VAT treatment of transfer pricing adjustments (also commonly referred to as a profitability adjustment or “TP Adjustment”) is once again coming to the attention of the Court of Justice of the European Union (“CJEU”). This time through a preliminary question from the Portuguese Supreme Administrative Court in the Stellantis Portugal case (no. C-603/24).

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VAT recognition of TP adjustments has for years raised significant questions of taxpayers making settlements with related parties. In an economic environment, in which business decisions may be taken dynamically on the one hand, and which may experience unexpected market fluctuations (reduced demand, disruption of supply chains) on the other, ongoing verification of transactions between related parties in terms of their profitability and adjustment to market conditions is an essential aspect of groups' tax policy. If changes in circumstances cause initially-established prices to deviate from market conditions, transfer pricing adjustments are required.

The basic question that taxpayers must answer is whether TP Adjustment should be treated as a transaction subject to VAT (and therefore affecting the tax base of the supplies of goods or services made, or constituting a new service), or as a settlement outside the VAT regime. The practice of the authorities in this regard – as shown by upcoming CJEU rulings related to TP adjustments – is not uniform.

What is the Portuguese case about?

The case concerns General Motors Portugal Lda. (“the Company”) from the General Motors Group (now Stellantis) which, acting as a distribution company, is engaged in the sale of cars in Portugal. As part of the group's business model, the Company:

  • purchases vehicles from manufacturers, which are group companies,
  • sells them to local dealers (third parties), who resell them to end customers.

Crucially, the Company also bears the cost of certain repairs, which are reported by end customers to the dealers. Such costs are reinvoiced by the dealers to the Company with VAT included (as a reinvoicing of services). Both the information on the amount of costs incurred for these repairs, as well as regarding other costs related to the distribution of cars, is provided by the Company to the manufacturers.

TP adjustments occurs between the Company and the group’s manufacturing entity. According to the contractual methodology of profitability adjustment, the original car prices are adjusted to the target profit on a quarterly basis. The adjustments are based on the profit actually achieved by the Company, as well as aforementioned costs incurred. The price adjustment is documented by credit notes as a transaction outside VAT regime.

Dispute with tax authorities and preliminary question

In the course of an tax audit at the Company, the Portuguese tax authorities conlcuded that the price adjustments in fact constituted remuneration for the services provided to producers. These services should be subject to VAT and documented by invoices.

The case went before the Portuguese Supreme Administrative Court, which decided to ask the CJEU a preliminary question. The question asked is whether an adjustment to the sales price of vehicles, which is aimed at achieving a minimum margin and is duly established and specified in a contract between the parties, should be considered a supply of services for VAT purposes.

The fact that yet another case regarding the VAT treatment of TP adjustments has been brought before the CJEU shows that this long-years questionable issue has still not been properly clarified. Although the premises developed by tax practice[1] are well known, their application and practical assessment continue to cause a number of problems for taxpayers. Moreover, as no clear interpretative guidelines for these premises are developed, the risk of a dispute with the tax authority over the VAT treatment of TP Adjustment cannot be fully managed and eliminated. Even if – in the taxpayer's opinion – the approach applied is correct, the authorities may think otherwise.

The broader context of the TP issue in VAT – other cases before the CJEU.

Currently, there are several important cases before the CJEU concerning the interface between VAT and transfer pricing.

In the Romanian case (no. C-726/23 Arcomet Towercranes), the CJEU was inquired on the VAT taxation of a settlement performed to adjust the profit achieved by an operating entity to its activities and risks (in accordance with OECD guidelines). In particular, whether the amounts subject to settlement between related parties should be treated as remuneration for a service subject to VAT. Importantly, the circumstances in this case are different – the authorities challenged taxpayer's application of VAT to the TP adjustment (and the related right of deduction by the “recipient” of the adjustment).

Another example can also be found in the Swedish case (no. C-808/23 Högkullen), which – although not directly related to TP Adjustment – also touches on the issue of VAT taxation of settlements subject to transfer pricing. In this case, the subject of the CJEU's decision will be the application of VAT regulations mandating the determination of the tax base at the market level for intragroup transactions.

These parallel proceedings, as well as the new preliminary questions, show that the impact of transfer pricing on VAT issues is undoubtedly significant and continues to raise questions of interpretation – not only in the context of profitability adjustments, but also in terms of e.g. determining the tax base or the right to deduct VAT from intragroup supplies. What's more, these issues are pan-European and can apply to basically any industry, as well as to various diverse business models that may exist in capital groups.

TP issues in Polish tax practice

Polish tax practice on transfer pricing adjustments seems to follow, so to speak, the jurisprudence at the European level – showing that although the premises for VAT taxation of such settlements are clear and indisputable, practical perspective of their application and fulfillment may raise a number of doubts.

Tax rulings and judgments issued by the Polish authorities and courts show that the correct VAT recognition depend in each case on background circumstances, in particular focusing on the contractual provisions describing the method of adjustments and the mechanism for their calculation between the parties. As indicated by the authorities, the key aspects to be verified in the context of VAT taxation of TP adjustments are i.e. the possibility of directly linking the adjustments to the supplies of goods or services made, the determination of their impact on the remuneration for individual, past supplies, as well as potential identification of independent supply in exchange for funds obtained under TP Adjustment.

Undoubtedly, the expected CJEU’s rulings may affect Polish practice both in terms of the treatment of TP adjustments for VAT purposes, as well as more widely on the issue of VAT settlements in relation to  transfer pricing. Hopefully, the CJEU will shed additional light not only on the well-known premises for VAT treatment of TP adjustments, but also –  and perhaps most importantly –  on the way these promises are assessed and practically applied.

We invite you to follow the CRIDO blog, where we will keep you updated on the new rulings issued by the CJEU. Already now, if you encounter problems with determining the VAT implications of TP settlements in your business, we invite you to contact us.

[1] Having mainly in mind the case law of the CJEU and local tax authorities, as well as the working papers of VAT Expert Group („Paper on topic for discussion. Possible VAT implications of Transfer Pricing.” Taxud.c.1(2018)2326098 – VAT Expert Group VEG No 071 REV2).