The VAT approach to Transfer Pricing Adjustments
The Tax Agency, in its Answer no. 266 of December 18, 2024, addressed the VAT treatment of transfer pricing (TP) adjustments. It reiterated that the objective of transfer pricing is to correctly allocate income between companies of a multinational group, applying the arm’s length principle, i.e. the price that would apply between independent companies under comparable conditions. However, in the case of VAT, the taxable base is determined by the consideration “actually received” and not by an estimated or residual value, as in the case of Transfer Pricing adjustments.
Criteria for the relevance of Transfer Pricing adjustments to VAT
Transfer Pricing adjustments are relevant for VAT only when there is a modification of the originally agreed consideration, as stipulated in the contract. These adjustments must meet certain criteria: be for consideration, relate to supplies of goods or services subject to VAT and have a direct connection to the agreed consideration.
Case study: Transfer Pricing adjustments between Alfa and Beta
In the specific case of the applicant Alfa, a company established in Italy, the question arose as to whether Transfer Pricing adjustments made on invoices issued by Alfa to its subsidiary Beta, in connection with intra-group transactions, are relevant for VAT. The Tax Agency concluded that the second invoice issued, which includes a Transfer Pricing adjustment, is not irrelevant for VAT purposes, as it is also intended to pay for the transaction made with Beta, and can only be considered irrelevant if its sole purpose is to adjust the counterparty’s operating margin.
The importance of consistency in agreements and documentation
Finally, the Agency stressed the importance of clearly defined and consistent Transfer Pricing agreements, contractual clauses, invoicing methods and the behavior of the parties to determine the proper VAT treatment of these adjustments.
Call to action
At TPC Group, we have Transfer Pricing and indirect taxation experts to help you comply with Italian regulations.
Contact us today and optimize your company’s tax management!
Source: Diritto Bancario
