Case C-726/23, SC Arcomet Towercranes SRL: Is VAT due on intra-group transfer pricing adjustments?

Who this will interest: corporate groups that trade between members and make price adjustments according to a transfer pricing policy

Key point(s): where TP adjustments can be seen as adjustments to the consideration for supplies between group members they fall within the scope of VAT and there needs to be an increase or decrease in VAT that would be charged according to normal rules

Essentia’s take: this is not the groundbreaking case that has been claimed by some sources. It simply restates long-established VAT principles dating back at least to the Aardappelenbewaarplaats GA case of 1981. However, it’s a good reminder to take care with the VAT consequences of TP adjustments, which is a frequently overlooked area.

Action points: check intra-group transactions and price adjustments and make sure that VAT has been taken into account!

The Case In Detail

The European Court of Justice (CJEU or the Court) has published its decision in the Arcomet Towercranes decision (Case C-726/23, SC Arcomet Towercranes SRL v Direcţia Generală Regională a Finanţelor Publice Bucureşti). The Court had 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 and therefore should be subject to VAT.

This is a highly anticipated and very important decision and for this reason our previous newsletter included included extensive comments on the Advocate General’s (AG’s) opinion on the matter. In the meantime however the Court has published its decision in this case and we have included below comments on why this decision is important and how it impacts companies.

Before reading the case you can also have a look at a separate article we wrote around the how VAT and Transfer Pricing legislation work and why their interaction is so complex (please see here).

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 terms and condition, 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 Court’s decision

The Court shared the view taken by the AG as anticipated in our previous article on this case. As a side note, the AG provides technical comments but it is up to the Court to decide if they agree with them and will therefore include them in the final decision. There have been instances in the past where the AG’s opinions were disregarded by the Court.

The AG’s comments are also not binding (i.e. they do not have legal effect) although they are usually very helpful in understanding the technical side of the arguments and context.

The Court’s decision on the other hand is less detailed but binding i.e. it will decide the outcome of the case and potentially set a precedent.

The Court essentially stated that the three payments made by Arcomet Romania to Arcomet Belgium should be seen as consideration for a supply of services which consists of negotiating the terms of purchase agreements on behalf of Arcomet Romania. Consequently they should be within the scope of VAT.

Previous case law had established there must be a direct link between the service provided and the consideration received. In this case however, a payment only had to be made if Arcomet Romania’s profit margin was above a certain value. Would this represent a break in the direct link? If so, then the transfer pricing adjustment was not within the scope of VAT.

Both the AG and the Court admitted the renumeration was variable, however they believed there was no uncertainty as to whether a payment would be made and therefore the direct link existed.

This seems odd given that the clause in question stated payment was contingent on a certain profit margin being achieved and moreover, Arcomet Belgium would be required to make a payment if the profit margin of the Romanian business was less than a certain value.

The AG observed that the rules around the remuneration are clearly defined and there should be no uncertainty on the matter in his view. However, whether the details of a payment are clearly explained in the contract is usually not something the Court uses to determine whether the direct link has been broken or not. What usually matters is whether there is uncertainty as to whether the payment will be made or not.

Both the Court and the AG failed to address this point.

On the issue of a potential payment by Arcomet Belgium to Arcomet Romania breaking the direct link, this matter was disregarded as the AG and the Court did not consider it was relevant since it had never happened in practice. It is not clear why the Court would dismiss this potential outcome and consider it outside of the facts of the case since it seemed relevant to the case at hand.

One possible explanation is that the AG and the Court took a “substance over form” view while analysing the contract and concluded the reverse payment will not take place in practice and should therefore be ignored. Moreover, as the profit margin had always been of a value that required a payment to be made by Arcomet Romania to Arcomet Belgium, it would make sense to assume that, in practice, there was no uncertainty over a payment having to be made in practice.

It is likely there will be further CJEU cases on this issue given the uncertainty created by the Court’s reasoning in this case and the lack of details in some key areas.

How does this case impact businesses?

The main takeaway is that payments considered transfer pricing adjustments from a transfer pricing perspective can also be consideration for a service and therefore within the scope of VAT.

This opens the door for tax authorities to review these types of payments with a view to determine if VAT should have been charged or not. Output VAT on a supply of service also means input VAT that can be recovered by the customer, hence one would expect the impact assessing VAT on these payments to be nil, however the tax authorities may be interested in assessing fines, penalties and interest for late payment and late reporting.

Will all transfer pricing adjustments be in the scope of VAT?

As the Court is always keen to point out, its findings and comments are applicable only in the case at hand and it should not be assumed they will automatically apply in all other similar instances. Principles resulting from this case however can also be used in other instances although a case by case review of the facts of each case will be required.

As such, companies that are part of corporate groups and have to undertake transfer pricing adjustments should review them from a VAT perspective as well as VAT may need to be charged in some cases, but not others.

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