VAT audit focus on year-end transfer pricing adjustments

• In tax audit activity focused on financial intermediaries, the Italian Tax Authorities (ITA) have focused, beginning mid-2025, on assessing the value-added tax (VAT) treatment of year-end transfer pricing (TP) adjustments, questioning whether such adjustments qualify as "VAT-relevant consideration."
• The ITA's recent rulings and audit practice distinguish TP adjustments contractually linked to specific supplies — which may affect the VAT taxable base — from adjustments made solely to align margins, which the ITA have generally deemed VAT-irrelevant.
• According to ITA's recent rulings, to be VAT-relevant, TP adjustments must (1) constitute consideration, (2) relate to identifiable transactions and (3) have direct documentation linking them to original supplies of goods/services.
• A recent Court of Justice of the European Union decision confirms that remuneration between affiliates can be VAT-taxable if linked to specific services, and authorities can ask for additional documentation beyond invoices to verify the existence of services, as long as this requirement is necessary and reasonable.
• Financial organizations and, more generally, multinational groups should review agreements and documentation, align processes for correct VAT treatment and consider advance engagement with tax authorities to help mitigate VAT compliance risks.

Executive summary

Since mid-2025 the Italian Tax Authorities (ITA) seem to have increased their focus on financial intermediaries, putting particular emphasis on the value-added tax (VAT) treatment of year-end true-up transfer pricing (TP) adjustments. These actions may have a significant impact on the sector.

Through the analysis of transfer pricing documentation and contracts, the ITA have challenged whether TP adjustments qualify as "VAT-relevant consideration" and have argued that TP adjustments functioning as margin corrections rather than true price alterations, fall outside the scope of VAT under Art. 2 para 3 of Presidential Decree No. 633/1972. As a result, they have assessed nondeductible VAT based on modifications to the pro-rata VAT deductibility percentage.

The ITA's position is based on recent rulings (e.g., No. 60/2018, No. 884/2021, and No. 266/2024), providing that TP adjustments only influence the VAT taxable base if they:

• Constitute consideration
• Relate to specific supplies of goods or services relevant for VAT purposes
• Link directly to the original transaction consideration

In situations in which adjustments merely align margins without contractual and documental evidence that the adjustment changes a consideration for a supply, the ITA have concluded these are not VAT-relevant.

Detailed discussion

Recent clarifications and EU developments

The ITA's latest guidance (see ruling reply No. 266/2024 and No. 214/2025) reinforces that only contractually defined TP adjustments, with clear documentation directly linking the adjustment to an initial supply, count as consideration for VAT. In this regard, documentation and invoice-level breakdown are critical.

In ruling reply No. 214 issued on 19 August 2025, the ITA highlighted the relevance of contractual provisions and supporting documentation in qualifying the VAT relevance of a TP adjustment.

In such a case, the relevant distribution agreement provided that the prices applied to supplies were initially provisional and could be adjusted through periodic TP adjustments, calculated based on the Transactional Net Margin Method (TNMM).

The foreign parent issued a debit note when the Italian company's profitability exceeded the arm's-length range and a credit note when the Return on Sales (RoS) ratio achieved by the Italian distributor was lower than the arm's-length range. The Italian company was able to provide supporting documentation — including a list of affected invoices and a detailed breakdown of the adjustments by transaction — clearly demonstrating the link between the original supplies and the subsequent adjustments. The ITA deemed this sufficient to establish that the adjustments were not general year-end settlements, but direct revisions of specific transaction considerations, and therefore relevant for VAT.

Additionally, a Court of Justice of the European Union (CJEU) decision issued in September 2025 confirmed that (1) payments between affiliates to align profitability may be VAT-taxable services if a direct link to services exists and (2) authorities can require supporting documentation beyond invoices to substantiate the existence of taxable transactions if this requirement is necessary and reasonable.

How to mitigate risk and ensure compliance — practical considerations

Taxpayers assessing possible risk to help ensure compliance may want to consider:

• Starting internal assessment proceedings aimed at revisiting and assessing past TP adjustments to confirm they have been treated correctly for VAT purposes
• Reviewing and, where needed, updating intercompany agreements to clearly establish the contractual framework and amounts for transfer pricing adjustments
• Ensuring that every TP adjustment considered relevant for VAT purposes is tied to specific, identifiable transactions and supported by thorough documentation that demonstrates its connection to the original supply or service
• Aligning invoicing, accounting and record-keeping practices with the correct VAT requirements (including reverse charges, invoice breakdowns and credit/debit notes)
• Engaging proactively with tax authorities — through advance rulings or cooperative compliance programs — to clarify interpretations and reduce uncertainty

With scrutiny on intra-group transactions intensifying across the European Union, acting now and prioritizing robust compliance can help businesses avoid legal disputes and protect their financial integrity. Affected entities should reach out to knowledgeable tax advisors for assistance navigating these issues.

For additional information concerning this Alert, please contact:

Studio Legale Tributario, Financial Services Milan

• Paolo Zucca
• Antonfortunato Corneli 
• Giancarlo Tardio
• Gabriella Cammarota
• Alberto Giorgi 
• Renzo Rivolta 
• Arianna Vergna 

Ernst & Young LLP (United States), Italian Tax Desk, New York

• Emiliano Zanotti 
• Giulio Monzani 
• Valentina Tagnin 

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor