VAT and transfer pricing adjustments: the worst of both worlds?
VAT and transfer pricing adjustments: the worst of both worlds?
In due course, the EU Court of Justice (ECJ) may shed some light on the VAT intricacies of transfer pricing (TP) adjustments. In Arcomet, the Bucharest Court of Appeals asked the ECJ whether the amounts included in yearly equalisation invoices to ensure arm’s length pricing within a group constitute payment for VAT relevant services. Should VAT indeed be due, the question was raised whether the tax authorities could require additional documentation for the deduction of such VAT. If anything, Arcomet demonstrates that not all VAT authorities apply a light touch when transfer pricing (TP) corrections are involved. Calculated corrections and TP-generated invoices could have real life, and adverse, VAT consequences.
Relevant facts
The case involves the Arcomet group – a global group in the crane rental sector. The Belgian parent company (Arcomet Belgium) sought suppliers for its group company in Romania and negotiated contractual terms with these suppliers. The various responsibilities and risks for selling/purchasing and renting cranes were laid down in a contract between the respective Arcomet companies. Arcomet Belgium assumed the greatest economic responsibility for achieving maximum occupancy of the crane fleet, quality and safety management and maximising the prices offered to customers,
This contract was prepared in order to comply with a TP study carried out for Arcomet Belgium. The contract thus provided a yearly correction mechanism as to bring the profit of Arcomet Romania within an ‘at arms’ length’ range. If the provisional financial statements resulted in a profit which was too high, Arcomet Belgium would issue an equalisation invoice to bring Romania’s profit back within an arms’ length range, and vice versa if the Romanian profit was below the acceptable range. VAT was not addressed in the TP study, nor in the contract.
Following the above mechanism, Arcomet Belgium issued equalisation invoices for 2011, 2012 and 2013. The Romanian VAT authorities took the position that these invoices related to services supplied to Arcomet Romania. A reverse charge applied, so Romanian VAT was due. On the other hand, this VAT could not be deducted, as Arcomet failed to produce documents ‘justifying the supply of the services and the need to carry them out for the purposes of taxable transactions”. This resulted in substantial VAT assessments, now challenged by Arcomet Romania. In the course of this appeal, the Romanian Tax Court raised preliminary questions to the ECJ on the VAT aspect of the TP-adjustments at hand.
It is now up to the ECJ to decide whether the TP-invoices, on one hand, trigger reverse charged VAT obligations while, on the other hand, this VAT can not be deducted because the invoices are not elaborate enough. This would result in a ‘worst of both worlds’ scenario. Alternatively should the invoices remain outside the scope of VAT altogether?
VAT guidance needed
Guidance from the ECJ would be welcome, as the VAT aspects of TP adjustments are far from clear. In this respect we refer to a report of the EU Value Added Tax Committee in 2017, where the issue was addressed, but certainly not resolved. Adjustments could represent a remuneration for a specific (new) supply or represent an increase (or decrease) of the VAT relevant remuneration for goods or services already supplied, especially when actual payments are made. On the other hand, a mere adjustment of taxable profit (for CIT purposes) would likely remain outside the scope of VAT. Much depended on the specific TP-arrangements as agreed between parties. In Arcomet the ECJ may finally provide some VAT guidance, but this guidance will likely be restricted to a rather specific TP-arrangement.
Liabilities triggered by inconsistent VAT reporting
There is something noteworthy about the Arcomet case. The Arcomet companies apparently struggled with the VAT reporting of the TP-corrections. Arcomet BE initially reported the TP-corrections as payments for (intra-EU) supplies of goods. In 2015, this was corrected: the invoices were now reported as being issued for intra-EU services. Arcomet Romania on its turn, declared an intra-EU purchase of services for the 2011 and 2012 adjustments. The 2013-adjustment was, however, not included in any VAT return at all, as it was considered the transactions were outside the scope of VAT. Also, the invoices issued referred to the rather opaque concept ‘equalisation invoice’ instead of describing the services provided (if any). We can imagine that such inconsistent approaches will be challenged by VAT authorities.
Recommendations
If anything, Arcomet is a cautionary tale about the importance of not neglecting VAT when making TP adjustments. Performing a VAT analysis upfront and acting accordingly, may help in minimising VAT liabilities afterwards. The ECJ may provide some helpful guidance in due course. What is clear, however, is that this issue is on the agenda of tax authorities. It should be on your agenda, too.