Do Transfer Pricing Adjustment trigger VAT?

Who this will interest: companies that are part of corporate groups.

Key point(s): The European Court of Justice (CJEU) has decided that transfer pricing adjustments do not trigger a VAT liability unless there is a direct link between the adjustment and a service being provided.

Essentia’s take: The decision provides some welcome common sense in a widely misunderstood area. TP adjustments are not in and of themselves VATable transactions, only when they are executed in such a way that they directly relate to taxable supplies.

Action points: Even though the decision is in the tax payer’s favour in this case, group companies should review their transfer pricing policy with a view to determine if a direct link can be established between the adjustment and a potential service.

In detail

The Court of Justice of the European Union has published its decision in the Stellantis VAT case.

Stellantis Portugal SA (Stellantis) is a business established and VAT registered in Portugal that is part of the General Motors group of companies. The General Motors group also includes other companies that manufacture motor vehicles and parts and accessories. The manufacturers sell their goods to other companies in the General Motors group which specialise in distribution and sales in particular geographical regions.

Stellantis was the distributor of these goods in Portugal. The goods (especially motor vehicles) were purchased from group manufacturers in other EU Member States. The vehicles were sold to independent dealers in Portugal which in turn sold them to the final customers.

If the vehicles had defects from the production process, issues covered by the manufacturer’s warranty or required roadside assistance then the customers would take the vehicles to the independent dealers for repair work. The dealers in turn would invoice Stellantis for the costs of the repair (and charging Portuguese VAT). Stellantis in turn would include these repair costs in its operational costs incurred to sell the vehicles.

Under an intra-group agreement from 2004, Stellantis was guaranteed a certain profit margin which was achieved by deducting from the price charged by the manufacturer the distribution costs. The repair costs mentioned above were included in the distribution costs and formed the basis for the transfer pricing adjustments.

Following an audit, the Portuguese Tax Authorities took the view that the transfer pricing adjustments made by Stellantis with regards to the manufacturers were in fact separate supplies of repair services. As these services took place in Portugal the Portuguese Tax Authorities considered Portuguese VAT should have been charged by Stellantis to the EU manufacturers.

Stellantis appealed the decision of the Portuguese Tax Authorities and, after going through the national courts, the case was referred to the European Court of Justice.

The decision of the Court

The European Court of Justice decided in favour of Stellantis and stated that the transfer pricing adjustment did not constitute consideration for a supply of services.

For VAT purposes, in accordance with settled case-law, a supply of services is carried out for consideration (and is therefore subject to VAT), only if there is a direct link between that supply of services and the consideration actually received by the taxable person. In other words, there needs to be a direct link between a service being provided and someone paying for that service.

In the Stellantis case there did not seem to be a legal relationship between Stellantis and the manufacturers that ticks these boxes i.e. there should have been a reciprocal commitment:

• By Stellantis to provide repair services on one hand and
• By the manufacturers to pay remuneration in respect of those services in the form of such an adjustment on the other.

The Court concluded there was no such commitment and therefore no direct link between the supply of those services and the adjustment. A provision of services for VAT purposes did not take place as a result of this.

There was an agreement in place for the adjustment of the transfer prices for the sold vehicles, however there was no such agreement for repair services. Furthermore, the transfer pricing adjustments included a number of other costs, not just those related to the repair services.

The Court also concluded the transfer pricing adjustments were in fact an adjustment of the tax base for the sales of vehicles, not a separate transaction.

Impact for businesses

This is an important decision on a contentious part of the VAT legislation. Most group companies have to perform transfer pricing adjustments and a decision in favour of the Portuguese Tax Authorities in the Stellantis case would have opened the door to additional VAT being assessed on a wide number of transactions in the European Union.

However, the decision is based on the specific circumstances of the case. It should be noted that in a previous high profile case the CJEU found that such a direct link was present between transfer pricing adjustments and a service being provided. The case was decided in favour of the tax authorities.

The current position is therefore nuanced, transfer pricing adjustments can lead to additional VAT being assessed in those cases where a direct link is found.

Businesses will need to review their transfer pricing documentation and see if it leads to adjustment potentially being linked to an identifiable service as this may trigger a VAT liability.

If you would like to know more about this decision, please reach out to us.