Background

The VAT treatment of transfer pricing (TP) adjustments is an important topic for multinational businesses. The question is whether TP adjustments should be seen as (a correction of) the consideration for supplies of goods or services or rather as payments outside the scope of VAT.

In the context of intra-group supplies of goods, the following three scenarios may apply:

  1. the TP adjustment does not attract VAT.
  2. the TP adjustment attracts VAT by forming a price adjustment related to the underlying goods.
  3. the TP adjustment attracts VAT by forming a consideration for separate services.

If TP adjustments attract VAT, this may result in substantial compliance requirements for businesses, such as issuing (credit) invoices and VAT return corrections. For companies that are not (fully) entitled to reclaim the VAT on costs, TP adjustments on the ‘cost side’ may also result in additional VAT leakage.

The European Court previously ruled in the Arcomet case that a TP adjustment in relation to contractually agreed services  can be considered as a consideration within the scope of VAT (see our website article). The Stellantis Portugal case deals with the question whether TP adjustments for previously supplied goods are also within the scope of VAT.

Stellantis case (C‑603/24)

The case concerns an international group that is involved in the distribution of motor vehicles. Stellantis Portugal functions as a domestic distribution company. It acquires the vehicles from an affiliated manufacturing company and subsequently sells the vehicles to (third-party) dealers. The dealer sells the vehicles to end-customers.

Based on intra-group TP policy, Stellantis Portugal is required to realise a certain minimum operating margin for the distribution activities. That margin is based on a resale minus approach considering the external vehicle sales prices and distribution costs (including repair costs and other operating expenses). To bring the actual operating margin of Stellantis Portugal in line with the agreed operating margin, the manufacturing company periodically issues debit and/or credit invoices for its supplies to Stellantis Portugal (depending on whether the underlying vehicle prices paid by Stellantis Portugal should be decreased or increased). In the litigated year, credit notes were issued by the manufacturing company, which resulted in a payment by the manufacturing company to Stellantis Portugal. No VAT is included on the credit invoices as parties considered the TP adjustments as payments outside the scope of VAT.

The Portuguese tax authorities argued that Stellantis Portugal rendered VAT taxable services to the manufacturing company. As no VAT is declared by Stellantis Portugal on the amounts received from the manufacturing company, the Portuguese tax authorities imposed VAT assessments on Stellantis Portugal.

Advocate-General’s advice

The Advocate-General advised the European Court that TP adjustments made by the tax authorities for direct tax purposes do not attract VAT. The Advocate-General states that TP adjustments fall within the scope of VAT if:

  1. the TP adjustment is directly related to a contractually agreed service (as ruled by the European Court in the Arcomet case); or
  2. the TP adjustment is contractually agreed as a correction of the initial sales price of goods.

According to the Advocate-General, in the Stellantis case, the amounts due by the manufacturing company should be qualified as a (downward) price adjustment for the vehicles supplied by the manufacturing company to Stellantis Portugal. In that regard, the Advocate-General deemed relevant that the contractual agreement between the manufacturing company and Stellantis Portugal relates to vehicle sales, that there is a direct link between the TP adjustment and the vehicle sales and that there is no separate legal relationship under which Stellantis Portugal provides any services for consideration to the manufacturing company.

Relevance for practice

Based on the view of the Advocate-General, TP adjustments that are contractually agreed within the framework of intra-group supplies of goods in principle fall within the scope of VAT. It is now up to the European Court to make its own decision regarding this important topic. In the meantime, we recommend businesses to analyse the VAT aspects of their group’s TP policies and to implement these in their ERP-system.

Our dedicated VAT specialists would be glad to provide advice on the implications for your business.