The article discusses the intersection of transfer pricing (TP) adjustments and Value Added Tax (VAT) implications in the context of related-party transactions. Specifically, it addresses the Italian tax authorities’ stance on whether an upward TP adjustment made by an Italian company to its foreign affiliates should be considered for VAT purposes. Here is a summary of the key points:
- Transfer prices between related parties are typically viewed as a corporate income tax issue.
- VAT implications of TP adjustments can lead to penalties, and in certain jurisdictions, such as Italy, criminal proceedings may be initiated.
Italian Tax Authorities’ Ruling (December 2021):
- Italian Tax Administration clarified that TP adjustments should be considered for VAT purposes if:
- The adjustment represents the consideration for a new supply, OR
- The adjustment represents an increase to the taxable amount of the original supply.
Criteria for Considering TP Adjustments for VAT:
- Existence of a consideration: A remuneration must be received for a supply to be recognized under VAT legislation.
- EU VAT Directive lacks a clear definition of ‘consideration,’ but case law provides guidance.
- Direct link between supply and consideration: A legal relationship must exist, ensuring reciprocal performance.
EU VAT Expert Group Recommendations (2017):
- A supply for consideration and a direct link to that supply are necessary for TP adjustments to have VAT implications.
- Consideration of the interaction between direct and indirect taxation, existence of the arm’s length principle, consideration, supply, and a direct link between supply and consideration.
Approaches in Other EU Member States:
- Czech Republic and the UK generally follow the EU approach, considering the existence of a direct link between the supply and the remuneration.
Italian Approach and Uncertainty:
- Italian VAT legislation doesn’t expressly address the impact of TP adjustments for VAT purposes.
- Inaccurate VAT treatment could lead to penalties and criminal implications in Italy.
- Taxpayers may file preliminary ruling requests to seek clarification on the VAT treatment of TP adjustments.
Recent Italian Tax Administration Position (December 2021):
- Upward TP adjustment relevant for VAT if it represents consideration for a new supply or increases the taxable amount of the original supply.
- Direct link between TP adjustment and supply is crucial for VAT implications.
- Taxpayers should not only focus on the corporate income tax impact but also consider the potential VAT impact of TP adjustments.
- Incorrect VAT treatment may lead to significant consequences, and seeking local advice is recommended.
In summary, the article emphasizes the importance of considering VAT implications when making TP adjustments and highlights the criteria and conditions under which the Italian tax authorities consider such adjustments relevant for VAT purposes.
- Baker & McKenzie – EU: VAT impact of transfer pricing adjustments – New insights in light of CJEU jurisprudence and new rulings in Italy
- Answer no. 529/2021 – Relevance for VAT purposes of price adjustments
- Further guidance needed on transfer pricing adjustments and customs valuations in Italy
- Italian Revenue Agency Ruling Addresses Permanent Establishments, VAT and TP
- Italian tax agency clarify transfer pricing adjustments and VAT
- Italy invoicing – new requirements / Transfer pricing adjustments – Clarifications by Italian revenue agency
- Landmark clarifications on VAT implications of transfer pricing adjustments and implementation of Skandia to Italian VAT grouping
- Ruling #529: Tax treatment applicable to price adjustments on the taxable base
- Tax authorities clarify VAT treatment of price adjustments
- VAT impact of transfer pricing adjustments
- VAT treatment of transfer pricing adjustments
- Year-end TP adjustments may not be relevant for VAT purposes