VAT on TP Adjustments

While the judgement provides some clarity on when a TP adjustment constitutes consideration for a supply coming within the scope of VAT, it is ultimately unsatisfactory in providing businesses with clear direction on the application of VAT to a TP adjustment.

The uncertainty around the VAT status of TP adjustments has centred on two main arguments. Firstly, it has been argued that the uncertain nature of whether there will be an adjustment and the amount of that adjustments breaks the necessary link between the payment and the supply. The fact that adjustments could be both negative and positive has buttressed this argument. The second main contention has been that a transfer pricing adjustment is more akin to a profit adjustment, driven by outside regulations, rather than a payment for a supply.

The judgement in Acromet Towercranes is useful in that it has confirmed that If the payment is in return for the service supplied it will not be outside the scope of VAT as a movement of profit regardless of how it is described or calculated. The key question then is whether you have the necessary reciprocity for the adjustment to be payment for a supply.

It is clear that a TP adjustment can, and will be consideration for a supply, where the TP adjustment is:

i. Governed by a legal relationship that establishes reciprocal obligations between the parties; and

ii. There is a direct link between the TP adjustment and a service received.

It seems that it is enough that a price be determinable and a service is provided for the required certainty to exist and the direct link between a payment made and a service received to be established.

However it is difficult to reconcile with a line of case law, including Baštová C-432/15, where it has been held “the uncertain nature of the provision of any payments is such as to break the direct link between the service provided to the recipient and any payment which may be received.”

It appears that the court sees the consideration in Acromet as being variable but not uncertain on the basis that the result of the calculation may mean that there is no adjustment, but the calculation will always be carried out and any resulting payment is understood by both parties to relate to the supply being made.

It is a fine distinction and it remains to be seen how tax authorities will seek to apply the decision.  The debate, it appears, will go on.

Next Steps

While more clarity would be preferable, the decision does increase the risk that tax authorities will view TP adjustments as VATable payments and it is essential that businesses review intra-group agreements and existing TP adjustments to take a view of existing risk areas and potential measures to mitigate uncertainty and risk of tax authority challenge.