Transfer Pricing, VAT Risks Still Hazy After Stellantis Opinion

The value-added tax implications of transfer pricing arrangements are becoming a hot topic, due to a string of recent European Court of Justice cases, including Arcomet Towercranes and Högkullen, as well as the UK case, JPMorgan Chase Bank N.A.

Last month, an Advocate General opinion in Stellantis Portugal, S.A. v Autoridade Tributária e Aduaneira said the group’s Portuguese entity’s transfer pricing adjustments weren’t consideration for a separate supply of services.

Instead of being a supply of services in their own right, the payments went to adjust the pre-existing price of the cars sold between the group entities. If the adjustment had been purely related to profits and not attributable to specific goods or services, there may in fact have been no supply—and thus no VAT to account for.

Many multinational enterprises continue to overlook the relationship between VAT and transfer pricing, despite a variety of treatments and VAT rules existing in more than 160 countries. Audits, litigation, and compliance costs can result from such neglect.

Although most multinationals can recover VAT paid on business purchases, companies operating in exempt sectors such as finance or insurance may also suffer restricted VAT recovery on their costs.

Multinationals can reduce these risks with specialist advice and detailed documentation.

VAT Considerations

Any payments (including transfer pricing adjustments) can be subject to VAT if they represent consideration for a supply, such as payments in exchange for specific goods or services. A direct link between the consideration and the supply must exist for payments to be subject to VAT.

In the context of transfer pricing, detailed factual consideration helps answer the question of whether such a direct link arises.

A transfer pricing adjustment adjusts the “transfer price” of a particular transaction to ensure arm’s-length terms apply. This is especially relevant when profit-based methods are used for transfer pricing, such as the comparable profits method, transactional net margin method, or profit split method.

Those methods seek to achieve an arm’s-length level of profit for the transaction in question. Multinationals may book such transfer pricing adjustments, often to “top up” the transfer price to ensure the profit earned is within a benchmarked range.

When multinationals use such profit-based methods for their transfer pricing analysis, the resulting adjustments often are associated with bundled services or intangibles. If so, the question of a link between the payments and the associated services can arise for VAT purposes.

VAT is levied on payments and transactions, not profits. This can lead to controversy over whether such transfer pricing adjustments are subject to VAT.

The opinion in Stellantis gives one example of a possible interpretation of such adjustments, but any analysis will be highly fact-dependent. For instance, adjustments arising from profit-based transfer pricing methods in the Arcomet Towercranes represented payment for the provision of specific services and were subject to VAT.

In addition, any services might be a single supply (with one overall tax treatment) as in JPMorgan Chase, or multiple separate supplies (with different tax treatments) as in Högkullen.

Detailed Reviews

Multinationals should implement a structured review process for VAT and transfer pricing to identify which intercompany arrangements trigger VAT consequences. This process would include:

• Mapping underlying supply flows
• Understanding the functional analysis of the activities and entities associated with each transaction
• Evaluating whether any transfer pricing adjustments represent consideration for VAT-eligible supplies

Because the VAT implications of adjustments vary based on the specific facts of each transaction, analysis of each individual arrangement is important.

By conducting a detailed review of intercompany transactions, multinationals can identify which transfer pricing adjustments may constitute consideration for goods or services and to what extent VAT applies.

In addition, exempt sectors such as banking and finance should consider that it may be possible to identify opportunities for exempt treatment of transfer pricing payments for intragroup supplies of services, and should consider where any input VAT restriction may apply.

Analysis and Documentation

To reduce their risks, multinationals should seek advice from qualified professionals specializing in indirect tax and transfer pricing. They also should have documentation that clearly explains the economic rationale for any year-end transfer pricing adjustments, and align contractual agreements, business conduct, and the tax positions that are reported to authorities.

Multinationals also should ensure their intragroup transactions are consistent with the contracts that govern them, as courts generally rely on the contractual terms in their decisions. By maintaining contemporaneous documentation on both VAT and transfer pricing policies and their implementation, multinationals can be better prepared to defend their tax positions in the event of an audit or legal proceeding.

Tax authorities might request further evidence to prove the existence of a transaction, so multinationals should maintain evidence that they provided intragroup services. These may include deliverables, contracts, time sheets, invoices, and emails that enable multinationals to demonstrate the service provided, supporting the VAT treatment of a transfer pricing adjustment.

As local tax authorities work to close the VAT gap, the intersection between VAT and transfer pricing will grow in importance. However, multinationals can and should take steps to reduce their risk. Performing a detailed review of intercompany transactions allows multinationals to plan for any VAT consequences and document their compliance.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Jon Morton is principal in the international tax and transfer pricing practice at Forvis Mazars US.

Linda Adelson is partner in the indirect tax practice at Forvis Mazars.

Jeremy Brown is partner in the financial services transfer pricing practice at Forvis Mazars.

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