The interaction between Value Added Tax (“VAT”) and Transfer Pricing (“TP”) has become an increasingly complex area for multinational groups.  

Recent judgements of the Court of Justice of the European Union (“CJEU”) in Högkullen AB (C-808/23), Arcomet Towercranes (C-726/23) and Stellantis Portugal (C-603/24) have provided some much-needed clarification and guidance, particularly in the context of intra-group services, year-end true-ups and open market value adjustments.  

In this article, in the context of key VAT and TP principles, we outline common themes emerging from the CJEU judgments and what the decisions mean for businesses.

It is clear from the decisions that while different taxes, VAT and TP cannot be looked at in isolation and the VAT treatment of supplies should be considered by reference to core VAT principles, while also considering the TP policies.  

A detailed case specific summary of each judgment can be found at Appendix 1.

Immediately below, we highlight key takeaways for in-house Tax and Finance teams to consider.

Our VAT and TP specialists are here to help you navigate the complexities. If you wish to discuss the implications on your business, please contact us.  

VAT and transfer pricing: key takeaways for businesses

  • VAT and TP are becoming increasingly interconnected, and businesses need to consider its TP policies from both a direct and indirect tax perspective. While recent CJEU judgments do not create a single VAT rule for TP adjustments, the key message is that given it is a transaction-based tax, the VAT treatment needs to be assessed on a case-by-case basis. Some TP adjustments may be VATable, others may not and it is the facts and circumstances, rather than the label attached, that will determine the VAT treatment. 
  • TP does not determine the VAT treatment. Equally, the VAT treatment should not be determined solely by the TP characterisation adopted by the parties. The fact that a TP policy is in place or something is described as a “TP adjustment” does not automatically mean a VAT charge arises. 
  • A review of TP policies and intra-group agreements should be carried to ensure businesses continue to be compliant from a VAT perspective and to identify any inter-group activity that may give rise to VAT exposure. This should include a review of management charges, cost-sharing arrangements, head office recharges as well as year-end adjustments.  
  • Businesses should ensure that the nature of the activities being performed, the basis of any recharge and the operation of the arrangements in practice are clearly documented and supported, with particular consideration given to whether payments may be regarded as consideration for identifiable supplies for VAT purposes. 
  • As part of its review of TP policies, businesses should consider whether TP adjustments are documented as price adjustments or service consideration and should ensure that detailed intercompany contracts are in place which clearly set out a description of services, the relevant parties, the existence of reciprocal performance as well as the payment terms agreed. 
  • Sufficient documentation needs to be in place to support VAT recovery entitlements, particularly for businesses who do not operate with full VAT recovery entitlements. Businesses should ensure that where a VATable supply has been carried out, VAT has been applied correctly and relevant invoices raised. 
  • In an ever-evolving world of complexity and tax authority scrutiny, it is important that businesses are comfortable with the treatment applied from both a TP and VAT perspective. Amongst the complexities, one key fundamental VAT principle continues to ring true: consideration needs to be given to the contractual arrangements and the economic reality of the transaction as to whether there is a supply for consideration with a direct link being in place between that supply and the payment received. 

Key VAT and transfer pricing principles

Before diving into the CJEU decisions and what they mean for businesses, it is important to understand the key VAT and TP principles. 

VAT

VAT is a tax levied on transactions and for VAT to apply, the transactions need to be within the scope of VAT. 

There are five key requirements to create a VATable transaction. If one of the five requirements below is missing, the supply should fall outside the scope of Irish VAT.

  1.  Supply for consideration (i.e. payment)

  2.  Goods or services

  3.  By a taxable person

  4. Acting in that capacity

  5. Place of supply is Ireland

TP

Irish TP rules apply to arrangements between associated parties. Their purpose is to ensure that profits, gains and losses subject to Irish tax are calculated as if the parties had transacted with each other on an arm’s length terms, consistent with the conditions that would have been agreed between independent enterprises. Where the actual consideration charged between associated parties differs from an arm's length amount, an adjustment may be required for tax purposes.

For an arrangement to fall within the scope of the Irish TP rules, three key conditions must generally be satisfied:

  1. There must be a supply or acquisition of something of economic value, such as goods, services, financing, or tangible or intangible assets.

  2. The parties to the arrangement must be associated at the time of the transaction.

  3. One or both parties must be within the charge to Irish tax in respect of the relevant activities.

Where these conditions are met, the consideration payable or receivable must be consistent with the arm's length principle.  

Recent CJEU decisions: what they mean for VAT and transfer pricing

While somewhat connected, both VAT and TP are different taxes and no automatic link exists between them. Each transaction should be considered independently from a VAT perspective, as a TP adjustment does not automatically mean a VATable supply. 

Not all TP adjustments are the same. Some may present consideration for additional goods or services supplied, others may constitute an adjustment to the taxable amount of an existing supply, while certain adjustments may simply reflect a profit reallocation or year-end true up undertaken to achieve an arm’s length outcome under a TP policy. Depending on the facts, a TP adjustment may be subject to VAT, outside the scope of VAT, or relevant solely for direct tax purposes only.

Albeit of potential relevance, the mere existence of a TP policy or year-end profitability adjustment does not determine the VAT treatment. Rather the VAT position should be assessed based on the underlying legal, commercial and economic substance of the arrangement, including whether there is an identifiable supply and a direct link between that supply and the consideration received.

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.

A direct link is established if there is; 

  1.  A legal relationship between the service provider and the recipient pursuant to which there is reciprocal performance; and
  2. Remuneration received for the performance of those services should be consideration for the identifiable service performed where the payment is neither voluntary, uncertain or difficult to quantify. 

It is therefore important that contracts between parties are sufficiently detailed and clearly outline the nature of the services being provided. In addition, payment terms should be specific enough such that they can include reciprocal performance.
 

VAT law precludes tax authorities from treating services supplied by a parent company to its subsidiaries as a single supply in all circumstances. Even if a single price is payable, each component of the supply should be analysed on its own merits. In scenarios where a number of elements are so closely linked that they may objectively be considered a single supply, from a VAT perspective it is not appropriate to artificially split a transaction, in particular where each element to the supply could be supplied independently on the open market. Similarly, from a TP perspective, the nature of the activities performed should be considered when assessing whether a charge is appropriate and how the costs should be allocated between group entities.

Services performed 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. Care should also be taken to distinguish activities which provide a benefit to group entities from shareholder or investor-related activities which may not be appropriate to recharge.

Multinational groups should review their intercompany agreements, transfer pricing policies, and supporting documentation to ensure they accurately reflect the nature of the activities performed, and basis for any charge between the group entities, in particular around the descriptions outlined, and cost allocation methodologies, to ensure that VAT is being applied correctly. This will become particularly important for multinational groups engaged in VAT exempt activities where partial or no VAT recovery entitlement exists. Additionally, consideration should be given to the impact of open market value rules as well as the rules around multiple and composite supplies.
 

The CJEU leaves it open to the tax authorities to go beyond the underlying invoice to support VAT recovery entitlements. Tax authorities can request further documentation to support VAT recovery where the request for any additional supporting documentation is necessary and proportionate to determine the right to VAT deductibility. This is particularly relevant where intra-group charges and year-end TP adjustments are implemented through settlement invoices, debit notes or credit notes.

Tax authorities cannot refuse a VAT deduction solely because the underlying invoice does not satisfy VAT invoicing requirements where the taxpayer can demonstrate that the services received are directly connected to its taxable activities. Therefore, the burden of proof rests with the taxpayer seeking the VAT deduction. Businesses should therefore be able to demonstrate not only that services were received, but also the nature of the activities performed and the commercial rationale for the charge.

This highlights the importance of supporting documentation and contracts to a transaction. Intercompany agreements should be in place and should clearly show the services provided, the parties to the transaction, any reciprocal and/or remuneration terms, how remuneration is calculated as well as any year-end adjustments and required operating profit margin. From a TP perspective, particular attention should be given to documenting the functions performed, assets utilised and risk assumed by the parties and the pricing methodology used to determine any year-end true-up or adjustment.

Contact us

Should you have any queries in respect of the above or the implications for your business, please contact Barry McNamara, Áine Casey, Ajay Singh or Nuri Ozman. 

Barry McNamara
Director - Indirect Tax
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+353 (0)1 499 5243
Ajay Singh
Transfer Pricing Director
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+353 (0) 1 499 5241

Case

Background

Judgment

Högkullen AB

Högkullen AB, a Swedish holding company, was actively involved in the management of its subsidiaries. It supplied management and support services to its subsidiaries which included premises, IT, etc. and charged subsidiaries using a cost‑plus model. 

During 2016, it invoiced c. SEK 2.3 million to its subsidiaries, an amount significantly lower than the total costs incurred of c. SEK 28 million. It excluded certain costs from the recharged amount, particularly shareholder-related expenses such as audit fees, general meeting costs, and capital raising expenses. 

This distinction reflected the view that certain activities were undertaken in the capacity of being the shareholder and did not provide a direct benefit to the subsidiaries and therefore were not appropriate for recharge under the group’s TP policy.

The VAT treatment of the services recharged differed, with some elements being subject to VAT, some VAT exempt and others outside the scope of VAT. VAT recovery was taken in full by Högkullen on the costs incurred.

The Swedish tax authority (“STA”) challenged this approach, arguing that the intra-group charges were below open market value and that all costs, including shareholder expenses, should be included in the taxable base, with each service assessed separately.

 

The CJEU held that EU VAT law precludes tax authorities from treating services supplied by a parent company to its subsidiaries as a single supply in all circumstances. 

Transactions comprising a single supply from an economic perspective should not be artificially split. Similarly, the fact that a single price is set and charged is not decisive in determining whether a single supply arises.  

The Court concluded that the various management services provided were not so closely linked as to constitute a single indivisible supply, notwithstanding that they were invoiced for a single consideration.

As such, each individual service could be supplied independently on the open market and were individually identifiable, with their own character.

The decision highlights the importance of understanding the underlying nature of intra-group activities and ensuring that service descriptions and charging arrangements appropriately reflect the activities being performed.

In the absence of a comparable open market price, the taxable amount should be determined by reference to the costs incurred in providing those services.

 

Arcomet 

Towercranes

Arcomet Romania (“Arcomet RO”) purchased and rented cranes for resale or rental to customers. Arcomet RO was the entity who held and concluded the sale/rental contracts, but it was another group entity, Arcomet Belgium (“Arcomet BE”) who sourced suppliers and negotiated contracts on behalf of Arcomet RO. 

A group TP study required subsidiaries to maintain a target profit margin. For a number of years, Arcomet RO recorded excess profits, leading Arcomet BE to issue TP invoices to recover the surplus. Arcomet RO self-accounted for reverse charge VAT on some invoices and treated others as outside the scope of VAT. The TP adjustment mechanism was intended to align the profitability of the group entities with the arm's length outcome identified in the TP analysis. However, Arcomet BE also performed commercial activities and assumed responsibilities which influenced the profitability achieved by Arcomet RO.

During an audit, the Romanian tax authority (“RTA”) denied input VAT deductions, arguing that Arcomet RO failed to demonstrate that the invoiced services were directly linked to its taxable activities.

 

 

 

The CJEU reaffirmed that a transaction is subject to VAT only where there is a direct link between a service supplied and the consideration received. There should be a legal relationship between the parties which involves reciprocal performance and clearly identifiable remuneration. This illustrates the importance of detailed contracts and agreements being in place between the parties. 

To establish whether a direct link exists, all circumstances should be considered. The remuneration should not be voluntary or uncertain and should not be difficult to determine. 

The CJEU found that Arcomet BE performed commercial functions and assumed economic risks that influenced Arcomet RO’s profitability, and that the payments made were directly linked to those activities.

From a TP perspective, the decision highlights the importance of considering the underlying functions performed, assets used and risks assumed by related parties when assessing the nature of intercompany payments. The fact that a payment is determined by reference to a TP policy does not, in itself, determine its VAT treatment. Rather, regard should be given to the activities carried on in practice and the commercial rationale for the payment.

Accordingly, in Acromet Towercranes, it was determined the TP adjustments constituted consideration for services and fell within the scope of VAT. 

In addition, the CJEU held that tax authorities cannot refuse input VAT recovery solely due to formal invoicing requirements not being met. Provided necessary and proportionate in order to consider the entitlement to VAT recovery, tax authorities can request additional supporting documentation to confirm services were incurred for the purpose of the taxable activities of the business. 

From a VAT recovery perspective, the burden of proof lies with the taxpayer to ensure sufficient documentation is available to demonstrate the entitlement to reclaim VAT. 

The decision also underlines the importance of ensuring that TP documentation, intercompany agreements and the conduct of the parties are aligned. Where a related party performs genuine functions or assumes responsibilities for the benefit of another group entity, businesses should ensure that these activities and the basis for any remuneration are clearly documented and supported.

 

Stellantis Portugal S.A 

Stellantis, a Portuguese company within the General Motors group, operated as a distributor of motor vehicles acquired from group manufacturers. It made onward supplies of motor vehicles to independent Portuguese dealers. The independent dealers sold the vehicles to the final customers.

Under the group’s TP policy agreed in 2004, Stellantis was required to achieve a specific operating margin for its distribution activities which was based on the sales price of the vehicles and corresponding costs. Preliminary vehicle prices were set, after which TP adjustments ensured that Stellantis achieved the agreed profit margin. The TP policy was therefore intended to ensure that Stellantis earned an agreed arm’s length return for its distribution activities, with periodic adjustments made to align actual results with the target profitability.

A key element of the costs included repair costs covered under warranty. The local Portuguese dealers carried out repair works who then invoiced Stellantis for such works (plus VAT) with Stellantis bearing all after-sales and operating costs. 

These costs were reported to the manufacturing entities, who then adjusted the sales price of vehicles to reflect the repair costs borne by Stellantis. These adjustments were documented by the issuance of credit or debit notes (ex. VAT). 

Following an inspection, the Portuguese tax authority (“PTA”) argued that the TP adjustments constituted consideration for services supplied by Stellantis to the manufacturing entities and should, therefore, be subject to VAT. As VAT had not been applied by Stellantis, the PTA took the view that a VAT underpayment of c. €1.5 million had arisen. 

 

The CJEU disagreed with the PTA’s interpretation and took the view that for a taxable supply to arise there should be a direct link between the supply of services and the consideration actually received by the taxable person. Such a direct link is established if there is a legal relationship between the parties, and the remuneration received by the supplier relates to actual consideration for an identifiable service. 

The CJEU determined that the objective of the 2004 agreement was to fix the transfer prices of the vehicles and to guarantee that Stellantis obtained a specifically determined profit margin. From a TP perspective, the Court recognised that the purpose of the adjustment mechanism was to achieve a targeted arm’s length outcome for the distributor rather than to compensate Stellantis for the provision of a separate service. While a clear legal relationship existed, the agreement did not specify that Stellantis was to provide repair services to the manufacturing entities in return for remuneration. As such, no direct link arises between the services provided and the payment received.

The decision highlights the importance of clearly documenting the purpose of year-end TP adjustments and ensuring that intercompany agreements accurately reflect whether an adjustment is intended to modify pricing between related parties or remunerate a specific activity or service. Where a TP adjustment is designed solely to achieve an agreed profit level, this should be clearly supported through the contractual arrangements and wider transfer pricing documentation.

 

 

 

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