The VAT Approach to Transfer Pricing Adjustments
The Tax Agency, in its Answer no. 266 of December 18, 2024, addressed the VAT treatment regarding Transfer Pricing adjustments. It reiterated that Transfer Pricing aims to correctly allocate income among companies of a multinational group, applying the Arm’s Length Principle, i.e., the price to be used among independent companies under comparable conditions. Conversely, concerning VAT, the consideration “actually received” determines the tax base and not an estimated or residual value, as in the case of Transfer Pricing adjustments.
Criteria for the Transfer Pricing Adjustments’ Relevance 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 valuable consideration, relate to deliveries of goods or services subject to VAT, and be directly related to the agreed consideration.
Case Study: Transfer Pricing Adjustments Between Alpha and Beta
In the case of the applicant Alpha, a company based in Italy, the question arose as to whether Transfer Pricing adjustments performed on invoices issued by Alpha to its subsidiary Beta concerning 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, given that it also aims to pay for the transaction performed with Beta and can only be considered irrelevant if it only intends to adjust the operating margin of the counterparty.
The Relevance of Consistency in Agreements and Documentation
Finally, the Agency emphasized the importance of clearly defined and consistent Transfer Pricing agreements, contractual clauses, invoicing methods, and the parties’ behavior to determine the proper VAT treatment of these adjustments.
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Source: Diritto Bancario