A-G opinion on VAT and Transfer Pricing adjustments

03/04/25

On 3 April 2024, Advocate General de la Tour (AG) released an opinion in the case of SC Arcomet Towercranes SRL (C-726/23). In short, the A-G clarifies that amounts charged by the Arcomet parent company to its subsidiary, calculated using the OECD's transactional net margin method for transfer pricing, should be considered as payment for services subject to VAT. Additionally, tax authorities can request further documentation to verify the use of services for taxable transactions, provided this is done proportionately. It remains to be seen whether the Court of Justice of the European Union (CJEU) will follow the opinion of the A-G.

Background

SC Arcomet Towercranes SRL (Arcomet Romania), a subsidiary of the global crane rental group Arcomet, is involved in a legal dispute with the Romanian tax authority, Direcţia Generală Regională a Finanţelor Publice Bucureşti. The case centers on the application of VAT rules to intercompany services and the conditions for VAT deduction. Arcomet Romania purchases or leases cranes, which it then sells or rents to its customers. Meanwhile, Arcomet Service NV Belgium (Arcomet Belgium), another entity within the Arcomet group, negotiates with suppliers on behalf of its subsidiaries, including Arcomet Romania, although the actual contracts are signed between Arcomet Romania and the suppliers or customers.

In 2011, 2012, and 2013, Arcomet Romania received invoices from Arcomet Belgium for services rendered, calculated based on the OECD's transactional net margin method for transfer pricing. These invoices were issued to adjust the operational profit margin of Arcomet Romania to align with market levels, as determined by a transfer pricing study. The Romanian tax authority conducted an audit and subsequently denied the VAT deduction claimed by Arcomet Romania, arguing that the company failed to provide sufficient evidence that the services were used for taxable transactions.

The case was brought before the Curte de Apel București (Court of Appeal Bucharest), which sought a preliminary ruling from the Court of Justice of the European Union (CJEU) on whether the amounts charged by Arcomet Belgium to Arcomet Romania should be considered as payment for services subject to VAT and whether additional documentation beyond the invoice could be required to substantiate the VAT deduction.

Opinion of the A-G

In its opinion, the A-G addresses the two questions successively, focusing firstly on whether such adjustments are subject to VAT and secondly whether tax authorities may require additional documentation to substantiate VAT deduction.

Application of VAT to Transfer Pricing Adjustments

The A-G addressed the issue of whether the amounts charged by a parent company to a subsidiary, calculated using the OECD's transactional net margin method for transfer pricing, should be considered as payment for services subject to VAT. The A-G concluded that these amounts do indeed constitute payment for services and fall within the scope of VAT. This conclusion is based on the contractual relationship between the parent and subsidiary, which involves the provision of services and corresponding remuneration. The A-G emphasized that the assessment should be made on a case-by-case basis, considering the economic and commercial reality of the transactions. The relationship between the parent and subsidiary, as outlined in their agreement, involves the provision of services and corresponding remuneration, which meets the criteria for a taxable service under VAT law.

Documentation Requirements for VAT Deduction

The A-G concluded that tax authorities are entitled to request further documentation, provided this is done proportionately and in accordance with the principle of VAT neutrality. The Advocate General highlighted that the right to deduct VAT should be allowed if the substantive conditions are met, even if some formal requirements are not fulfilled. The burden of proof lies with the taxpayer to demonstrate that the services were used for taxable activities.

What does this mean for your organisation?

The A-G emphasizes that the VAT implications of transfer pricing corrections should be determined on a case-to-case basis, considering that there are various parameters involed including different types of adjustments, agreements, and methods. Therefore, according to the A-G there is not one single answer to all questions arising at the junction between VAT and transfer pricing. If followed by the CJEU, it becomes increasingly important for businesses to review the VAT implications of intercompany service agreements. Ensuring the correct VAT treatment of (transfer pricing) adjustments can help to minimize the risk of disputes with tax authorities.

Additionally, the A-G highlights the necessity for robust documentation to support VAT deduction. Tax authorities are entitled to request additional documentation beyond the invoice to verify that the services were used for taxable transactions. It is important for businesses to maintain comprehensive records that clearly demonstrate the nature of the services provided, and the direct link between these services and the consideration.