VAT implications of transfer pricing adjustments
The CJEU has confirmed that amounts invoiced for services between related companies calculated according to the OECD methodology are subject to VAT. If a parent company provides services to a subsidiary that are linked to its operating profit margin, they constitute a taxable supply. Tax authorities may even require additional documents to prove the existence of the services and their link to the company's activities.
Romanian Arcomet engaged in renting cranes. Contractual terms and conditions were negotiated by its parent company in Belgium; the actual purchases and rentals were then carried out by Arcomet in Romania. The transfer prices between the two were set in such a way that the operating profit margin of the subsidiary was in line with the methodology under the OECD international rules for corporate income tax.
Arcomet Romania concluded a contract with its parent company under which the parent company assumed most of the commercial responsibilities such as strategy and planning, negotiating (framework) contracts with third-party suppliers, negotiating the terms of financing contracts, quality and safety management, etc. In addition, the parent company also committed itself to bear the main economic risks associated with its subsidiary’s activities.
On the other hand, Arcomet Romania undertook to purchase and hold all goods necessary for the exercise of its activity and to be responsible for their sale and rental. At year-end, a settlement invoice was issued (under the contract), based on the operating profit margin actually achieved by Arcomet Romania.
In the period under review, Arcomet Romania achieved a higher profitability, and the parent company issued an annual settlement invoice. The heart of the dispute was whether the invoiced amount was subject to VAT.
The court emphasised that to answer the question, the legal relationship between the provider and the recipient was of key importance, and that the remuneration must correspond to the actual value of the services provided.
In the given situation, the legal relationship was supported by a contract, and it was clear from the presented facts that the received services impacted the subsidiary’s operating profit margin, e.g., because of the savings generated due to the activities being carried out by the parent company. The remuneration therefore represented the actual consideration for the received services. As regards the objection that the amount invoiced served merely to adjust the subsidiary's operating profit margin for the purposes of direct taxation, the court disagreed: in its opinion, everything pointed to the existence of the provided services regardless of the fact that the transfer price was set for direct taxation purposes.
According to the court, the fact that the remuneration was variable and depended on the subsidiary's performance did not affect this conclusion. The remuneration was neither voluntary nor was its amount difficult to quantify or uncertain. Its terms were set in advance and based on precise criteria.
The court did not comment on the alternative situation in which the subsidiary would not have achieved the required profit margin.
The court also stated that the tax authorities may require additional evidence of the receipt and use of services, apart from the invoice, as long as it was necessary and proportionate. The right to deduct VAT cannot be denied simply because an invoice does not meet certain formal requirements, if it contains all the information necessary to verify that the substantive conditions for claiming the VAT deduction were met.
It is therefore not decisive for VAT purposes that the primary reason for transfer pricing adjustments was direct taxation (corporate income tax). It is always necessary to also assess the financial flows from a VAT perspective and to examine whether the payment is based on a supply for VAT purposes (in this case, the supply of services).