Arcomet Towercranes SRL (Arcomet Romania), a subsidiary of Arcomet Belgium, had entered into a transfer pricing agreement ensuring that the company would remain within an agreed profit margin of -0.71% to 2.74%, with invoices issued when the profit was above or below this range. In 2011, 2012 and 2013, Arcomet Romania recorded a profit above the said margin, for which it received three invoices from Arcomet Belgium. These invoices were recorded by Arcomet Romania as payments for intra-group services.
Arcomet Romania was subject to a tax audit, covering the period during which these invoices were issued, and which resulted in the company being ordered to pay additional CIT and VAT, as the deductions were denied on the grounds that the company had not justified the necessity of the services invoiced in the context of its taxable activities. Furthermore, no supporting documents had been provided.
The case ended up in the Romanian Court of Appeal, which decided to stay the proceedings and to refer the following questions to the Court of Justice of the European Union for a preliminary ruling:
“1) Is Article 2(1)(c) of Council Directive 2006/112/EC on the common system of value added tax (1) to be interpreted as meaning that the amount invoiced by a company (the principal company) to an associated company (the operating company), equal to the amount necessary to align the operating company’s profit with the activities carried out and the risks assumed in accordance with the margin method of the OECD Transfer Pricing Guidelines, constitutes a payment for a service which therefore falls within the scope of VAT??
2) If the answer to the first question is in the affirmative, with regard to the interpretation of Articles 168 and 178 of Council Directive 2006/112/EC on the common system of value added tax, are the tax authorities entitled to require, in addition to the invoice, documents (for example, activity reports, [works] progress reports, and so forth) justifying the use of the services purchased for the purposes of the taxable person’s taxable transactions, or must that analysis of the right to deduct VAT be based solely on the direct link between purchase and supply or [between purchase and] the taxable person’s economic activity as a whole?”
Opinion of the Advocate General
The Advocate General proposes that the Court should answer the questions as follows:
1) Article 2(1)(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2010/45/EU of 13 July 2010, should be interpreted as meaning that:
the remuneration for intragroup services, provided by a parent company to a subsidiary and detailed contractually, which is calculated according to the transactional net margin method recommended by the principles of the Organisation for Economic Co-operation and Development (OECD) on transfer pricing for multinational enterprises and tax administrations, must be considered as being the consideration for a provision of services carried out for consideration, within the meaning of this provision, and must be subject to value added tax (VAT).
2) Articles 168 and 178 of Directive 2006/112, as amended by Directive 2010/45, must be interpreted as meaning that:
they do not object to the tax administration requiring a taxable person requesting VAT deduction to provide documents other than the invoice to justify the use of the services purchased for the purposes of its taxable transactions, provided, on the one hand, that these documents are requested in compliance with the principle of proportionality and, on the other hand, that they are of a nature to prove the existence of the services in question and their use for the purposes of the taxable person’s taxable transactions.
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