The Court of Justice of the European Union (“CJEU”) recently ruled on the VAT treatment of transfer pricing adjustments. The case in question concentrated on intragroup management services that were subject to year-end adjustments based on income and profitability realized during the year.
Taking the case’s context into account, the CJEU took the view that amounts paid under the transfer pricing adjustment fall under the scope of VAT, since they constitute consideration for the intragroup management service.
Because these payments fall within the VAT framework, taxpayers must comply with invoicing requirements and demonstrate how and to what extent (subject to the transfer pricing adjustment) the service recipient used intragroup services, in order to claim input VAT deductions. In this context, the CJEU placed the burden of proof on the taxpayers.
The CJEU also highlighted that, with regard to substantiating the right to deduct input VAT, national tax authorities can review both the manner and degree to which intragroup services are linked to the taxable economic activity of the service recipients.
It should be noted that the CJEU’s ruling does not apply universally to all types of transfer pricing adjustments. There is a possibility to develop transfer pricing structures (taking into account the actual content of the transactions, the provisions of the relevant contracts, etc.) in a way that falls outside the scope of VAT and, consequently, does not trigger VAT-related administrative obligations, such as issuing invoices or making subsequent corrections.
KPMG’s experts are ready to assist with implementing transfer pricing adjustment structures and their VAT treatment, ensuring compliance with related administrative requirements and, in particular, substantiating the link to taxable economic activity.
