Replying to the clarification No° 60/2018, submitted by a taxpayer about the relevance, for VAT purposes, of contributions made by the controlling entity to compensate the operating losses of the controlled entity, the Revenue Agency provides a useful clarification about the treatment of different cases of TP adjustments. Differences in the conditions for the application, and lack of some of the requirements needed for the proper application of the tax led the Agency to qualify such contributions compensating operating losses how operations not relevant for VAT purposes.

Clarifying the doubt rose following the taxpayer application No° 60/2018, the Agency outlines as in the case TP adjustments are applied to compensate operating losses and to align margins with the arm’s length principle, these are not relevant for VAT purposes.

The case treated in the clarification regards the company Beta that, acting as a Principal, bears all risks relating to the production and sale of the products for which Alfa is responsible for the production (the applicant of the clarification). In this regard, Beta signed an agreement with Alfa, qualifying as contract assembler, according to which Alfa undertakes to make the equipment it owns to the other local subsidiary Gamma acting as a contract manufacturer. Among Alfa responsibilities, the Company is also responsible for the coordination of production and distribution elements, as well as for the management of logistics and quality control on behalf of Beta. The products purchased by Gamma are subsequently resold by Alfa to Beta for distribution in the latter's markets. Both sales of products occur at prices aligned with the TP policy set by the Group and in compliance with the arm’s length principle. However, as envisaged by the TP policy, in the event that the sales of Alfa, even if carried out consistently with said policy, should reveal a final profitability of the Company that does not fall within the interquartile range identified, a contribution (TP adjustment) is made in order to align such a marginality with the relevant arm’s length evidence. In this sense, the appellant asks if this contribution is relevant for VAT purposes.

In its response, the Agency argues as, in the case under analysis, since the lack of one of the main requirements for the proper application of VAT, consisting in the identification of a synallagmatic relationship between the contribution and the sales of goods carried out with Beta, the needed conditions do not exist for these operations be relevant for VAT purposes.

The response provided by the Agency confirms the previous orientation of the EU Commission that in its working paper no°923 of February 2017, highlights the relevance of TP adjustments for VAT purposes in all cases where the adjustments can be considered as remunerations paid directly in relation to certain and previous sales of products. Differently, in the case in exam, the adjustment is configured as a mere contribution to the financial year and therefore since the aforementioned synallagmatic relationship between the contribution and the sale of products misses, there is not that "subjective value" to be understood as the price actually paid for a given good or service, that represents the basis for the application of the value added tax.

Matteo Coppola
Transfer Pricing Manager - Milan