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Recent decisions of the Court of Justice of the European Union highlight the complex interaction between VAT and transfer pricing, urging businesses to review intra-group agreements and policies for VAT compliance.
Some of the main takeaways for businesses to consider and review internally include:
- A review of transfer pricing policies and intra-group agreements to ensure compliance from a VAT perspective.
- The need for detailed contracts which include clear payment terms.
- Sufficient documentation being in place to support VAT deductions, particularly for holding companies.
Our experienced team can help you navigate the impact of these CJEU decisions and ensure your VAT and transfer pricing arrangements remain compliant and efficient.
Arcomet Towercranes (C-726/23)
Intra-group transfer pricing adjustments are subject to VAT, but tax authorities could demand documentation to support VAT deduction.
Background
The CJEU’s recent decision in SC Arcomet Towercranes SRL considers the VAT treatment of intra-company transfer pricing adjustments as well as the supporting documentation which can be requested by a tax authority. By way of background, Arcomet Romania purchases or rents cranes for resale or onward rental to its Romanian customers. Arcomet Belgium seeks suppliers on behalf of its subsidiaries, which includes Arcomet Romania, and engages in contract negotiations with suppliers. However, the sale or rental contracts are concluded by Arcomet Romania with both the supplier and the customer.
As part of a transfer pricing study carried out in December 2010 in respect of transactions between Arcomet Belgium and its subsidiaries, it was deemed the subsidiaries were required to record an operating profit margin of between -0.71% and 2.74%, in accordance with transfer pricing rules.
Arcomet Romania recorded profit surpluses in 2011, 2012, and 2013 and Arcomet Belgium issued transfer pricing invoices to Arcomet Romania to recover the excess profit. Arcomet Romania applied and operated the reverse charge mechanism and treated the initial two invoices as an intra-Community acquisition of purchases. The third invoice was treated as being outside the scope of VAT.
During a tax inspection, the Romanian tax authorities rejected the input VAT deduction taken on the basis that Arcomet Romania failed to prove that the services referred to in the invoices were in
connection to its taxable activities.
Questions referred to the CJEU:
The Romanian Court of Appeal referred the following questions to the CJEU:
- Should transfer pricing invoices issued by one company to another constitute a payment for a service and therefore fall within the scope of VAT?
- If so, are tax authorities entitled to request additional documentation to support the link between the services purchases and the receiving company’s taxable activities?
Are transfer pricing invoices subject to VAT?
The CJEU firstly stated that fundamentally a supply of services “for consideration” will be subject to VAT only if there is a direct link between the service provided and the remuneration received. In the context of the Arcomet, Arcomet Belgium provided certain commercial services and bore economic risks associated with the activity of Arcomet Romania. Arcomet Romania agreed to remunerate Arcomet Belgium a specific amount for these economic risks.
The CJEU opined that the payments made by Arcomet Romania were for the activities carried out by Arcomet Belgium that affected Arcomet Romania’s profit margin. As such, there was a direct link between the services provided and consideration paid and therefore, the supply of services fell within the scope of VAT.
Documentation required to support VAT deduction
The case also provides that tax authorities cannot refuse a VAT deduction on the sole ground that the underlying invoice does not satisfy VAT invoicing requirements if the taxpayer can otherwise demonstrate that the service received were directly attributed to its taxable activities by means of other documentation or substance.
The burden of proof is therefore on the taxpayer seeking deduction and the CJEU leaves it open to the tax authorities whether to request further documentation to support VAT deduction. However, any additional supporting documentation requested by the tax authority, must be necessary and proportionate to determine the right to VAT deductibility.
Practical implications
Under intra-EU transfer pricing arrangements, assuming certain risks and responsibilities on behalf of an associated company should constitute a service for VAT purposes. This requires the associated company receiving the service to self-account for VAT. However, it is important that contracts between the parties are sufficiently detailed and clearly note the detail and nature of the services being provided. In addition, payment terms should also be specific enough such that they can include reciprocal performance.
From a VAT deduction perspective, invoices should clearly indicate the nature of the services rendered and the amount paid. The burden of proof to demonstrate deduction entitlement sits with the taxpayer making the claim. This means that in the event of scrutiny from the tax authorities, it is important to maintain supporting documentation to prove that the service was used for taxable activities, e.g. transfer pricing agreements, evidence of economic activity – particularly for holding companies.
Högkullen AB (C-808/23)
Parent-subsidiary supplies – the CJEU addresses the taxable amount of intra-group supplies for VAT purposes.
Background
This case concerns the taxable amount of intra-group supplies. Högkullen AB (Högkullen) is a Swedish parent company of a real estate group and provides intra-group services management, financial, real estate management, investment, IT and HR services to its subsidiaries in exchange for consideration subject to VAT. In 2016, Högkullen invoiced its subsidiaries for a total amount of c. SEK 2.3 million.
Högkullen invoiced the services performed to its subsidiaries using the cost-plus method covering expenses such as premises, telephone, information technology, corporate hospitality, and travel, however, the taxable amount charged was lower than the total amount of all expenses incurred by the Swedish parent company (of c. SEK 28 million) as some of the costs relating to shareholder expenses like audit fees and expenses related to the general assembly meetings, as well as the costs of raising capital, were excluded from the taxable amount. This led to a lower tax amount (VAT) than expected by the Swedish tax authorities.
Of the costs incurred by Högkullen in 2016, approximately half of such costs related to costs subject to VAT, with the remainder being VAT except or costs which would have been outside the scope of VAT.
The Swedish tax authorities disputed the taxable amount, arguing the amount charged by Högkullen to its subsidiaries was below the open market value and should include all costs incurred, including shareholder expenses. The authorities stated that each management service provided should be considered separately and that the open market value should align with the full costs incurred.
Questions referred to the CJEU:
The following questions were referred to the CJEU:
- The CJEU was asked to clarify whether the services provided by a company to its subsidiaries should be considered a single supply for which there is no comparable price for VAT purposes.
- Whether the open market value is to be determined based on the full costs incurred, including costs of raising capital and shareholder expenses in the taxable amount.
CJEU decision
The CJEU ruled that European VAT law precludes tax authorities from categorically treating the services supplied by a parent company to its subsidiaries as a single supply in all circumstances. The management services provided by Högkullen to its subsidiaries should not be considered a single supply for which there is no comparable price and therefore prevents the use of the comparison method to determine open market value.
The CJEU reiterated the principles of composite and multiple supplies providing that, in the context of Högkullen, the various services provided cannot be concluded as so closely linked that they form a single indivisible supply.
Even if a single price is payable, each component of the supply can be provided independently in the open market. In determining the consideration, in the absence of an open market value for similar services, the consideration should equal the taxable amount of costs incurred by Högkullen.
The CJEU did not address the second question and stated that this question is only relevant if it would have considered the services provided by Högkullen to its subsidiaries a single unique service.
Practical implications
The CJEU’s decision clarifies that the services by a parent company to its subsidiaries should be assessed individually given each separate service has its own individual and identifiable character, even where a single fee is charged for all services.
The CJEU’s decision highlights the importance of intercompany agreements as well as the interaction between VAT and transfer pricing arrangements and the complexities and challenges which may arise. This is particularly important in scenarios where the recipient of a supply may not have full VAT deductibility entitlements.
Companies should therefore review their intra-group arrangements to ensure VAT is being applied correctly. Consideration should also be given as to the VAT multiple and composite supply rules.
Contact us
Should you have any queries in respect of the above or the implications for your business, please contact Barry McNamara, Áine Casey or Merille Pangasinan.
