CJEU’s advocate general on VAT treatment of transfer pricing adjustments

Acting as a distributor, Stellantis Portugal, S.A. purchased vehicles and spare parts from its related manufacturing companies. It then sold them to independent dealers who in turn sold them to end customers. In cases of manufacturing defects, customers contacted the dealers who then invoiced Stellantis Portugal, S.A. for the repairs, which therefore bore the cost of warranty repairs.

Based on the reported costs of distributing vehicles and spare parts and repairing vehicles (including operating costs), manufacturers subsequently adjusted the prices at which they sold the vehicles to the company. This adjustment was made based on a transfer pricing arrangement agreed between them to ensure that the company achieved a planned operating profit. The manufacturers adjusted the sales price of the vehicles and issued the company either a credit or debit note. The Portuguese tax authority considered this transfer pricing adjustment to be a consideration for a service provided by the company to the manufacturer and subject to VAT in Portugal.

According to the advocate general, the fact that the company bears the costs of repairing the goods it sells and that these costs are considered when determining the price of the goods purchased does not mean that it provides a service to a third party. Also, there is no contract that could justify the conclusion that the company provided a service to the manufacturer. Moreover, if its distribution costs or repair costs were lower, the company would have to pay the manufacturer for the service it provided, which would be unrealistic.

In the advocate general’s opinion, the case in question instead concerns a subsequent adjustment of the price for the vehicles supplied that was still uncertain at the time the agreement was concluded and that could change upwards or downwards. It is therefore not necessary to artificially create fictitious services beyond the scope of the deliveries made, especially if those services could lead to negative prices.

The advocate general formulated the following conclusions:

• Where the profit adjustment is made through a separate provision of services for consideration that are not merely fictitious, this constitutes a taxable supply of services.
   
• Where the profit adjustment is made by the tax authorities for the purpose of the proper allocation of profits, this is, in principle, irrelevant for VAT purposes.
   
• If, as in the case in question, the profit adjustment is made through a purchase price that is applicable to a specific supply of goods and has been agreed as variable precisely for this purpose, this constitutes a change to the taxable amount of the original supply, not the provision of a separate service.

We will continue to monitor this case and provide an update as soon as the CJEU rules on the matter.