Transfer pricing and VAT: More clarity

The Link Between Transfer Pricing Adjustments and VAT 

In cases where companies are subject to corporate income tax in multiple jurisdictions, debates can arise concerning the allocation of profits and losses among these jurisdictions. To address this, international transfer pricing rules have been established. These rules mandate that internal pricing must mirror arm's length transactions, as if conducted between unrelated third parties. Consequently, when calculating profits in relation to affiliated companies or permanent establishments in different countries, companies must ensure adherence to these arm's length principles. Often, the assessment of compliance with arm's length standards occurs post-tax year, leading to corrections in profit allocations among countries. These corrections may involve issuing additional invoices to reallocate profits and costs in accordance with transfer pricing rules. 

From a VAT perspective, questions arise regarding whether these supplementary invoices pertain to intercompany supplies and whether the invoiced amount constitutes remuneration for supplies or services, or merely represents a price adjustment. In the latter scenario, VAT obligations may arise. 

Recent developments: Stellantis Portugal (C-603/24) 

Advocate General (AG) Kokott has recently given an opinion in the Stellantis Portugal case (C-603/24). This opinion has provided important clarification on how transfer pricing adjustments should be treated for VAT purposes. 

Background  

The Stellantis Portugal case arose in the context of intra-group transactions within a multinational automotive group. Stellantis Portugal, acting as a distributor in Portugal, purchased vehicles from other group companies and sold them to local dealers. The group had established a transfer pricing policy that set target profit margins for the Portuguese entity. After actual revenues and costs, including warranty and repair expenses, were accounted for, adjustments were made through quarterly debit or credit notes to normalize the profit margins. The Portuguese tax authorities contended that part of these payments could constitute VAT-taxable consideration for repair or other services, while the contractual arrangements between the parties did not clearly indicate a separate service obligation. The central question was whether these transfer pricing adjustments created new VAT-taxable supplies, or whether they merely reflected price corrections to earlier transactions. 

AG Kokott's Opinion  

Following a detailed examination, the Advocate General took the view that the VAT consequences of profit adjustments introduced for corporate income tax purposes cannot be assessed in the abstract, but depend on both their underlying character and the way in which they are effected. Against that background, the Advocate General identified a number of distinct situations, each of which may lead to a different VAT outcome: 

• No automatic VAT liability: AG Kokott emphasized that transfer pricing adjustments do not automatically constitute separate VAT-taxable services. 
• Price adjustments vs. separate services: Payments that merely adjust the price of a previous transaction are considered adjustments to the taxable amount of the original supply, not payment for a distinct service. 
• VAT-relevant criteria: Only adjustments that alter the agreed consideration for a supply or relate to a separately agreed service are relevant for VAT purposes. 
• Profit allocation alone is irrelevant for VAT: Adjustments made purely to allocate profits or correct margins under corporate tax rules do not trigger VAT obligations. 
• Economic and contractual reality: VAT treatment should reflect the actual economic substance of the transaction and the contractual basis of the payment, not merely the method of profit allocation. 

Significance of AG Kokott's Opinion 

AG Kokott’s opinion highlights the fundamental distinction between profit allocation for corporate tax purposes and the VAT treatment of individual transactions. While transfer pricing corrections are aimed at aligning profits among related companies and jurisdictions, VAT is concerned with whether there is a taxable supply of goods or services and whether the payment received constitutes consideration for that supply.  

According to the Advocate General, only adjustments that effectively alter the transaction price of a supply or correspond to a separately agreed service can be relevant for VAT purposes. Any transfer pricing correction that simply allocates profits or corrects margins without linking to a real, distinct service should not generate VAT liability.  

Although the Advocate General’s opinion is not binding, it carries significant interpretive weight and is likely to influence the Court of Justice’s eventual judgment. It provides a framework for determining which intra-group adjustments may be subject to VAT, stressing that economic reality and the contractual basis of payments, rather than the method of profit allocation under corporate tax rules, should guide VAT treatment. This opinion is particularly relevant for companies seeking clarity on how transfer pricing adjustments interact with VAT, as it underscores the need to distinguish between adjustments that merely correct prices and those that remunerate actual supplies of services. 

Conclusion  

The emerging case law confirms that the VAT treatment of transfer pricing adjustments cannot be determined by reference to corporate tax principles alone. As illustrated by Advocate General Kokott’s opinion in Stellantis Portugal, transfer pricing adjustments that merely correct prices or allocate profits within a group do not, as such, give rise to VAT. By contrast, the earlier Arcomet (c-726/23) judgment demonstrates that where intra-group charges relate to real and identifiable services supplied under a contractual framework, VAT may be due, even if the remuneration is determined using a transfer pricing methodology. 

Taken together, these developments underline that VAT analysis must focus on the economic and contractual reality of the transaction. The decisive question is whether a payment constitutes consideration for a taxable supply of goods or services. For businesses, this means that transfer pricing adjustments should be carefully assessed and documented from a VAT perspective to avoid unintended VAT liabilities or challenges to input VAT deduction. 

Want to know more?

The relationship between VAT and transfer pricing is a complex issue. It would benefit legal certainty if more clarity is provided on this when answering questions to the ECJ. At aaff, we like to be of significance. By sharing knowledge, giving advice and providing insight. Would you like to know more about transfer pricing adjustments and their VAT implications or would you like advice and/or support on your VAT issues? Feel free to contact our VAT specialist.