A ruling was issued by the Italian Revenue Service on the following question on the VAT treatment of Transfer Pricing adjustments.
1) an internal CUP (Compared Uncontrolled Price) methodology is used, on the basis of which, net of appropriate adjustments, the price of goods charged by ALFA S.p.A. to its EU affiliates is compared with the price applied by the same company in transactions with independent third parties. The adjustments applied to the price identified by the CUP method, as clarified by the same applicant in the note forwarded at the time of submitting the supplementary documentation, consist of a discount of XX on the price of finished products that can be applied to independent third parties; this last reduction would be attributable to the higher costs borne by the subsidiaries compared to third party resellers;
2) at the end of the year, a corroborative analysis (sanity check) is carried out using the TNMM (Transactional Net Margin Method), aimed at ensuring that, without prejudice to the application of the intragroup prices identified according to the internal CUP method (net of the appropriate corrections), the margins (expressed in terms of Operating Margin or Return or Sales) of the EU affiliates are also consistent with the functional profile assumed by the same and fall within the interquartile range of the specific benchmark developed by the group.
The internal CUP method described above was used to quantify the prices charged in all intra-group transfers between ALFA S.p.A. and its European subsidiaries, including those listed above, i.e. BETA Holland, BETA Hungary, BETA Prague, BETA Germany and the Austrian branch of the latter.
The corroborative analysis carried out (at the end of the year) in accordance with the Group’s TP policy showed that in the year XXX the aforementioned companies achieved margins above the upper quartile of the benchmark.
Consequently, in order to bring the operating margin back to levels that are consistent with their functional profile, as outlined by the specific benchmark developed by the group, it was necessary to make adjustments.
Therefore, ALFA S.p.A. reports that it will “issue adjustment invoices” to the EU subsidiaries that will record an extra cost that will reduce their EBIT and therefore the relative ROS net sales revenue.
In light of the above, the Company – after having highlighted that the financial transactions between the Company and the German subsidiary and the Austrian permanent establishment of the latter are subject to a procedure of Bilateral Advanced Price Agreement, for the tax periods XXX – asks for clarifications on the treatment, for the purposes of VAT, to be reserved to the “price adjustments” described above, made for the sole purpose of bringing the marginality of the above-mentioned EU subsidiaries within the range of values identified by the group’s TP policy.
Tax Ruling of the Italian Revenue Agency
”
…
According to the Community Courts, “by allowing in certain cases to consider that the taxable amount is equal to the open market value of the transaction, Article 80(1) of the VAT Directive introduces an exception to the general rule laid down in Article 73 of the latter which, as such, must be interpreted restrictively (see. (see judgments of 21 June 2007, Ludwig, C-453/05, ECR p. I-5083, paragraph 21, and of 3 March 2011, Commission v Netherlands, C-41/09, not yet published in the ECR, paragraph 58, and the case-law cited therein)”.
As a corollary to the above principle, the Court of Justice of the European Union itself has ruled that “the conditions of application laid down by Article 80(1) of the VAT Directive are exhaustive and, therefore, national legislation cannot provide, on the basis of that provision, that the taxable amount is to be equal to the open market value of the transaction in cases other than those listed in that provision, in particular where the supplier, the vendor or the purchaser is entitled to deduct VAT in full”. (In this sense judgment of 26 April 2012 in case 621/10)
The Community guideline on the scope of application of Article 80 of Directive no. 112 of 2006 has been confirmed by the case law of the Supreme Court of Cassation in its judgment no. 2240 of 2018, referred to by the petitioner.
Having said that, it should be noted that, as also emerges from the note forwarded by the petitioner at the time of submission of the supplementary documentation, the TP adjustments in question, although involving for the foreign subsidiaries of ALFA S.p.A. the recognition of an extra cost aimed at lowering their operating margin, are not directly related to the original sales of finished products made by the same petitioner.
In other words, even if the adjustments made under the TNMM method do in fact result in the recognition of an additional cost for the foreign subsidiaries, it is not possible to establish, on the basis of the documentation provided by the applicant, that such additional cost is directly linked to the transactions (supply of goods) already carried out and, therefore, that it constitutes an upward adjustment of the VAT base of the same.
Therefore, it is considered that the financial adjustments made as a result of the TP adjustments under review, which were carried out in implementation of the TP policy of the “BETA” Group, are excluded from the scope of application of VAT.”
Click here for English translation
Click here for other translation