Stellantis Portugal, S.A. was subject to a tax audit which ultimately resulted in litigation before the Portuguese courts. The central issue was whether an ex post transfer pricing adjustment within a multinational group, made to ensure compliance with the arm’s length principle for corporate income tax purposes, had any implications for VAT. Specifically, the question was whether a year-end adjustment that reallocates profits between related companies without altering the unit prices of individual transactions should be treated as a retroactive adjustment to the consideration for earlier supplies of goods or as consideration for a separate supply of services for VAT purposes.
This dispute arose in the context of a distribution arrangement, whereby vehicle prices were designed to be adjustable to ensure a minimum profit margin. The adjustment was implemented through the issuance of debit or credit notes by related manufacturers. The underlying concern was whether such profit adjustments, although driven exclusively by income tax considerations, could nevertheless give rise to a taxable event for VAT, despite there being no identifiable additional supply of goods or services.
The Supremo Tribunal Administrativo referred a preliminary question to the European Court of Justice, asking whether the concept of a supply of services for consideration under Article 2 of the Sixth VAT Directive covered price adjustments that had been contractually agreed to ensure a minimum profit margin.
“Must Article 2 of the Sixth VAT Directive (Sixth Council Directive 77/388/EEC of 17 May 1977 (1) on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment), as worded in the version in force at the time of the facts, be interpreted as meaning that the concept of the supply of services effected for consideration contained in that provision includes an adjustment of the sale price of vehicles which is duly provided for and determined in a contract concluded between the parties, in order to achieve a minimum profit margin, and which is documented by means of a credit or debit note issued to the applicant/appellant by the European manufacturers of the General Motors group?”
OPINION OF ADVOCATE GENERAL
In the Advocate General’s view, transfer pricing adjustments fall within the scope of VAT where they are directly linked to a contractually agreed supply of services, as recognised by the European Court in the Arcomet case, or where the adjustment is provided for contractually as a correction to the initial sales price of goods.
“I therefore propose that the question referred for a preliminary ruling by the Supremo Tribunal Administrativo (Supreme Administrative Court, Portugal) should be answered as follows:
Articles 2(1)(c), 73 and 90 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that the relevance, for the purposes of VAT law, of an adjustment of profits made for reasons of income tax law depends on what it relates to and how it is made.
Where the adjustment of profits is made by means of separate supplies of services for consideration (creation of input and output) and there are not only fictitious supplies of services, those separate supplies of services for consideration constitute taxable transactions for the purposes of Article 2(1)(c) of Directive 2006/112.
Where the adjustment of profits is made unilaterally and subsequently by the tax authority solely for the purposes of an appropriate allocation of profits between two tax-levying States, that is not, in principle, relevant for the purposes of VAT law.
On the other hand, where, as in the present case, the adjustment of profits is made by means of a sale price which has been provided for precisely for that purpose and agreed to be variable and which relates to a specific supply of goods, that constitutes a reduction in the taxable amount under Article 90 of Directive 2006/112 or a further part of the taxable amount under Article 73 thereof in respect of the supply made. Since the change in the taxable amount of a supply relates solely to the consideration, it cannot itself constitute a ‘supply of services for consideration’ within the meaning of Article 2(1)(c) of Directive 2006/112.”
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