VAT regime of transfer pricing adjustments
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By Letter Ruling n.60 of November 2nd 2018, the Italian Tax Authority has clarified that the contribution paid to a subsidiary as a year-end adjustment, in order to maintain its margins within the market range, is not relevant for VAT purposes.
In the hypothesis analyzed, the interpellating company, part of a multinational group, operates as a contract assembler in favor of the non-EU principal, where the latter is also responsible for the distribution of products. If the actual profit margin of the former deviates from the range identified with reference to the transfer pricing regulations, the principal undertakes to recognize to the operating company a contribution equal to the difference between the profit achieved by the latter and that determined at arm’s length.
The Tax Authority preliminarily focuses on the burden of consideration requirement of a provision of services, as set forth by art. 2 first paragraph of Directive n.2006/112/EU, and per art. 3, first paragraph of the D.P.R. 633/72, also noting that according to the consistent case-law of the EUCJ “services are provided for consideration [..] only when a legal relationship exists between the service provider and the user in the context of which a mutual benefit relationship is established”.
The analysis must, therefore, be carried out in relation to the contractual relationship between the aforementioned entities, and in this case – the Agency believes – by virtue of the absence of synallagma, it has to be excluded that the contribution can set up remuneration for a specific service, to be independently subject to VAT pursuant to art. 3 of Presidential Decree 633/72.
Likewise, it can be excluded that the contribution can be qualified as an increase or decrease in the contractualized payments for the goods exchanged between the two entities, given that the tax base – for the purposes of applying the tax – consists of the consideration actually received from the provider, and does not constitute an estimated value according to objective criteria (Article 73 of Directive 2006/112/EU, Article 13 of Presidential Decree 633/72, Cases EUCJ ex multis C-249/12 and C-250/12, C-549/11, C-621/10 and C-129/11).
The European Commission, in Working Paper n.923, taxud.c.1 (2016) 1280928, has therefore summarized the requirements that must be jointly applied so that the transfer pricing adjustments affect the determination of the tax base for VAT purposes:
- presence of a consideration, ie a monetary or in-kind adjustment for such adjustment;
- sale of goods or services for which the consideration refers have to be identified;
- there is a direct link between the supply of goods or services and the consideration.
In the context of intra-group transactions, the Commission points out that the structure of the arm’s length principle for direct tax purposes cannot be superimposed to that which is relevant for VAT, noting that in the second case “it can only be used in order to prevent tax evasion or avoidance in a set of well-defined circumstances ” (see paragraph 3.1.1).
In conclusion, the taxable base of the sales of goods is determined on the basis of the consideration received pursuant to art. 13 of the D.P.R. 633/72, and cannot be (re) determined with reference to a different value, such as for example the arm’s length value for the purposes of direct taxes.
Consequently, the agreed contribution is not relevant for VAT purposes.