CJEU Advocate General: transfer pricing and VAT treatment
In his opinion (C-726/23), Advocate General Jean Richard de la Tour stated that remuneration for intra-group services calculated using the transactional net margin method as recommended by the OECD should be regarded as consideration for services rendered and is therefore subject to VAT.
Romanian SC Arcomet Towercranes SRL buys cranes and sells or rents them to its customers. Its Belgium-based parent company, Arcomet Service NV Belgique, finds suppliers for its subsidiaries and negotiates contractual terms with these suppliers. Purchase and rental contracts are concluded directly by the subsidiary with its suppliers and customers.
Based on a transfer pricing study, an operating margin was set between the parent company and its subsidiaries ranging from 0.71% to 2.74%. Should a subsidiary deviate from that margin, one of the parties would issue an equalisation invoice.
Between 2011 and 2013, the Romanian subsidiary generated higher profits. Therefore, the parent company issued equalisation invoices, which the Romanian company reported as the receipt of services from another member state under the reverse charge mechanism. The Romanian tax administration assessed the situation to the effect that the subsidiary had failed to prove that the services were linked to its economic activity. It thus had to pay output VAT, but was denied the right to deduct VAT.
According to the Advocate General, transfer pricing payments must be assessed on an individual basis. However, in the present case it was clear from the wording of the contract that the parent company was providing the subsidiary with supplies, as it assumed most of the commercial responsibilities, such as strategy and planning, negotiating (framework) contracts with third-party suppliers, and others. At the same time, the remuneration for the supplies was set.
According to the Advocate General, in the present case there was a direct link between the supplied services and the consideration, as the amount of the remuneration for the supplies provided by the parent company was set from the time of the conclusion of that contract, and the conditions of the remuneration were determined by precise criteria and as such were not random. The subsidiary issuing an equalisation invoice in the event of a margin lower than the set range cannot call that conclusion into question.
The Advocate General thus concluded that the price settlement was subject to VAT. According to the Advocate General, to prove the right to deduct VAT on the price adjustment received, the tax administration may also require evidence other than tax documents, in accordance with the principle of proportionality.
The Advocate General only opined on intra-EU transactions. Should the CJEU accept the proposed conclusions, the VAT treatment of price adjustments within the EU will be partially clarified. However, please note that even the previous case law does not clarify the impact of a price/transfer pricing adjustment for imports of goods.