services provided by Arcomet Belgium to Arcomet Romania. The fact that the exact amount of the TP adjustments is unclear at the moment the services are rendered should not be relevant according to the Advocate-General. The same goes for the fact that, in case of a negative profit, Arcomet Romania would have issued an invoice to Arcomet Belgium (instead of the other way around).
Relevance for practice
Based on the view of the Advocate-General, TP adjustments that are contractually agreed within the framework of intra-group services may qualify as a VAT relevant consideration if these can be directly linked to the services provided. This sounds logical and therefore does not come as a surprise. It is now up to the European Court to make its own decision regarding this important topic. In the meantime, it is recommended for businesses to analyze the VAT aspects of their group's TP policies and the ERP-implementation of any TP adjustments.
Our dedicated VAT specialists would be glad to provide advice on the implications for your business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
