AG opinion in Arcomet case: VAT implications of transfer pricing adjustments

Recently, the Advocate-General (“AG”) De la Tour of the European Court of Justice provided his opinion in the Arcomet case (C-726/23) on the treatment of transfer pricing adjustments for VAT purposes and the required evidence to substantiate VAT deductions. In his opinion, the AG has stated that, whether transfer pricing adjustments are or are not in scope of VAT, should be analyzed on a case-by-case basis.

Background

SC Arcomet Towercranes SRL (“Arcomet Romania”), part of the Arcomet Group, purchases or leases cranes and subsequently leases or sells these on the Romanian market. While performing its activities, Arcomet Romania received support from its parent company, Arcomet Service NV Belgium (“Arcomet Belgium”), who is responsible for performing main business activities such as strategic management and planning, servicing of the cranes and negotiating contracts with the third-party suppliers and for managing the main business risks associated with the Arcomet Group business.

In 2010, a transfer pricing study was conducted to determine an arm’s-length profit margin for Arcomet Romania. Subsequently, Arcomet Belgium and Arcomet Romania entered into an agreement, which governed the arm’s-length profit margin to be realized by Arcomet Romania and which stipulated the invoicing mechanism applied to ensure that Arcomet Romania realized a profit margin within the arm’s-length range. In case Arcomet Romania realized a profit margin that fell outside the arm’s-length range (either below or above), Arcomet Belgium or Acromet Romania would issue an additional invoice to account for the difference.

Between 2011 and 2013, Arcomet Romania received several year-end invoices from Arcomet Belgium, to ensure that the profit margin reported by Arcomet Romania would be within the arm’s-length range. The VAT liability was reverse-charged to Arcomet Romania. The Romanian Tax Authorities denied the VAT deduction claimed by Arcomet Romania, arguing that no services were performed for consideration.

In essence, the questions raised to the court aim to obtain clarity on whether year-end transfer pricing adjustments can be considered a consideration for a service.

Services for consideration

The AG emphasizes that, for VAT to be levied, two cumulative conditions must be met:

1. there must be an identifiable service, and
2. there must be a direct link between the service and the payment received.

According to the AG, this link may exist in the context of year-end transfer pricing adjustments in case:

• The services contribute to the recipient’s economic activity;
• The year-end adjustment essentially constitutes a recalculation of the consideration for previously rendered services;
• The payment takes place within a contractual framework in which the method for determining the consideration was agreed upon from the outset.

In other words: if the year-end transfer pricing adjustment is not viewed as a standalone payment, but rather as a correction to existing considerations for identifiable services, VAT may, in principle, be applicable.

Critical observations

We believe several critical observations can be made in response to this conclusion from a VAT perspective:

• The year-end transfer pricing adjustment is aimed at achieving an arm’s-length profit margin, and depending on the facts, may not always be aimed at revaluing or rewarding individual services. Imposing VAT on the year-end transfer pricing adjustment appears inconsistent with the logic of the VAT system;
• In this case, according to the AG limited information is available regarding the exact details of the intercompany agreement concluded between the parties, leaving uncertainty about the qualification of any other underlying services;
• As a result, the AG was unable to provide greater clarity on how such intercompany agreements should be interpreted from a VAT perspective. It would have been helpful had the AG provided further guidance on the full scope of services and invoicing flows (e.g. from Arcomet Romania to Arcomet Belgium, or vice versa depending on the profit margin).
• The opinion of the AG  offers limited guidance for taxpayers. In our view, it would have been helpful if the AG had gone further in analysing the relevant facts and in examining how the consideration could be directly allocated to the specific services covered in the intercompany agreement. Amongst others, the following key questions remain unanswered:
  • Could the underlying arrangement effectively be considered a barter transaction that requires balancing payments?
  • Based on the facts provided, it is unclear whether invoices have been issued by Arcomet Romania to Arcomet Belgium. Therefore, the question arises whether services were performed by Arcomet Romania for consideration, or whether the consideration would only arise when a year-end transfer pricing adjustment is made?
  • If the consideration only arises from the year-end transfer pricing adjustment, on what grounds is there a direct link between an individual service and the payment?

It is worth noting that the AG highlights that the assessment of whether a year-end transfer pricing adjustment is subject to VAT must be made on a case-by-case basis. Precisely because these assessments must be made on a case-by-case basis, it allows for tax authorities to impose VAT adjustments or raise questions.

Right to deduct

A notable point is that the AG allows room for national tax authorities to request additional documentation beyond the invoice, provided such requests are proportionate and not excessive. However, the fundamental right to deduction must remain protected, and a mere formal defect should not automatically lead to a denial of input VAT recovery.

Possible impact

This case — along with other relevant cases (C-527/23 Weatherford Atlas GIP, C-808/23 Högkullen, and C-603/24 Stellantis Portugal) — illustrates the increasing attention of EU tax authorities on the interaction between transfer pricing and VAT. However, the detailed outcome is yet to be determined, following the final decision of the ECJ in the coming months.

Recommendation

Our recommendation is to proactively evaluate your group’s current transfer pricing policies and intercompany agreements and, where necessary, make adjustments to reduce potential VAT risks. We would be happy to schedule a meeting with you to discuss the relevance and potential impact of these developments in your specific situation.

Questions?

if you have any questions on the above, please don’t hesitate to contact Johan Visser or Taco Wiertsema, or our colleagues in Sweden and Finland; Martin Fridh and Sini Paljärvi.