Transfer pricing adjustments: VAT risks highlighted by Stellantis
Transfer pricing adjustments: VAT risks highlighted by Stellantis
Transfer pricing adjustments can trigger VAT liabilities, an area that businesses often overlook. The Court of Justice of the European Union recently addressed this issue in Stellantis Portugal, offering important guidance. The decision underscores a key point: both the contractual arrangement and the actual conduct of the parties determine the VAT treatment of a transfer pricing adjustment. The question is whether your organisation fully controls these outcomes.
Transactions between related parties must be priced at arm’s length. If not, tax authorities may make profit adjustments, potentially increasing corporate income tax liabilities. To mitigate this risk, parties may set arm’s length prices for their intercompany transactions upfront (price setting) and then test outcomes at year-end (outcome testing). Outcome testing may require adjustments. These retrospective adjustments can have VAT—and, in certain cases, customs—implications.
The Court of Justice of the European Union (CJEU) recently ruled on this issue in the Stellantis Portugal case and provided further clarity on how such transfer pricing adjustments should be treated for VAT purposes.
When vehicles required repairs due to manufacturing defects, warranty issues or roadside assistance, the local dealers made the necessary repairs and invoiced Stellantis for the services. Stellantis then reported the costs to the manufacturer.
Under the parties’ agreement, transfer prices may be adjusted to ensure Stellantis achieves a predetermined profit margin. Prices are initially set using the transactional net margin method and adjusted upward or downward at the end of each period. The manufacturer issued a debit or credit note to Stellantis to align actual results with the target margin. According to the Portuguese tax authorities, the adjustment constituted consideration for repair services supplied by Stellantis to the manufacturer and, therefore, VAT was due on this amount.
The court found no contractual arrangement under which Stellantis supplied repair services to the manufacturer. The only agreement in place concerned the guaranteed profit margin. Furthermore, the actual behaviour of the parties, as described by the referring court, did not indicate the existence of a repair-service agreement.
Even if such an agreement existed, the court held that the transfer pricing adjustment could not be regarded as consideration for repair services. Repair costs were only one of several parameters in the transfer pricing formula. When Stellantis achieved its target margin, no reimbursement took place.
The CJEU emphasized that transfer pricing adjustments may require an upward or downward correction of the taxable amount for the original supply of vehicles. This may affect VAT and, in the case of imports from outside the EU, customs duties.
If you would like to understand how these developments affect your organisation, please contact your BDO advisor or one of our transfer pricing, VAT or customs specialists. We would be pleased to assist you.
Transactions between related parties must be priced at arm’s length. If not, tax authorities may make profit adjustments, potentially increasing corporate income tax liabilities. To mitigate this risk, parties may set arm’s length prices for their intercompany transactions upfront (price setting) and then test outcomes at year-end (outcome testing). Outcome testing may require adjustments. These retrospective adjustments can have VAT—and, in certain cases, customs—implications.
The Court of Justice of the European Union (CJEU) recently ruled on this issue in the Stellantis Portugal case and provided further clarity on how such transfer pricing adjustments should be treated for VAT purposes.
Summary of Stellantis Portugal
The case concerns a vehicle manufacturer that sold vehicles and related accessories to a related distributor, Stellantis Portugal, which then resold them to local dealers.When vehicles required repairs due to manufacturing defects, warranty issues or roadside assistance, the local dealers made the necessary repairs and invoiced Stellantis for the services. Stellantis then reported the costs to the manufacturer.
Under the parties’ agreement, transfer prices may be adjusted to ensure Stellantis achieves a predetermined profit margin. Prices are initially set using the transactional net margin method and adjusted upward or downward at the end of each period. The manufacturer issued a debit or credit note to Stellantis to align actual results with the target margin. According to the Portuguese tax authorities, the adjustment constituted consideration for repair services supplied by Stellantis to the manufacturer and, therefore, VAT was due on this amount.
CJEU judgment
The CJEU rejected the tax authorities’ position.The court found no contractual arrangement under which Stellantis supplied repair services to the manufacturer. The only agreement in place concerned the guaranteed profit margin. Furthermore, the actual behaviour of the parties, as described by the referring court, did not indicate the existence of a repair-service agreement.
Even if such an agreement existed, the court held that the transfer pricing adjustment could not be regarded as consideration for repair services. Repair costs were only one of several parameters in the transfer pricing formula. When Stellantis achieved its target margin, no reimbursement took place.
The CJEU emphasized that transfer pricing adjustments may require an upward or downward correction of the taxable amount for the original supply of vehicles. This may affect VAT and, in the case of imports from outside the EU, customs duties.
Why this matters
Many businesses underestimate the indirect tax consequences of transfer pricing adjustments. Depending on the facts:- An adjustment may constitute consideration for a supply of services, as seen in the Arcomet Towercranes case.
- An adjustment may require revisiting the taxable amount of earlier supplies for which VAT has already been accounted for.
- Issuing corrective invoices;
- Amending VAT returns; or
- Updating EC Sales Lists (recapitulative statements).
What should businesses do?
Given the potential VAT and customs implications, businesses should:- Assess the VAT treatment of all transfer pricing adjustments, including whether they affect the taxable amount of prior supplies.
- Review and, if necessary, update intercompany agreements, ensuring they accurately reflect the intended economic reality.
- Evaluate customs implications where transfer pricing adjustments affect import values and related procedures.
How BDO can help
BDO’s transfer pricing, VAT and customs specialists work together to help clients identify the indirect tax consequences of transfer pricing adjustments. We take a coordinated approach to confirm that both the legal framework and the practical conduct of the parties are aligned.If you would like to understand how these developments affect your organisation, please contact your BDO advisor or one of our transfer pricing, VAT or customs specialists. We would be pleased to assist you.
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