Does transfer pricing create VAT liabilities and reporting issues?

For a very long time it was thought that VAT and transfer pricing are two different taxes that cannot interact with each other.

In search of more revenue however, tax authorities have tried a number of times to link adjustments made for transfer pricing purposes to VAT, usually arguing that a transfer pricing adjustment should also lead to an increase in the amount of VAT assessed on the transactions to which the adjustment relates.

Taking this view creates a number of practical issues and potentially opens the door to significant retrospective VAT liabilities. Tax payers are therefore not happy with this view and have seen cases being taken to tribunal.

How do VAT and transfer pricing rules interact?

The main issue with VAT and Transfer Pricing is that they are systems designed on opposite principles:

From a VAT point of view consideration for a supply is the price actually paid. The price actually paid will often be determined on the open market, but this is not a requirement for VAT purposes. The exception to this rule is stated in articles 72 and 80 of the VAT Directive, which allow Member States to introduce anti-abuse measures in very limited cases. The main issue these anti-abuse measures seek to address relates to transactions between group companies where the recipient of goods or services cannot recover VAT in full. Not using the open market value in this case may lead to a VAT saving.

Transfer pricing is concerned with determining the open market value of a transaction (called the “arm’s length principle”). There are multiple methods of determining the open market value, some of which look at the arm’s length value of particular transactions while others will try to determine the profit margin that should apply in open market transactions.

Because of this fundamental difference between the principles behind the two taxes, it is not very clear what the relationship between the two taxes is, especially when it comes to adjustments being made as a result of transfer pricing policy.

On one hand, a transfer pricing adjustment essentially means that the value of transactions between related parties was not at arm’s length and needs to be increased or decreased.

But as discussed above, VAT does not look at profitability or whether the price is higher or lower than the open market value in most cases. The consideration for a supply is whatever is received in exchange for that supply, regardless of whether it is at market value of not (with the exception mentioned above).

We also know that, from a VAT perspective, there must also be a direct link between the service supplied and the consideration received. In some circumstances it may be possible to actually adjust the value of a particular transaction for transfer pricing purposes. In such a case there is a legitimate question of whether a transfer pricing adjustment should also result in a VAT adjustment.

In practice, many transfer pricing adjustments are the result of benchmark studies that look at profitability of the business rather than the actual value of particular types of supplies of goods and services. In other words most transfer pricing adjustments cannot be linked to the value of a particular transaction.

One might therefore conclude that no adjustments should be necessary for VAT purposes, unless the method used allows us to clearly outline the transactions impacted by the adjustment. However, there is currently no guidance on this being the case.

There is also a question of whether transfer pricing adjustments made by the tax authorities should result in VAT adjustments given that they typically only impact the business being audited and not the counter party to the transaction.

While there has been some interest in trying to clarify this matter, so far we have not had any conclusive guidance.

Recent case law and developments

There was however hope that this might change in 2025 as two cases dealing with transfer pricing and the concept of open market value were expected to be heard with the Court of Justice of the European Union (CJEU or the Court).

In the Arcomet Tower Crane case (Case C‑726/23) the Court was 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. We do not have a decision in this case yet, however an Advocate General (AG) was asked to provide his view. The AG’s opinion is not binding on the Court, however, the technical comments are often used by the Court in its decision.

The AG in this case believes that what the tax payer had considered a transfer pricing adjustment was in fact a provision of services for VAT purposes.

If the Court takes the same view we will still not have much guidance on the interaction between VAT and transfer pricing. However, while not explicitly stated, the fact that the AG solely focuses on the VAT rules and ignores the transfer pricing assessment of the tax payer suggests that the VAT rules should be followed even if this leads to a result that is different to the one resulting from the transfer pricing rules.

Another interesting case that many VAT practitioners were looking forward to is C-808/23 Högkullen AB v. Skatteverket where the Court was asked to look at whether the services provided by a holding company to a subsidiary should be calculated based using an open market value. This is the exception mentioned in the VAT rules where the open market value of goods and services must be used as consideration.

The case revolved around a holding company that was acquiring services form third parties and recharging some of them (plus a mark up) to its subsidiaries. As not all costs were being recharged (overheads were left out), and the subsidiaries were partially exempt, the group was saving VAT. The Swedish Tax Authorities took the view this is not correct and the open market value in this case should include at the very least the overheads as well.

Similar to the AG, the CJEU did not discuss the interaction between VAT and the concept of “open market value”, even though it was explicitly requested by the referring national court. Instead the Court stated that the question was not relevant because the service provided by the holding company to the subsidiaries was not a single supply of a complex service but a collection of separate services. Therefore, to determine the open market value each service that was invoiced by the holding company should be reviewed to see if it was valued correctly.

The two cases mentioned above have something in common: there seems to be a certain reluctance by the CJEU (and the appointed AG) to tackle the difficult question of how VAT should deal with the concept of open market value and transfer pricing adjustments.

In other words, despite having two new cases on this matter in 2025, we do not seem to have more guidance or information.

Perhaps the CJEU does not want to create new VAT rules as a result of its decision, especially on an issue that may have a significant impact on the way VAT works.

What are the risks of getting it wrong?

The main issue is that tax authorities in the EU may consider that more transfer pricing adjustments should be brought within the scope of VAT. The AG’s opinion in Arcomet seems to suggest VAT rules take precedent, even if they are at odds with the transfer pricing rules. While is not a surprise, once the Court publishes its decision, we might see tax authorities reclassifying more transfer pricing adjustments into consideration for a supply of goods or services.

Companies that have subsidiaries in the EU should review their transfer pricing adjustments from a VAT point of view to ensure they are not in fact consideration for a supply of goods or services. Where this is the case, the transfer pricing adjustment may result in VAT adjustments as well.

If you have questions on the VAT impact of transfer pricing adjustments or other similar VAT questions, feel free to reach out to us and we would be happy to discuss.