VAT Implications Associated with Transfer Pricing Adjustments

The Arcomet case involves two entities: SC Arcomet Towercranes SRL (‘Arcomet Romania’) and Arcomet Service NV Belgium (‘Arcomet Belgium’).

Arcomet Romania purchases or rents cranes to sell or lease to its customers. Arcomet Belgium is responsible for supplier negotiations and contractual terms for its subsidiaries, including for Arcomet Romania. According to the contract between the two parties, Arcomet Belgium agreed to take on most commercial responsibilities such as strategy and planning, negotiation of framework contracts with third-party suppliers, negotiating the terms and conditions of financing contracts, engineering, finance, crane fleet management at central level, and quality and safety management. Arcomet Belgium also assumed the main economic risks associated with the activity of Arcomet Romania’s activities. Conversely, Arcomet Romania agreed to purchase and hold all goods necessary for its operations, and to manage the sale and rental of those goods and for the provision of services.

A Transfer Pricing analysis was conducted to support this contract. Following the analysis, to keep the Arcomet Romania profits and Arcomet Belgium profits within Transfer Pricing range (determined to be between -0.71% and 2.74%), “equalisation invoices” were issued each year:

• If the Arcomet Romania operating profit was above 2.74%, Arcomet Belgium issued an invoice to Arcomet Romania to reduce the latter’s profit.
• If the Arcomet Romania operating profit was below -0.71%, Arcomet Romania issued an invoice to Arcomet Belgium to increase the Arcomet Romania’s profit.

The question presented to the CJEU is, in essence, whether the remuneration in respect of intra-group services calculated in accordance with a method recommended by the OECD Guidelines, specifically for Arcomet Belgium, corresponding to the part of the operating profit greater than 2.74%, constitutes consideration for a supply of services, and thus falling within scope of VAT.

The CJEU recalled that a supply of services is carried out ‘for consideration’, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the actual consideration for an identifiable service supplied to the recipient. That is the case if there is a direct link between the service supplied and the consideration received.

Applying these principles to the case at hand, the CJEU held that:

• The requirement for a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance appears to be satisfied, given that both parties entered into reciprocal commitments in the contract.

• The requirement that the remuneration received by the provider of the service constitutes the actual consideration for the service supplied to the recipient also appears to be satisfied, as the payment made by Arcomet Romania constitutes remuneration in respect of the activities carried out by Arcomet Belgium. The variable nature of the remuneration does not impact this conclusion. Additionally, the possibility that Arcomet Belgium could be required to pay Arcomet Romania does not break the direct link between the supply of services at issue and the consideration received.

On this basis, the CJEU concluded that the remuneration in respect of intra-group services, provided by a parent company to its subsidiary and contractually detailed, which is calculated in accordance with a method recommended by the OECD Guidelines and corresponds to that part of the operating margin greater than 2.7% achieved by that subsidiary, constitutes the consideration for a supply of services for consideration falling within scope of VAT.

While the Transfer Pricing Rules set out in Subsidiary Legislation 123.207 state that the implications of transfer pricing adjustments are limited to the Income Tax Acts, based on the foregoing it cannot assume that transfer pricing adjustments automatically fall outside scope of VAT. A case specific assessment is required. 

Interestingly, the CJEU limited its comments to the remuneration corresponding to that part of the operating margin greater than 2.7% achieved by Arcomet Romania. It remains unclear whether the same position or conclusion would have been reached if there had been a payment from Arcomet Belgium to Arcomet Romania, as a result of an operating margin at the level of Arcomet Romania of less than 0.7%.

Therefore an assessment is required, considering the specific facts of each case, to determine whether for VAT purposes, the particular transfer pricing adjustment fulfils the relevant hallmarks to qualify as a supply ‘for consideration’.

Should you have any queries or wish to discuss further, please send an email to anthonypace@kpmg.com.mt or louisegrima@kpmg.com.mt.