By Davide Anghileri, University of Lausanne
The EU Commission has published a VAT Expert Group working paper which concludes that transfer pricing adjustments should be treated as outside the scope of VAT where all parties have a full right to deduct VAT.
The VAT Expert Group, which assists and advises the EU Commission on VAT matters, said in its April 18 paper that VAT and transfer pricing adjustments are focused on different aspects of taxation. The expert group affirmed that VAT is a transaction-based tax with businesses just acting as tax collector and the VAT borne by the final consumer, while transfer pricing adjustments are made to determine the taxable basis for direct tax purposes.
Hence, transfer pricing adjustments should not necessarily result in a price adjustment for VAT purposes, even though the profit adjustment may be an indirect consequence of goods being bought or sold and other kinds of costs being incurred.
The VAT Expert Group took the position that transfer pricing adjustments cannot be directly linked to previous transactions as they do not lead to a new taxable transaction nor do they adjust a past transaction.
However, in cases where there is a contractual provision requiring a modification to the consideration originally given, and where the parties to the transaction do not have the full right to deduct VAT, a VAT adjustment should be allowed because there is a direct link with the initial supply, the expert group concluded.
In such cases, the VAT treatment of the adjustment should be the same as the initial supply. For goods, the price of each product can be adjusted for each supply being made. For services, the cost of each service provided can be adjusted, the VAT Expert Group said.
The paper concludes that transfer pricing adjustments should not create additional adverse VAT impacts on businesses. Even if an adjustment is required for VAT purposes, it should not lead to the application of penalties and late payment interest, the group states.
Moreover, the paper states that if the transfer pricing adjustment is within the scope of the VAT, the statute of limitations should not run on the right to refund or deduct VAT due that arises from the adjustment.
Four real-life examples are included in the paper with the aim of not only explaining the conclusions of the VAT Expert Group but also of showing and raising questions and issues on the topic at stake.
Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
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