A ruling was issued by the Italian Revenue Service on the following question on the VAT treatment of Transfer Pricing adjustments.
“Alfa represents that it is part of a multinational Group (hereinafter, the “Group”). The Group is implementing a new integrated development plan, aimed at the joint creation of products and platforms necessary for the production and marketing of goods under brand X.
The legal and economic ownership of the X trademark and of the relevant know-how belongs to the non-EU company Beta, which acts as “Principal” and assumes all risks connected to the production and marketing of the goods, granting the trademark and the know-how free of charge to the subsidiaries engaged in the production and marketing of the X goods.
The plaintiff entered into an intra-group agreement (the ‘Agreement’) with Beta, whereby Beta undertakes to act as contract assembler for the purpose of manufacturing X products, putting its own equipment at the disposal of Gamma (a company incorporated under Italian law which acts as a contract manufacturer). In particular, Alfa has contractually assumed the task of coordinating all production factors relating to the production of the goods, as well as those relating to the marketing of the same, through the Group’s distribution network, and the task of managing logistics and quality control activities, in the interests of Beta.
The X goods, produced by the company Gamma, are therefore purchased by the company Alfa at a price in line with the policy adopted by the Group in terms of transfer prices, consistent with the criterion of free competition (the so-called “Arm’s length”). Subsequently, they are marketed, through Beta, in the North American and Rest of the World markets and, through Delta, in the European, Middle Eastern and African markets (the so-called EMEA market). In this regard, the questioning Company points out that also the sales made by it to Beta and Delta take place at a price in line with the Group’s policy in terms of transfer prices, consistently with the criterion of free competition.
In accordance with the transfer pricing model followed by the Group, the Agreement provides that, if the actual profits recorded by the respondent company in a given year falls outside the interquartile range of reference, specific adjustments must be made in order to comply with the above-mentioned arm’s length criterion. As a result of this, Beta undertakes to recognise, where necessary, the payment of a contribution in favour of Alfa whenever the latter incurs operating losses, such as those resulting from the activities carried out and from the considerable costs incurred for the purchase of equipment used in the production cycle.
In light of the above, the Company asks to know whether or not the contribution possibly recognised by Beta in favour of the latter, in case of a difference between the profit realised by the latter and the profit determined according to the arm’s length criterion, can be considered relevant for VAT purposes pursuant to Article 3 of Presidential Decree No. 633 of 1972.”
Tax Ruling of the Italian Revenue Agency
In order for transfer pricing adjustments to affect the determination of the taxable amount for VAT, by increasing or decreasing the consideration for the sale of the goods or the provision of the service, it is therefore necessary that:
(a) there must be consideration, i.e., a monetary or in-kind adjustment for such an adjustment;
(b) the supply of goods or services to which the consideration relates is identified;
(c) there is a direct link between the supplies of goods or services and the consideration.
As pointed out by the European Commission itself in the aforementioned document no. 923, “while the principle of free competition must generally be observed in all intra-group transactions, on the basis of the transfer pricing rules applied for the purposes of direct taxation, the scope of the principle of free competition laid down by the VAT Directive seems much more circumscribed. In fact, such a rule is susceptible to optional application by Member States and can only be applied for the purpose of preventing tax evasion and avoidance under well-defined circumstances” (see paragraph 3.1.1).
Such circumstances are specifically identified by Article 80 of Directive 2006/112/EC – implemented in Italy by Article 13, third paragraph, of Presidential Decree No. 633 of 1972 – as an exception to the general criteria for determining the VAT taxable amount set forth in Article 73 of the Directive. In this respect, according to the case-law of the EU Court of Justice, “the conditions for the application of the latter article [Article 80 of Directive 2006/112/EC] are mandatory and national legislation may not provide, on the basis of that provision, that the taxable amount is to be equal to the open market value in cases other than those listed in that provision” (see the judgment of 8 May 2013, in case C-142/12, and the judgment of 26 April 2012, in cases C-621/10 and C-129/11).
This orientation is, moreover, confirmed by the most recent case law of the Supreme Court of Cassation, according to which “transfer pricing is based on the concept of normal market value pursuant to Presidential Decree no. 917 of 22 December 1986, Article 9 and Article 76, paragraph 5 (now 110, paragraph 7) (…) and responds to the need for a fair division of profits in the various countries where multinational groups operate. For VAT, on the other hand, the consideration actually received is a pivotal element of the mechanism for applying the tax, based on the principle of neutrality of the tax (which would be violated if the taxable base were calculated as an amount per hypothesis higher than the consideration received: a principle that has always been derived from the EU directives (most recently made explicit in Article 73 of Directive 112/2006/Cee) and implemented in Italy by Presidential Decree No. 633, Article 13 of 26 October 1972″ (Judgment No. 2240 of 2018).
On the basis of these principles, with reference to the present case, the Agreement between Alfa and Beta does not appear to establish a direct link between the aforementioned contributions/adjustments paid between the parties and the individual supplies of X goods made between them. Consequently, the amounts in question must be considered, in principle, as not relevant for VAT purposes and, therefore, cannot be considered as an increase or decrease in the taxable amount of such transactions.”
Italy VATTP Interpello 60 2018_Risposta n. 60 del 2018