ECJ rules on transfer pricing adjustments

Facts and questions referred

The applicant, General Motors Portugal (GMP, later Stellantis), was a local Portuguese distribution company that purchased cars from so-called ‘Original Equipment Manufacturers’ (OEMs) and resold them to independent authorised dealers. In the event of manufacturing defects, problems covered by the warranty and roadside assistance, end customers contacted the authorised dealers, who invoiced GMP for the resulting costs.

Contractual agreements existed between GMP and the OEMs, under which GMP was required to achieve a certain profit margin from the car business. To this end, the transfer prices for the cars were adjusted in line with repair costs,both upwards and downwards, so that payments were made in both directions. GMP’s general operating costs also influenced the transfer prices.

The Portuguese court referred the question to the ECJ whether GMP had provided a taxable repair service to the OEMs in return for payment.

ECJ ruling

A taxable service requires a direct link between the service provided and the consideration received. This presupposes a legal relationship within which reciprocal supplies are exchanged. In this context, the remuneration must represent the actual value of a determinable service. The ECJ finds that the legal relationship arising from the contractual agreements in question is, to its knowledge, the only relevant legal relationship. However, none of the clauses contained therein suggests that GMP was obliged to provide repair services to the OEMs.

If the referring Portuguese court were to affirm the existence of such a legal relationship based on circumstances unknown to the ECJ, that court would have to examine whether the remuneration for it was granted of free will or depended on chance. This is because the uncertainty of remuneration could negate the direct link between service and remuneration.

The ECJ also considered in its assessment that the costs of the repairs were only one of the parameters that had been decisive for the price adjustments.Operating costs had also influenced them, meaning that payments from GMP to the OEMs could also have occurred. Furthermore, compensation payments were made only to the extent that they were necessary to achieve the specified profit margin. Both factors argue against a service provided by GMP to the OEMs.

The ECJ suggests that the Portuguese authorities should examine a reduction in the tax base for the car supplies.

Analysis

Many businesses and consultants would like the ECJ to clarify the treatment of transfer pricing adjustments once and for all. This has not happened again but was not really to be expected, as the ECJ has always ruled on a case-by-case basis and does not establish a systematic framework.

Nevertheless, it can be inferred from the decision that the VAT treatment of transfer pricing adjustments must be assessed based on the legal relationships at hand and is not automatically to be regarded as subject to VAT. In the present case, no repair service had been agreed upon, so no such service existed for VAT purposes either. A mere adjustment to achieve an agreed intra-group profit margin is therefore generally insufficient to constitute an exchange of supplies for VAT purposes, as this would require a direct link between a specific supply and the payment.

However, the reverse conclusion is unlikely to be permissible: had the parties here expressly agreed on repair services, the question would have arisen as to whether these had actually been carried out. The fact that payments may also be made by the potential service provider (GMP) to the service recipient (OEM) clearly argues against this.

The adjustment of transfer prices purely for the purposes of profit margins is therefore likely to lead to taxable supplies only in exceptional cases. They are most likely to be classified as changes to the tax base under Article 90 of the VAT Directive, although each case must be examined individually.

Author: Nadia Schulte