The series of CJEU judgements on TP adjustments continues. The latest CJEU judgement in the Romanian case C-726/23 (Arcomet) confirms that TP adjustments should be analyzed on case-by-case basis, taking into account the nature of the services, documentation and intentions of the parties. Depending on the outcome of the analysis, the adjustment may be subject to VAT. It is definitely a mistake to automatically assume that a TP adjustment is not subject to VAT.

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Background

The case concerned two related companies:

  • Arcomet Romania, which sold and rented construction cranes to its customers, and
  • Arcomet Belgium, which sourced suppliers for its subsidiaries, including Arcomet Romania, and negotiated contractual terms with them.

Arcomet Romania, partially due to the support of its parent company, has independently concluded contracts with its customers and suppliers.

According to the transfer pricing analysis between Arcomet Belgium and its subsidiaries, the subsidiaries should maintain an operating margin of between -0.71% and 2.74% – these assumptions were confirmed by the agreement with the subsidiaries. In addition, a compensatory invoice was issued annually: (i) by Arcomet Belgium in the event of a profit exceeding 2.74% or (ii) by Arcomet Romania in the event of a loss below -0.71%.

Due to Arcomet Romania's profits exceeding the expected range, for three years under review, the company received corrective invoices from Arcomet Belgium for the relevant amounts.

For the first two years, Arcomet Romania accounted the invoices received as imports of services and deducted input VAT, which was questioned by the Romanian tax authorities.

Questions raised

The Romanian court referred the following questions to the CJEU, seeking to determine:

  • whether the amount invoiced by Arcomet Belgium to Arcomet Romania constitutes payment for a service which is therefore subject to VAT and
  • whether the tax authorities have the right to request documents other than the invoice to prove that the services purchased were used for transactions subject to VAT.

Opinion of the Advocate General and judgment of the CJEU

Advocate General Jean Richard de la Tour pointed out that in this case, a VAT-taxable service is indeed being provided. In this regard, the Advocate General drew attention to the fact that Arcomet Romania and Arcomet Belgium had concluded an agreement which included: (i) a provision of services involving the transfer of economic risk to Arcomet Belgium and (ii) remuneration for that service.

Furthermore, in the Advocate General's view, there is no obstacle to the tax authority requesting documents other than invoices confirming the use of the services purchased for the purposes of taxable transactions, provided that the request for documents is justified by the principle of proportionality.

In its judgment, the CJEU essentially agreed with the Advocate General's conclusions, both on the question of whether a VAT-taxable service exists and on the issue of the tax authority's request for documents other than the invoice.

Practical consequences of the judgment

As the judgment shows, the nature of the services provided between related entities is of key importance from the perspective of the classification of transfer pricing adjustments for VAT purposes.

In this context, the documentation collected (e.g. a contract, as was the case in Arcomet) and the mechanism for calculating the transferred funds and its link to specific transactions between related entities are important.

It should also be noted that if related entities are not involved in direct transactions and only margin levels/cost allocations to other companies in the group are adjusted, then this will not necessarily constitute a VAT-taxable supply.

It is also worth remembering that the services provided should be confirmed by appropriate evidence of their performance, and an invoice alone will not always be sufficient evidence. Therefore, it is important to collect evidence in a thoughtful and structured manner, which will ultimately secure the right to deduct input tax.