Review of the VAT treatment of Transfer Pricing Adjustments

Transfer Pricing (TP) refers to the pricing of goods, services, and intangible assets exchanged between related companies under common ownership, often across different jurisdictions. To prevent profit shifting to low-tax countries, the OECD established Transfer Pricing Guidelines, which require transactions to follow the Arm’s Length Principle, pricing as if between independent parties. These guidelines aim to ensure profits are taxed where value is created and have been widely adopted in national tax laws, including Malta. TP adjustments can be taxpayer-initiated, such as revising invoices or accounting entries before filing tax returns, or imposed by tax authorities through primary, secondary, and corresponding adjustments to align taxable profits with market-based pricing and avoid double taxation.

The Court of Justice of the European Union (CJEU) has issued three rulings relevant to the VAT treatment of Transfer Pricing (TP): Weatherford Atlas Gip SA, Hogkullen AB, and Acromet Towercranes, with a fourth case, Stellantis Portugal, still pending. Weatherford confirmed that VAT deduction on intra-group services cannot be denied solely because services are shared or deemed unnecessary, reinforcing VAT neutrality. Hogkullen emphasized that intra-group services must be assessed individually rather than as a single supply, aligning VAT valuation with economic reality and supporting separate TP benchmarks. Acromet clarified that TP adjustments calculated under OECD guidelines can constitute consideration for a supply of services subject to VAT, and tax authorities may require additional documentation beyond invoices to verify the existence and use of services. These rulings collectively stress substance over form and the link between TP adjustments and VAT obligations.

The CJEU rulings provide key principles for determining VAT treatment of Transfer Pricing (TP) adjustments. TP adjustments are subject to VAT when there is a direct link between a supply of goods or services and the consideration paid, as confirmed in Acromet Towercranes. VAT neutrality must be maintained, meaning input VAT cannot be denied solely due to formal invoice deficiencies or because services are shared or deemed unnecessary, provided they relate to taxable activities (Weatherford Atlas Gip SA). Tax authorities may request additional documentation to verify the existence and use of services, as long as such requests are necessary and proportionate. Furthermore, each transaction must be assessed individually based on economic reality, avoiding artificial splitting or aggregation of supplies (Hogkullen AB). Ultimately, VAT applies where reciprocal obligations exist, consideration is provided, and the transaction reflects genuine economic activity, requiring case-by-case analysis under Articles 14, 24, and 1(2) of the VAT Directive.

Taxpayer-initiated adjustments can involve issuing invoices for supplies or making book entries not directly linked to a supply. When invoices are raised to align with the arm’s-length principle, as in Acromet, the key question is whether there is a direct link between the goods or services supplied and the consideration received. If such a link exists, the adjustment falls within the scope of VAT and may trigger reverse charge rules for cross-border transactions, with the recipient entitled to input VAT deduction if the supplies are used for taxable activities and supported by proper documentation. For adjustments related to interest or exempt services, VAT implications may include partial attribution adjustments, while adjustments involving profit shares or tax-only entries generally fall outside VAT scope. Primary, Secondary, and Corresponding adjustments initiated by tax authorities must also be assessed for VAT impact, especially where they relate to cross-border supplies, as these may require reverse charge or corrections to avoid penalties. Ultimately, each TP adjustment must be analyzed individually to determine whether it constitutes a taxable supply under VAT rules.