VAT treatment of Transfer Pricing Adjustments

It is common practice in business that related companies or divisions under common ownership or control exchange between them goods, services, and intangible property (like patents or royalties).  The price charged for such transfers is called Transfer Pricing (TP).

As these companies may be established in different jurisdictions, TP may affect the profits made by the company in a particular jurisdiction.

Therefore, to prevent profit shifting to more favourable jurisdictions offering a low rate of corporate tax, the OECD (Organisation for Economic Co-operation and Development) issued the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which provide the global standard for pricing cross-border transactions between related companies within a multinational enterprise.

The primary objective of these guidelines is to ensure that profits are taxed where economic activity takes place and where value is created, thereby preventing artificial profit shifting and eliminating double taxation.

The core principle of TP is The Arm's Length Principle.  This means that the price charged for a transaction between two related parties (associated enterprises) must be the same as the price that would have been charged between two unrelated parties operating at "arm's length" in comparable circumstances.  This would ensure that the valuation of intercompany transactions reflects market-based pricing.

The OECD guidelines provide for TP adjustments between related companies to reflect the arm's length principle.  They have been adopted in national direct tax legislation across the world and the EU, including Malta.  However, not all Member States may be applying all the provisions of the guidelines.

The guidelines also put an emphasis on the use of the Mutual Agreement Procedure and indirectly extend to self correcting procedures by the taxpayer.  This would result in a Taxpayer-initiated adjustment, which consists of a voluntary adjustment made by the taxpayer to comply with the arm’s length principle in pricing, before the submission of the Income Tax returns.  This type of adjustment may fall into two categories:

1. In the case where the associated companies make supplies of goods or services to each other, such TP adjustment may take the form of an adjustment to the value of the supplies of the goods or services, thus requiring the issue of invoices to cover supplies whose value is not considered compatible with the arm’s length principle.  This would such supplies in line with the OECD guidelines.
2. In other cases, the TP adjustment may be the result of a book transaction which is not directly linked to a supply, such as that related to interest on loans charged between companies or from any share of profits between the companies, which are not considered in line with the arms length principle.  Or it may be a direct adjustment to the tax due, where the tax of one company is increased and the tax of the other company is decrease by the same amount. 

In the absence of a Taxpayer-initiated adjustment, tax authorities may carry out the following TP adjustments themselves:

1. A Primary Adjustment - An adjustment that a tax administration in a first jurisdiction makes to a company’s taxable profits as a result of applying the arm’s length principle to transactions involving an associated enterprise in a second tax jurisdiction.  For example, where the Tax Administration adjusts the price of goods sold by a Maltese company to its foreign affiliate to match market value.
2. A Secondary Adjustment - An adjustment that arises from imposing tax on a secondary transaction.  A secondary transaction is a constructive transaction that some jurisdictions will assert under their domestic legislation after having proposed a primary adjustment in order to make the actual allocation of profits consistent with the primary adjustment. For example, after effecting the primary adjustment, it would result that had the correct price been charged, extra money would have moved between the companies. Therefore, the tax authorities would treat that missing movement as a constructive transaction i.e. a transaction that didn’t actually happen, but it is assumed that it has happened for tax purposes. Secondary transactions may take the form of constructive dividends, constructive equity contributions, or constructive loans.  This means that the tax authority would pretend the extra profit was paid out as a dividend, or that it was lent to the other company or that it was an investment in the other company.  And if such deemed transaction is taxable for direct tax purposes, e.g. if the dividend is taxable, then a secondary TP adjustment is made by the tax authority to tax that deemed dividend.
3. A Corresponding Adjustment - An adjustment to the tax liability of the associated enterprise in a second tax jurisdiction made by the tax administration of that jurisdiction, corresponding to a primary adjustment made by the tax administration in a first tax jurisdiction, so that the allocation of profits by the two jurisdictions is consistent. A Corresponding Adjustment is intended to avoid double taxation when a foreign jurisdiction carries out a Primary Adjustment.  For example, if Member State A increases the profits of a parent company established in that Member State, Member State B shall reduce the profits of the associated company accordingly.  This adjustment should also be treated on the basis of the nature of the Primary adjustment carried out in Member State A.

CJEU Rulings related to VAT Treatment of TP Adjustments

Up to now there have been four CJEU cases which could be relevant to the VAT treatment of TP.  These are the Weatherford Atlas Gip SA (C-527/23) decided on the 12 December 2024, Hogkullen AB (C-808/23) decided on the 3 July 2025, Acromet Towercranes (C-726/23) decided on the 4 September 2025 and Stellantis Portugal (C-603/24) decided on the 13 May 2026. 

Weatherford Atlas Gip SA (C-527/23)

This case did not directly address a year-end adjustment of TP but concerned the right to deduct VAT on intra-group management and support services, which are subject to TP rules.

The Court held that the right to deduct VAT on intra-group services cannot be refused merely because:

- The services were simultaneously shared with other group companies.

- The services were deemed “unnecessary” or “inappropriate” by the tax authority (provided that they are used for the taxable person’s own taxable transactions).

Hence in this case, the Court supported the principle of VAT neutrality where TP is concerned.  If a service is a real service linked to taxable consideration, the input VAT is deductible regardless of how the group structures the sharing and cost allocation governed by TP methodology.

Hogkullen AB (C-808/23)

This case concerned intra-group services consisting of business management services, financial services, real estate management services, investment services and IT and staff administration.  These services were considered as a single supply by the Tax Authorities and the revaluation of the VAT taxable amount for such services to reflect the Open Market Value, could not be determined in line with the first paragraph of Article 72 of the VAT directive, specifically where Article 80 of the VAT Directive applies (e.g. where the recipient has a limited right for VAT deduction). The Open Market Value is often analogous to the arm’s-length principle in TP.

The CJEU emphasized that the tax authorities cannot treat all intra-group management services as a single supply if they are clearly identifiable and have a distinct character.

By requiring the component services to be assessed individually, the ruling supports the use of separate TP methods, benchmarks for different categories of intra-group services (e.g. technical support vs financial administration) when determining the correct VAT taxable base under the Open Market Value rules of Article 80.

The most important conclusion from this case is that the economic and commercial reality of a transaction prevails (substance over form). Hence, what counts is whether an identifiable service or good was supplied for consideration and not the label “transfer pricing adjustment”.

Acromet Towercranes Case (C-726/23)

“Is Article 2(1)(c) of [the VAT Directive] to be interpreted as meaning that the amount invoiced by a company (the principal company) to an associated company (the operating company), equal to the amount necessary to align the operating company’s profit with the activities carried out and the risks assumed in accordance with the margin method of [the OECD Guidelines], constitutes a payment for a service which therefore falls within the scope of VAT?”

It is clear from this question that the Court was asked whether a TP adjustment under the OECD Guidelines may be considered as a payment of consideration for a supply of service, thus confirming that the supply actually took place.

The Court has established that the remuneration in respect of intra-group services, provided by a parent company to its subsidiary and contractually detailed, which is calculated in accordance with a method recommended by the OECD Guidelines and corresponds to the part of the operating profit margin greater than 2.74% achieved by that subsidiary, constitutes the consideration for a supply of services for consideration falling within the scope of VAT.

The Court also held that articles 168 and 178 of the VAT Directive must be interpreted as not precluding the tax authority from requiring a taxable person who seeks the deduction of input VAT paid to submit documents other than the invoice in order to prove the existence of the services referred to in that invoice and their use for the purposes of the taxed transactions of that taxable person, provided that the submission of that evidence is necessary and proportionate for that purpose.

Stellantis Portugal Case (C-603/24)

Stellantis Portugal acted as a national distributor within an automotive group.  It purchased cars from related EU manufacturers (OEMs) and sold them to independent dealers.  Under a transfer pricing policy, the prices were set to ensure Stellantis earned a pre‑determined margin.

At year-end, adjustments were made to achieve that margin and credit/debit notes were issued by the OEMs.  The adjustment took into account overall costs, including warranty and repair costs paid to the dealers, and operating costs incurred by Stellantis Portugal.

The Portuguese Tax Authority argued that these adjustments represented consideration for repair services supplied by Stellantis to the manufacturers.  Therefore, they should be subject to VAT.

The Court was asked whether the concept of “supply of services for consideration” under the VAT Directive includes an adjustment to the sale price of vehicles by way of transfer pricing adjustments.

The Court ruled that transfer pricing adjustments do NOT, in themselves, constitute consideration for a supply of services.  For a transaction to be considered as consideration for services rendered, there has to be a legal relationship characterised by reciprocal commitments relating to the supply of services and the payment of remuneration in respect of those services in the form of such an adjustment, establishing a direct link between the supply of those services and that adjustment. 

The Court found that there was neither an obligation for Stellantis to provide services to OEMs in return for payment nor a clear reciprocal performance.  The adjustments were driven by profit margin alignment, not as a payment for a service.  Any link between the TP adjustments made by the OEMs and the repair services was indirect.  There was no direct link between the TP adjustments and the warranty repairs by the dealers.  Therefore, no taxable “supply of services” exists.

Transfer pricing adjustments aim to allocate profits (for income tax purpose) and not to remunerate specific supplies.  On the other hand, VAT looks at actual transactions, not accounting adjustments. 

The Court therefore concluded that there is no automatic VAT on TP adjustments and that they do not constitute consideration just because money flows between group entities.

Adjustments aimed at ensuring arm’s length profitability are purely financial/accounting mechanisms and do not constitute supplies.  They are to be assessed based on economic reality and their link (or lack thereof) to a supply.

However, the Court also indicated that where TP adjustments may represent adjustments to the original price of the goods supplied, then it should be the national court to decide their final classification. The Court did not exclude that, where appropriate, TP adjustments may be treated as retroactive price adjustments to goods/services.

Conclusions from the Court rulings

The above CJEU cases provide enough guidelines regarding the principles to be adopted for the VAT treatment of TP adjustments.

Based on such case law, we may conclude that:

1. TP adjustments are taxable for VAT where there is a direct link between a supply of services and the consideration paid, where a TP adjustment reflects such consideration. By analogy, it could also be concluded that the same VAT treatment should be applied to TP adjustments where there is a direct link between the goods supplied and the consideration received, such as instances where the TP adjustment reflects a retroactive price adjustment to specific goods. - Acromet Towercranes (C-726/23), Stellantis Case (C-603/24)
2. The tax authority cannot refuse the right to deduct VAT on the sole ground that an invoice does not satisfy certain formal conditions required by the national legislation transposing the VAT Directive, if it has available all the information to determine whether the substantive conditions for that right are satisfied. Denying the right to deduct VAT on intra-group services based on transfer pricing policies undermines the neutrality of the tax, so that if the services are real and contribute to the taxed activity, the input VAT should be deductible. The right to deduct VAT on intra-group services cannot be refused merely because the services were simultaneously shared with other group companies or if they are deemed “unnecessary” or “inappropriate” by the tax authority (provided that they are used for the taxable person’s own taxable transactions). - Weatherford Atlas Gip SA (C-527/23)
3. The Court did not prevent the tax authority from requesting further documentary evidence from the taxable person to prove that the services shown in the invoices were used for the purpose of his taxed activity, provided that the request is necessary and proportional. - Acromet Towercranes (C-726/23)
4. Where services are revalued for the purpose of a TP adjustment, it follows from the second subparagraph of Article 1(2) of the VAT Directive that each transaction must normally be regarded, for the purposes of VAT, as being distinct and independent, a transaction which comprises a single supply from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system. There is a single supply where a number of elements or acts supplied by the taxable person to the customer are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split.  Hence, economic reality (substance) prevails over form. - Hogkullen AB (C-808/23)

VAT Treatment

According to article 1(2) of the VAT Directive, “The principle of the common system of VAT entails the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services,...”

Under article 14(1) and 24(1) of the VAT Directive, a ‘supply of goods’ shall mean the transfer of the right to dispose of tangible property as owner (article 14(1)) and a ‘supply of services’ shall mean any transaction which does not constitute a supply of goods (article 24(1)).

Hence, for a transaction to fall within the scope of VAT, it has to be established that there is a direct link between an existing supply (of goods or services) and consideration paid by way of the TP adjustment.

Where the transaction concerns a supply of goods, the following criteria should be met to determine if the direct link between the consideration and the supply exists:

• There is a transfer of the right to dispose the goods as owner - The recipient has to gain the ability to use the goods as if he is their owner.  Legal title is not essential; economic control matters (Shipping and Forwarding Enterprise Safe (C-320/88) and B2 Energy (C-676/22)).
• There is existence of consideration - something of value is given in return (money, goods, services etc).  Consideration must have a subjective value agreed by the parties (P. Sp.z o.o (C-241/23)).
• There is a clear direct connection between the goods supplied and the payment or benefit received. If the link is indirect or conditional, it may not qualify (Bastova (C-432/15), Apple & Pear Development Council (C-102/86)).
• The transaction is based on economic reality and reflects genuine economic activity.  Artificial arrangements that lack substance shall be ignored (Halifax (C-255/02), Newey (C-653/11) and various other CJEU rulings).
• There are reciprocal obligations performed by both parties (supplier delivers goods, recipient provides consideration). Gratuitous transfers are generally excluded unless deemed supplies apply.

Where the supply concerns services, a direct link exists between a supply of services and consideration paid represented by the TP adjustment, only if the following conditions are met:

• There is a legal relationship between the provider of the service and the recipient;
• Pursuant to such relationship there is reciprocal performance;
• The remuneration received by the provider of the service constitutes the actual consideration for an identifiable service supplied to the recipient.

(Acromet Towercranes (C-726/23), Balgarska natsionalna televizia (C-21/20), UCMR-ADA (C-501/19) and other cases)

In order to determine the VAT treatment of TP adjustments, the above mentioned principles may be applied to the types of TP adjustments on a case by case basis, as each case shall be examined on its own merits.

The Taxpayer-Initiated Adjustment

As already mentioned above, a Taxpayer-initiated adjustment may take the form of:

1. invoices issued for supplies; or
2. a book adjustment not directly linked to a supply, or a direct adjustment to the tax due.

The Acromet case deals with the a form of Taxpayer-initiated adjustment, namely the issue of invoices for supplies of services that adjust the Open Market Value in terms of the arm’s-length principle. 

Hence, where the TP adjustment is related to a transaction constituting an increase in the value of services supplied by the parent company to the associated enterprise, it is important to examine if there is a direct link between services supplied and the consideration received by way of that adjustment.  Such direct link is determined on the basis of the established criteria for consideration for services referred to above.  If such direct link exists, the TP adjustment would fall within the scope of VAT and shall be considered as a supply of services. 

Similarly, where the adjustment relates to an increase in the value of goods, it is important to establish whether the direct link exists between supplied goods and consideration received, based on the established criteria related to goods.  If in the affirmative, the TP adjustment falls within the scope of VAT, i.e. a supply of goods. 

As the adjustment refers to cross-border supplies, reverse charge may be applied on the supplies by the associated company to which the invoices are issued.  Infact, the invoices raised in connection with such adjustment would give rise to a right of deduction to the receiving company, provided that it can prove that the goods or services were used for its taxable activities.  Documentary evidence related to such use should be kept by that company, as the tax authority has the right to request such evidence, provided this is necessary and proportionate.

Regarding the second category of Taxpayer-initiated adjustments, namely book adjustment not directly linked to a supply, or direct adjustments to the tax due, the same analysis should be carried out to determine whether a direct link exists between the adjustment and a supply of goods or services.  For instance, where the adjustment is related to intra-company interest charges, it could be determined that such adjustment is directly linked to a service which is exempt without the right of deduction.  Hence, this may give rise to the need to adjust partial attribution of input VAT for the company charging such interest. 

On the other hand, where the TP adjustment relates to share of profits or increase or decrease of tax which consists of a direct transaction in the book of the company, and there is no direct link between a such adjustment and a supply, such adjustment may fall outside the scope of VAT.

VAT Treatment of other types of Transfer Pricing Adjustments

As explained earlier, the Primary Adjustment and the Secondary Adjustment seem to be adjustments raised at the discretion of the Tax Authority. Therefore, the companies have the right to be informed by the Authority regarding the basis on which such adjustment is made. 

If a Tax authority retains that a Primary adjustment is directly linked to a supply of goods or services between the companies, and the consequence of such adjustment would result in an under-declaration of output VAT or an over-declaration of input VAT, the Tax authority may issue assessments and charge VAT on the value of these adjustments under the provisions of VAT legislation.  This may also result in administrative penalties and interest.

Where these adjustments are directly linked to cross-border supplies of goods or services that are taxable in the place of destination in the EU, these become exempt from VAT for the supplying company, while the associated company receiving the services in the other Member State would be required to account for VAT under the Reverse Charge system.  Hence, if the associated company has a full right of deduction, such adjustments should not create any VAT payment due.  Similarly, where the associate company is established outside the EU, an adjustment that is directly linked to a supply made to it may have to be treated under the normal VAT rules for supplies to taxable persons outside the EU.

There may also be instances where the directly linked cross-border supplies are taxable for VAT in a Member State which is not the Member State of the acquirer, (e.g. services connected with immovable property), or where the acquirer does not have a full right of deduction.

It is therefore recommended that where a Primary or Secondary adjustment is not disputed, companies should carry out an assessment of their VAT situation resulting from such adjustment to determine whether any VAT could potentially become payable. Submitting corrections where applicable, before the issue of assessments by the tax authority, may save the company administrative penalties and interest.

This also applies to Corresponding Adjustments that are issued by a second tax jurisdiction to avoid double taxation resulting from a Primary Adjustment made by the first tax jurisdiction.

In conclusion, as already stated, every case of a TP adjustment should be analysed separately and on its own merits.  Such analysis should be based on whether there is a direct link between the adjustment and a supply of goods or services which would bring it within the scope of VAT.  If it is in the scope of VAT, then the analysis should focus on whether the linked supplies are taxable or exempt from VAT.  If taxable, account should be taken on whether any VAT due becomes payable.

On the other hand, if it is determined that no direct link exists between the adjustment and a supply, then such adjustment would fall outside the scope of VAT.