In international taxation, the crossroads between transfer pricing (TP) and value added tax (VAT) has always been a tricky one - and it just became even more interesting. With the Court of Justice of the European Union (CJEU) recent judgment in Arcomet Towercranes SRL (Case C-726/23), TP adjustments are once again under the VAT spotlight.
The CJEU held that intragroup year-end profit adjustments which have been commonly, and potentially erroneously, in our view, considered to be outside the scope of VAT can, under certain conditions, constitute taxable supplies for VAT purposes thereby giving rise to VAT consequences.
Businesses should therefore review their related party transactions to establish whether TP adjustments fall within or outside the scope of VAT, safeguarding historic positions to disregard such adjustments form a VAT perspective.
THE ARCOMED CASE IN BRIEF
The case concerned two related entities established in different Member States in the EU. The entities entered into a service agreement where the remuneration was determined based on the OECD TP rules to ensure a target operating profit margin. At year-end, adjustment invoices were issued to align the profit margin with the TP studies.
The Tax Authorities considered that VAT was due under the reverse charge mechanism on these invoices, but found that the input VAT was not recoverable.
The case focuses on how the Council Directive 2006/112/EC on the common VAT system should be interpreted in relation to two key questions:
- Whether invoices issued between related entities to adjust profits in line with the OECD TP Guidelines can be regarded as consideration for VAT-taxable services.
- Whether tax authorities may require additional evidence beyond invoices to support input VAT recovery for such intra-group services.
The CJEU held that there was a direct link between the services rendered (which were contractually agreed) and the payments made (constituting reciprocal performance). Therefore, the TP adjustments fell within the scope of VAT and constituted consideration, even though the remuneration was variable and calculated based on OECD Transfer Pricing Guidelines to achieve specific profit margins.
Regarding the second question, the CJEU clarified that tax authorities may legitimately request additional evidence beyond a proper VAT invoice to verify that services were actually supplied and used for taxable business purposes, since a business must satisfy both formal and substantive conditions to ensure input VAT recovery. Therefore, recovery of input VAT is not automatic.
IMPACT OF THE DECISION
The Arcomet judgment touches upon an area long marked by complexity and uncertainty. Even though it was always our view, based on basic principles that TP adjustments may (under conditions) constitute VATable supplies, this judgement highlighting that such adjustments cannot automatically be disregarded from VAT as a purely direct-tax mechanism.
The decision makes clear that a binding agreement/obligation reflecting genuine intra-group supplies can fall within the VAT scope, even if the relevant amounts involved are a result of a TP adjustment.
As a result, cross boarder intra-group transfer pricing adjustments may now create VAT reporting obligations and even costs which were previously disregarded.
NEXT STEPS
While the Arcomet judgment offers a useful guidance, it also illustrates that this area remains far from clear-cut. The CJEU’s findings are highly dependent on the underlying facts and contractual realities of the case, meaning that the VAT treatment of TP will differ across cases. Member States have already begun issuing assessments on cases concerning VAT and TP and further developments are expected from CJEU judgements which indicates the need for immediate action to safeguard current positions before further and potentially stricter interpretations come into play.
Businesses should therefore adopt a cautious, case-by-case approach on their intra-group arrangements and are encouraged to take actions to safeguard historic positions while at the same time ensure any opportunities or risks are identified and managed.
We are naturally at your disposal to assist you in reviewing your intra-group agreements, TP studies and supporting documents.
Contact us:
George Liasis
Partner, Indirect Tax
George.Liasis@cy.ey.com
Charalambos Palaontas
Partner, Transfer Pricing
Charalambos.Palaontas@cy.ey.com
Elpida Papachristodoulou
Director, Indirect Tax
Elpida.Papachristodoulou@cy.ey.com
Iacovos Kefalas
Director, Indirect Tax
Iacovos.Kefalas@cy.ey.com
Ioanna Drousioti
Manager, Indirect Tax
Ioanna.Drousioti@cy.ey.com
Pantelis Charalambides
Manager, Indirect Tax
Pantelis.Charalambides@cy.ey.com
