Are transfer pricing adjustments subject to VAT?

In Case C-726/23, SC Arcomet Towercranes SRL v Direcţia Generală Regională a Finanţelor Publice Bucureşti the Court has been asked to look at whether a payment made by a subsidiary to its parent company as a result of a transfer pricing adjustment is consideration for a supply.

This is an important point as transfer pricing adjustment usually take place on a yearly basis and imply significant adjustments. There has always been a looming question around whether these adjustments should also impact the VAT position of the business.

Background

Arcomet Romania is a subsidiary of the Arcomet group, a global business that operates in the crane rental market. Arcomet Romania buys and rents cranes to customers in Romania while Arcomet Belgium was responsible for finding suppliers for its subsidiaries and negotiating the contractual terms with them. The parties claim that Arcomet Belgium only negotiated prices and the terms and conditions; the cranes were sold directly by the supplier to Arcomet Romania.

A transfer pricing study had previously found that an arm’s length profit margin for Arcomet Romania should be between -0.71% and 2.74%. In 2011, 2012 and 2013 Arcomet Romania achieved a profit margin higher than 2.74% and as a result of that payment of the excess profit was made by Arcomet Romania to Arcomet Belgium.

Initially the payments were said to have been made because Arcomet Belgium had sold the cranes to Arcomet Belgium. This was later corrected and two of the payments were reported as consideration for the provision of services, while one payment was outside the scope of VAT as a transfer pricing adjustment.

The tax authorities, during a VAT audit, decided that the three payments did not relate to the provision of goods or services that were used by Arcomet Romania in order to carry out taxable supplies and assessed VAT under the reverse charge mechanism while also refusing VAT recovery on the input element.

The CJEU considers this case to be very complex and has therefore requested that an Advocate General (AG) reviews it and provides their opinion.

AG’s opinion

The AG’s opinion acknowledges the link to transfer pricing rules and provides a brief overview of the discussions on this matter.

However, to most people’s disappointment it then goes on and states that the three payments are in fact just consideration for a supply of services by Arcomet Belgium which consist of negotiating the terms of purchase agreements on behalf of Arcomet Romania. The fact that consideration is paid only if a profit is achieved within a certain interval is not considered an issue based on passed case law. In other words, what the parties assumed was a transfer pricing adjustment, the AG believes to be consideration for a supply of services for VAT purposes if a “substance over form” view is taken.

The AG uses existing VAT rules to reach this conclusion and which means the link between VAT and transfer pricing rules does not need to be further investigated.

It should also be noted that the AG’s opinion is not binding on the Court i.e. the Court can agree with the AG, ignore the AG’s opinion or only use certain arguments put forward by the AG. Their technical comments are however often included in the judgement or used as grounds for the decision.

What the Court will decide remains to be seen with the decision being expected in the next few months, however it seems likely to us that the CJEU will agree with the AG.

Why is this important?

Many VAT practitioners were hoping this case would provide more information concerning the relationship between VAT and transfer pricing. And to be fair it would have been great to have at least some comments (even if non-binding) on how the two rules interact.

But the AG’s decision does offer some important information.

First of all, we are reminded that any case involving transfer pricing adjustments has to be reviewed based on its individual characteristics.

While not explicitly stated, the other important point from the AG’s decision is that the VAT rules do not have to be in tune with transfer pricing rules. Arcomet group believed a transfer pricing adjustment had taken place, which may or may not be correct from a transfer pricing perspective. This does not seem to have an impact on the AG’s opinion on how the VAT rules should be applied.

However, as mentioned, it remains to be seen if the CJEU agrees with the AG’s comments.

VAT and transfer pricing

Companies that are part of corporate groups and have to undertake transfer pricing adjustments should be mindful of the VAT rules as well as the Arcomet case shows, VAT rules have to be looked at separate from the transfer pricing ones.

If you would like to further discuss the AG’s decision or need any help concerning VAT and transfer pricing adjustments, feel free to reach out to us.