Introduction

Businesses have long sought clarification on the interaction of VAT and transfer pricing ("TP") rules. The uncertainty relates primarily to whether TP adjustments are outside the scope of VAT or whether they constitute an adjustment to consideration for a supply of goods or services for VAT purposes.

There is some non-binding guidance available in the form of working papers from the EU VAT committee and the VAT Expert Group. In 2017 the VAT Committee recommended a number of factors to take into account, when determining whether a TP adjustment should be considered for VAT purposes (such as the arm's length principle, and the existence of a direct link between the supply and consideration). In 2018, an EU VAT Expert Group Paper concluded that, unless otherwise agreed contractually between the parties, a TP adjustment should be treated as outside the scope of VAT, where it relates to B2B transactions and the parties have full VAT recovery.

Two CJEU referrals

While these working papers are a helpful resource, there is currently no binding precedent to rely upon when seeking to determine the VAT treatment of transfer pricing adjustments in the EU. However, this is likely to change as two cases have recently been referred to the Court of Justice of the European Union ("CJEU"). One of the referrals is from the Romanian courts and the other is from the Swedish courts. A brief summary of these referrals is set out below:

  1. Acromet Towercanes (C-726/23)[1]: The appellant is a Romanian company which is part of a global group of companies in the crane rental sector. During an audit by the Romanian tax authority, a number of 'equalisation invoices' were queried by the tax authority. In this referral from the Bucharest Court of Appeals, the CJEU is asked to consider if the amount invoiced by a company to an associated company which is a transfer pricing adjustment to ensure an agreed profit margin, constitutes a payment for a service that falls within the scope of VAT as per Article 2(1)(c) of the Directive. A further query relates to the sufficiency of documents relied upon to justify the level of VAT recovery claimed.
  1. Hogkullen (C-808/23)[2]: Aktiebloaget Hogkullen is the parent company of a real estate management group in Sweden, which provides its subsidiaries with management, financial, real estate management, investment, informational technology and personnel management services, for which it received consideration. The parent company calculated the consideration in line with the application of a cost-plus TP method but it excluded from the cost base certain costs which it considered to be 'shareholder costs' such as audit and meeting costs, together with the costs of a planned new issuance of shares and stock exchange listing. The Swedish tax authority considered that those services formed part of the supply to subsidiaries. The company argued that it is not in line with OECD TP guidelines to charge shareholder costs to subsidiaries. In that light, the CJEU is asked to clarify the interpretation of Article 80 of the VAT Directive in determining the open market value of services supplied by a parent company to its subsidiaries, some of which did not have a full VAT recovery entitlement, and the relevance of the applicable TP method to this exercise.

    It is hoped that the interaction between VAT and TP rules will be clearer, once the CJEU has considered and ruled on the above mentioned cases. We will closely follow the progress of these cases and continue to monitor other relevant developments in this area. However, in the meantime, we note that as is the case for all TP adjustments, careful consideration should be given to the associated VAT implications, and indeed customs implications, where relevant.

Footnotes

1. CURIA - Case information (europa.eu)

2. CURIA - Case information (europa.eu)

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