Edited by Giorgio Massa, Davide Accorsi, Paola Bramato, Aisha Noura Grin
With the ruling reply no. 266 of 18 December 2024, the Italian tax authorities have expressed their opinion again on the relevance for VAT purposes of the so-called ‘transfer pricing adjustments’ applied by multinational groups in relation to transactions carried out between related companies. Confirming a consolidated orientation and in line with the guiding principles dictated by the EU legislation, the Financial Administration has confirmed the irrelevance for VAT purposes of such adjustments where they are aimed at ‘rectifying’ the operating margin of the counterparty company in accordance with the principle of free competition. Otherwise, where such adjustments represent a ‘correction’ of the contractually agreed consideration for the sale of goods or provision of services, this value is relevant for the purposes of calculating the VAT taxable base. The document also underlines the importance of contractual agreements in order to define the relevance or otherwise of the adjustments.
In the past, the Italian tax authorities, in line with the recent document under comment, had clarified that the adjustments made in application of transfer pricing policies are relevant for VAT purposes when it is possible to ascertain the existence of a direct link between the initial supply and the final adjustment (ruling reply no. 529 of 2021, see our previous newsalert of 31 August 2021). Otherwise, adjustments deriving from agreements that define the adjustment necessary to reach a certain margin and those aimed at distributing profits are not relevant for VAT purposes (ruling reply no. 60 of 2018, see our previous newsalert of 7 November 2018; and ruling reply no. 884 of 2021).
The now consolidated orientation of the Italian administrative practice seems consistent with the clarifications provided at the EU level by the VAT Committee in Working paper no. 923 of 28 February 2017 and by the VAT Expert Group in document no. 071 of 18 April 2018. While waiting for the Court of Justice of the European Union to rule on the issue (see cases C-726/23, Arcomet Towercranes, and C-603/24, Stellantis Portugal[1]), even the recent ruling reply no. 266 of 18 December 2024 does not seem to be an exception.
The case under examination
The applicant is a company ‘Alfa’ established in a Member State of the EU other than Italy and identified for VAT purposes in Italy, which carries out (to the extent of interest) exports of goods from Italy to the subsidiary ‘Beta’ resident in the United States.
The group has adopted a TP policy according to which, at the time of sale of the goods, Alfa issues an initial invoice to Beta for a value equal to 5% of the amount due. The remaining 95%, including the transfer pricing adjustment, is invoiced subsequently, normally by aggregating the adjustments relating to sales made in a quarter.
In the proposed interpretation, Alfa believes that only the invoices issued in relation to the sale of the goods are relevant for VAT purposes, while those issued subsequently (equal to approximately 95% of the value of the goods) are not relevant for VAT purposes, as they are solely aimed at aligning the margins of the US subsidiary with the principle of free competition.
The reply of the Italian tax authorities
First of all, the different purposes of transfer pricing and VAT disciplines are highlighted. The first is the correct distribution of profits of a multinational group among subsidiaries that trade goods and services in different countries. Therefore, for TP purposes, the price applied to such intercompany transactions must respect the principle of free competition and be compliant with what would be expected for the same transaction between unrelated parties that carry out comparable activities. VAT, on the other hand, has the purpose of taxing consumption and the taxable base of the transactions is normally the consideration agreed between the parties. The normal value is used only in completely residual cases for the purposes of calculating the VAT taxable base.
Therefore, TP adjustments are not normally relevant for VAT purposes, unless there is a direct connection with the consideration agreed by the parties for the sale of the goods and the provision of the services. In particular, following the orientation previously expressed by the VAT Committee and the VAT Expert Group, the Italian tax authorities underline, in the commented reply, that TP adjustments are relevant for VAT if, from the contractual clauses, the parties’ will to increase or decrease the consideration originally agreed for one or more transactions relevant for VAT purposes emerges.
In light of these considerations and reiterating what has already been stated in the previous practice documents cited in this note, the Italian tax authorities come to the conclusion that TP adjustments influence the VAT taxable base if the contractual clauses agreed by the parties provide that the adjustments:
- are made for consideration;
- relate to specific supplies of goods or services that are relevant for VAT purposes;
- there is a direct link between the adjustment and the originally agreed consideration.
The Italian tax authorities therefore concludes that, in the case subject to the ruling request, the invoices issued subsequent to those issued at the time of sale are relevant for VAT purposes for the following reasons:
- the parties decided to determine the consideration for the transactions subject to the ruling in accordance with the ‘arm’s length principle’ and this is evident from the contract between the parties[2];
- there is a manifest disproportion between the initial invoiced price of 5% of the consideration (which the parties intended to be in line with the market value) and the adjustment value of approximately 95% of the agreed price[3].
Although these adjustments result in a change in the VAT taxable amount of the exports, the Italian tax authorities do not provide any clarification on the effect of these adjustments for customs purposes, as the applicant company did not request clarification in this regard.
[1] In its request for a preliminary ruling in Case C-726/23, the referring court asked whether the amount invoiced by a company resident in Belgium to a subsidiary belonging to the same group, resident in Romania, in order to align the margin with that provided for by the TP policy constitutes remuneration for a service falling within the scope of VAT. If the answer is affirmative, it was also asked whether the tax authorities are entitled to request, in addition to the invoice, other documentary evidence justifying the use of the services purchased in order to determine any right to deduct VAT.
In its request for a preliminary ruling in Case C-603/24, the referring court asked whether an adjustment of the price of the goods supplied, duly established and given concrete form in an agreement concluded between the parties, in order to obtain a minimum profit margin, and implemented by issuing a credit or debit note, can constitute a service relevant for VAT purposes. Both rulings of the Court of Justice on the issues discussed are certainly of interest to Italy, which has already expressed its position on these issues in the cited practice documents.
[2]The contract between the parties states that ‘The Supplier (i.e. Alfa) will sell the Products to the Distributor (i.e. Beta) in accordance with the free competition standard, as detailed in the Annex…. The remuneration for these Products may be adjusted from time to time to accurately reflect a fair market price. According to the cited Annex, The prices for the Products purchased by the Distributor … will be set annually based on the Net Revenue and projected Internal Costs … Prices may be updated more frequently if agreed between Distributor and Supplier’.
[3] Furthermore, the Italian tax authorities point out that Alfa has recently changed its invoicing method in order to be able to invoice at the time of sale at a value closer to the market price, and only to invoice adjustments for any discrepancies with the arm’s length price. In this regard, the Italian tax authorities believe that the amount covered by the second invoice would not be relevant for VAT purposes if and to the extent that it is aimed at adjusting the operating margin of the counterparty.
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