The interaction between VAT and Transfer Pricing has long been complex, as TP focuses on aligning profits within groups while VAT applies to individual transactions. The Court of Justice of the European Union (CJEU) recently addressed this issue in Arcomet C-726/23, referred by a Romanian Court, concerning whether TP adjustments constitute consideration for VAT purposes and the conditions for input VAT deduction.
Case Background
Arcomet Towercranes SRL (Romania) received three invoices from its Belgian parent, Arcomet Service NV, based on a transfer pricing study applying the transactional net margin method (TNMM). Romanian Tax Inspectors treated these invoices as management services and applied VAT through the reverse charge mechanism, although denied input VAT deduction, citing insufficient evidence of services performed. The dispute led to preliminary questions before the CJEU on VAT scope and deduction rights.
CJEU Findings
1. VAT Scope of TP Adjustments – The Court held that TP settlements can constitute consideration as a taxable supply for VAT services if genuine management or operational services are provided. Even though remuneration varied annually, the contract established a sufficient direct link between services and payment.
2. Input VAT Deduction – Deduction requires both a valid invoice and evidence that services were supplied and used for taxable activities. Tax authorities cannot deny deduction on the grounds that services were “unnecessary” but may request proportionate supporting documentation beyond the invoice. The CJEU found tax authorities can request additional documents to verify the use of taxable services if these are deemed fair and reasonable.
Key Points
- Intra-group TP adjustments linked to real services fall within VAT’s scope.
- Deduction depends on substantive reality, not the perceived necessity of services.
- Authorities may ask for evidence, but refusal cannot be based solely on minor formal defects.
Observations
The judgement provides clarity but leaves tension around the principle of remuneration certainty. Payments under TNMM were not guaranteed, yet the Court relied pragmatically on contractual structure and actual outcomes. This reflects a desire to include TP settlements within VAT, even if consistency is debatable.
Whilst this case focuses on VAT, businesses need to be equally alert to the customs duty implications within transfer pricing adjustments to ensure consistency with arm’s length principles to avoid potential penalties and double taxation.
Conclusions
Businesses should revisit their intra-group arrangements. Contracts must clearly set out services and remuneration mechanisms; invoices should meet VAT requirements; and supporting evidence should be retained to substantiate deductions. Proactive alignment of TP and VAT policies will mitigate disputes and strengthen compliance.
This article was written by Gerry Myton and Charmaine Richards.
Gerry Myton, Regional Partner and Head of Tax Investigations & Indirect Taxes
Gerry heads up our London/South-East region and our national Indirect Tax and Tax Investigations teams. His background is in indirect tax which he has specialised in for 35 years and he has previously worked for HMRC and Big 4/Top 20 accountancy firms. Gerry works across the entire spectrum of Indirect Tax but has particular strengths in property/construction, financial services, international trade, retail, leisure/travel, health and dispute resolution.
Charmaine Richards, VAT Manager
Charmaine is a Manager in our VAT team, where she brings a wealth of experience from working for 15 years with HMRC within their Large Business Team and the Fraud Investigation Service. Her expertise spans several sectors, including pharmaceutical, automotive, retail, energy, healthcare, construction, and land and property.
