VAT consequences of transfer pricing adjustments: The Advocate General’s analysis in Stellantis Portugal

These two areas of taxation operate with different objectives, so this can cause difficulties when aligning them in practice. 

Value added tax focuses on specific supplies of goods and services, and it requires a clear link between what is provided and the consideration paid, including any subsequent adjustment in the price.

Transfer pricing, by contrast, focuses on transactions to be undertaken at an arm’s length price. The price is determined with reference to either a comparison of actual prices between two independent parties, or margins at gross or net level earned by third parties undertaking untainted transactions or by allocating profits between two (or more) related parties with some economic rationale. Transfer pricing seeks to ensure that profits are distributed in a manner that reflects what would have occurred between independent parties. When an internal pricing model uses provisional values that are later adjusted to align with expected or agreed outcomes, the question arises whether these adjustments simply correct the amount paid for a previous supply or whether they constitute a new transaction for tax purposes.

AG opinion in Stellantis

The opinion issued by Advocate General Kokott at the Court of Justice of the European Union (CJEU) in January 2026 in the Stellantis Portugal case offers valuable guidance on this point.

The commercial structure at the centre of the case involved a distribution business engaged in the purchase of vehicles from affiliated manufacturers. Stellantis Portugal was a distributor of General Motors’ vehicles. Stellantis acquired vehicles under a pricing arrangement that set an initial value based on expected market conditions. Stellantis Portugal’s operating margin was intended to fall within a defined range, and this intention was built directly into the pricing mechanism. Unlike fixed price arrangements, this structure recognised the uncertainty inherent in forecasting sales volumes and operating costs. As a result, the initial price was not regarded as final. Instead, it was subject to revision once the actual results of the period were known. When the financial year closed, the manufacturer issued credit notes, or debit notes, to adjust the provisional price to achieve the intended margin for the distribution function (by Stellantis Portugal).

This method of pricing is used in many sectors where distribution models rely on expected results rather than precise predictions. The adjustments made at the end of the period ensure that the distributor receives a return that is considered reasonable in light of the functions performed, the assets used and the risks assumed and controlled. The distributor in this case also incurred warranty repair costs and general operating expenses. It incurred the warranty costs as it was charged by the local third-party dealers that repaired vehicles for manufacturing defects under warranty. The year-end price adjustment took this into consideration when computing the distributor’s final margin, but it did not alter the fact that the activity of distributor was simply the purchase and resale of vehicles.

The Portuguese tax authority took the view that the adjustments represented more than simple adjustments to the price of the vehicles originally supplied to Stellantis. According to the authority, the distributor’s payment of warranty related costs and other expenses provided an advantage to the manufacturer. Since the manufacturer reduced the price paid by the distributor at the end of the year, the authority argued that this reduction represented a payment for services by the distributor to the manufacturer. The authority suggested that the distributor had performed identifiable functions for the benefit of the manufacturer and that the downward adjustments reflected compensation for these functions. If this interpretation were correct, value-added tax would be due because there would have been a supply of services from the distributor to the manufacturer within the scope of VAT.

The Advocate General began her assessment by focusing on the legal structure of the arrangement rather than its economic consequences alone. She noted that the pricing mechanism was set out clearly in the original agreement between the parties, that the initial price was provisional and subject to change. This type of structure does not in itself create new obligations between the parties at the end of the period. Instead, it reflects their intention that the price paid for the goods will be finalised once the relevant financial information is available. The issuance of credit notes and debit notes was simply the means by which this finalisation occurred.

Central to her reasoning was the distinction between an internal financial adjustment and a transaction that qualifies as a supply under value added tax principles. For a transaction to fall within the scope of VAT, there must be a clear and direct link between what is provided and the consideration paid for it. The Advocate General examined whether the distributor had undertaken any activity that could be described as a service performed for the manufacturer. She found no evidence to support that conclusion. The distributor bore the cost of the warranty repairs (by the dealers), but these repairs were for the benefit of end customers. The repairs did not create a contractual obligation that linked the distributor to the manufacturer in a manner that would qualify as a service for VAT purposes. The manufacturer did not engage the distributor to carry out these repairs, and there was no indication that the year-end adjustments were made as payment for the repairs.

The Advocate General also considered the broader implications of the tax authority’s position. If every transfer pricing adjustment could be interpreted as payment for services, the line between income tax and value added tax would become blurred. Internal profit adjustments are made to ensure that the result reflects what independent parties would have earned. These adjustments are not intended to reflect new supplies of goods or services. Treating them as such would extend the scope of value added tax beyond what the legislation intended and would create additional administrative obligations without any underlying commercial substance.

Her analysis emphasised that the pricing adjustments were not evidence of any new transaction. They were simply part of the process of determining the correct purchase price for the vehicles. VAT legislation already contains provisions (Under Article 90 and 73 of the EU VAT Directive) that allow for adjustments to the taxable amount when the original price is revised after the original supply has taken place. These rules ensure that tax is charged on the correct value for a transaction. They do not require each revision of the price to be treated as a new, separate supply under Article 2(1)(c) of the VAT Directive.

Key takeaways from the opinion

The Advocate General’s opinion provides clarity for groups that rely on variable pricing structures. It indicates that, in the absence of additional obligations or identifiable services performed between the parties, year-end pricing adjustments do not give rise to separate supplies of taxable services. The adjustments (other than the ones made by tax authorities as a part of transfer pricing audits/ interventions) should be treated as corrections to the original taxable amount, provided that the contractual documentation clearly reflects their nature and purpose.

The opinion also highlights the importance of careful drafting of contracts and consistent documentation. Agreements should set out pricing mechanisms clearly and explain factors that will influence later adjustments. It is important for the parties to demonstrate that these adjustments relate to the original supply of goods and not to any separate activity. This documentation helps demonstrate that the pricing adjustments fall under the rules governing changes to the taxable amount rather than the rules governing new supplies. It also highlights the importance of accurately setting out the true nature of the actual transactions, in line with transfer pricing principles.

It recognises the commercial reality of variable pricing arrangements and confirms that internal adjustments designed to bring an initial price to its final form do not ordinarily create new supplies for VAT purposes. If the Court of Justice adopts this reasoning, it will help promote a more consistent approach to pricing adjustments and give multinational companies greater clarity over their tax obligations. The opinion therefore represents an important development in the ongoing effort to align legal principles with commercial practice in the area of indirect taxation.

If you’d like further information or wish to explore how transfer pricing adjustments might affect your organisation from a VAT perspective, please feel free to get in touch with us.