On December 12, 2024, the Court of Justice of the European Union (CJEU) issued a ruling in the Weatherford Atlas Gip case (C-527/23), clarifying the interaction between Value Added Tax (VAT) and Transfer Pricing policies in intra-group transactions.
Background
Weatherford Atlas Gip, part of the Weatherford group specialist in oilfield services, acquired Foserco SA, a Romanian renderer of ancillary services for the extraction of oil and natural gas, in 2016. During 2015 and 2016, Foserco received general administrative services from related companies within the group located outside Romania. These services included information technology, human resources, marketing, accounting, and consulting, applying the reverse charge mechanism for VAT. The costs of these services were allocated to Foserco according to the group’s Transfer Pricing policies.
Dispute with the Romanian Tax Administration
The Romanian tax administration denied Foserco the right to deduct VAT, claiming the lack of a direct link between the services received and its taxed activities. In addition, they considered the evidence displayed on the necessity of such services to be insufficient, qualifying them as “shareholder costs” that should not be allocated to subsidiaries.
Questions Raised Before the CJEU
The Romanian regional court referred to the CJEU the question of whether the right to deduct VAT on intra-group services can be legitimately denied when these are simultaneously provided to other related companies, and their necessity is not clearly justified.
CJEU Ruling
The CJEU ruled in favor of Weatherford Atlas Gip, concluding that refusing to deduct VAT contravenes the VAT Directive. According to CJEU case law, the right to deduct input VAT is fundamental to the common VAT system and reflects the principle of tax neutrality. This right generally requires a direct and immediate link between a specific input transaction and a particular output transaction. In this case, if the services supplied enabled the taxable person to carry out his/her VAT-taxed transactions, the right to deduct input VAT is justified. The extent of this right must be evaluated considering the economic and commercial reality of the services provided.
Implications for Multinational Enterprises
This ruling underlines the significance of solid documentation in intra-group transactions, especially concerning the allocation of costs and the substantiation of the necessity of the services received. Companies should ensure tax regulation compliance in their Transfer Pricing policies, ensuring that intra-group services directly contribute to their taxed economic activities.
Conclusion
The CJEU ruling in the Weatherford Atlas Gip case effectively clarifies the relationship between VAT and Transfer Pricing in the European Union. It highlights the need for multinational companies to maintain detailed and transparent documentation of their intra-group transactions to support the right to deduct VAT and ensure compliance with effective tax regulations.
Source: Mondaq
