1. VEG No 071 REV 1 Possible VAT implications of Transfer Pricing Adjustments Presentation to the VAT Committee by the VAT Expert Group
April 13, 2018

2. What is the problem?

3. Business Case
Example
Principal manufactures its products in 10 different EU countries.
These goods are sold to 15 different affiliates (distributors) domestic, in the EU, outside EU
VAT consequences all “easy and usual”
Then comes year-end …. Margins missed due to e.g. lower/higher volumes, exchange rates, variances on administrative and advertising expenses, …. => Spontaneous adjustment
Or … consequence of an audit, tax inspector in country B considers margin too low and requires 1% extra to be taxed
How to deal with these adjustments?

4. Business Case Example – Spontaneous adjustment @ year-end
The Principal needs to issue a TP adjustment for the year to each of its affiliates (amounts might vary greatly from one affiliate to another)
Transfer Pricing Adjustment - Principal needs to issue 15*10 = 150 debit/credit notes
Each affiliate will potentially receive 10 credit notes from the same legal entity but from its different VAT numbers.
On these 150 credit notes, the Principal will need to show the list of all invoices for the TP adjustment (here an adjustment of the price of previous supplies) relate to i.e. all invoices by affiliates, by sourcing plant.
In some countries, the Principal will be required to refile all VAT returns for the periods of the initial supply i.e. the past 12 VAT returns.
300 bookings to be checked by the various tax authorities for no monetary impact, as we assume all parties have full right to deduct.
Issue: What is the taxable transaction? What is the taxable amount? Impact on invoicing (correct each invoice?) and reporting (retroactive amendment of VAT returns)? Deduction and liability of VAT? When does the transaction take place?

5. Impact Transfer Pricing Adjustments
What is the “Taxable Transaction”?
Outside scope of VAT
Price adjustments – the adjustment is linked to a prior underlying taxable transaction for VAT purposes (retroactive adjustment)
Further consideration for a subsequent supply (prospective adjustment)
Consideration for a separate service – separate taxable transaction for VAT purposes

6. Proposal VAT Expert Group
Simplification: Transfer Pricing Adjustments (“TPA”) should be considered as “Outside scope of VAT” where both parties have the full right to recover VAT
Only when one of the traders does not have a full right of recovery, TPA might require a VAT adjustment if there is a sufficiently direct link between any payments resulting from an adjustment and specific supplies.
TPA resulting from a tax audit will always be treated as outside of the scope of VAT unless the parties agree to change the consideration accordingly

7. In case simplification would not work ….
Outside scope of VAT
Non-voluntary adjustments
Voluntary Prospective Compensating adjustments – considered as taxable transaction when ‘future’ supply is made
Taxable transaction - Direct link with the initial supply
No direct link with the initial supply – Contractual arrangements to be considered
Outside scope of VAT: Profit adjustments to reach profit margin, profit split
In scope of VAT: adjustment for previous supplies, billing of variances between actual and budgeted cost of marketing or administrative expenses

8. ?