Italy – RULING
OPINION OF THE REVENUE AGENCY
Answer No.
884/2021
In
particular, the questioning company notes that the intragroup transfer prices
charged to its EU subsidiaries are the subject, as emerges from the Group's TP
policy, of a study divided into the two phases illustrated below:
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.
INTERPRETATIVE
SOLUTION PUT FORWARD BY THE TAXPAYER
The
taxpayer first of all refers to the Community provisions set forth in Article
2(1) of Council Directive No. 112 of 28 November 2006 - implemented in the
Italian legal system by Articles 2 and 3 of Presidential Decree No. 633 of 26
October 1972 - which govern the definitions of "supply of goods" and
"supply of services" for consideration for the purposes of value
added tax.
The company
also points out that Article 73 of Directive No. 112 of 2006 identifies the
methods for determining the taxable amount for VAT on the supply of goods and
services, stating that it "shall include everything which constitutes the
consideration paid or to be paid to the supplier for those transactions by the
purchaser, the customer or a third party, including subsidies directly linked
to the price of those transactions".
According
to Article 73, which corresponds to Article 13 of Presidential Decree No 633 of
1972, it is not necessary, in the view of the applicant, for the consideration
to be subject to VAT to be representative of the market value of the goods or
services, given that value added tax is applied only to the total amount owed
by the supplier on the basis of the contractual provisions.
That
general rule may be derogated from only in the cases provided for in Article 80
of Directive 2006/112/EC, which allows Member States, in order to prevent tax
evasion or avoidance, to take measures to ensure that in cases expressly
identified by the provision, the taxable amount for the supply of goods and
services is equal to the open market value.
Article 80
of Directive 2006/112 must be interpreted restrictively, given that, according
to the line taken by the Community courts referred to by the applicant, the
consideration for the supply of goods or services constitutes the subjective
value, that is to say, what is actually received, and not a value estimated on
the basis of objective criteria.
That said,
ALFA S.p.A. expresses the view that the TP adjustments necessary for the sole
purpose of ensuring that its Community affiliates, the recipients of the
supplies of finished products carried out by the same, achieve a marginality,
in terms of Operating Margin, within the infraquartile
range identified by the Group's TP policy, cannot fall within the scope of
application of value added tax due to the lack of the objective requirement set
out in Articles 2 and 3 of Presidential Decree No. 633 of 1972.
In the
opinion of the taxpayer, the aforesaid TP adjustments do not have any direct
link with the ordinary supplies of goods and services carried out by the
taxpayer, nor can they be qualified as remuneration for an independent supply
of services, since there is no synallagmatic link
between the aforesaid adjustments and any specific supply of services carried
out.
In
substance, the above adjustments, as emerges from the Group's TP policy, are
exclusively aimed at allowing the various foreign subsidiaries to achieve a
level of profitability deemed appropriate to their functional and risk profile.
In fact,
the adjustments made in the year XXX are justified by the fact that, in that
year, the margins expressed by the companies in question were at a level higher
than the upper quartile of the benchmark and, therefore, compliance with the
principle of free competition requires that adjustments be made in order to
bring them back to that value.
Consequently,
there is no synallagmatic link between the
aforementioned TP adjustments made by the applicant and the supplies of goods
and services relevant for VAT purposes.
The
applicant also points out that the tax authorities, in accordance with the
principles established by the Court of Justice of the European Union, have recognised that contributions paid in return for an
obligation to do, not to do or allow, or in the case of an obligatory
relationship with consideration, are subject to VAT. If this is not the case,
the contribution does not assume an onerous nature and represents a mere supply
of money excluded from the scope of application of value added tax, pursuant to
Article 2(3) of Presidential Decree No 633 of 1972.
The company
also considers that the above mentioned TP adjustments cannot be considered as
an increase in the consideration charged for the supply of goods already made
by it to the foreign subsidiaries.
The use of
the CUP methodology to price intra-group transfers would ensure that the prices
charged for the supply of goods to EU subsidiaries and the agency fees paid to
the German subsidiary are in line with the arm's length principle.
The
possible adjustment under the NPT is logically downstream as it relates to the
functional profile of the subsidiaries and the need to ensure that their risks,
functions and assets are not remunerated too much (or too little) compared to
comparables carrying out the same activity.
Therefore,
in the absence of a direct link between the amounts paid by way of adjustments
and the original transfers - a situation which, in the opinion of the
applicant, can be found in the present case - it is not possible to classify
those amounts as an increase in the prices charged for those transfers.
In support
of its argument, the respondent refers to the considerations made by the
European Commission in "Working paper no. 923", taken up and
integrated by the Vat Expert Group in the subsequent document issued on 18
April 2018, in which it is confirmed that transfer pricing adjustments aimed at
aligning the marginality of a subsidiary are not relevant for VAT purposes,
since they are not directly related to the supplies of goods and services.
The
respondent also points out that the interpretation expressed at EU level
concerning the VAT relevance of TP adjustments has been implemented in the
answer no. 60 published on 2 November 2018, whereby the tax authorities
excluded the VAT liability of TP adjustments made in the case examined in the
above-mentioned practice document.
In order to
further support its interpretation, the company refers to the decision of the
Court of Cassation no. 2240 of 2018, cited in its answer no. 60 of 2018.
OPINION OF
THE REVENUE AGENCY
It should
be noted, on a preliminary basis, that in order to identify the correct
treatment, for VAT purposes, to be reserved for the TP adjustments aimed at
ensuring that certain European companies of the "BETA" Group - the
recipients of the supplies of finished products carried out by ALFA S.p.A. -
achieve an operating margin such as to be able to achieve an operating margin
in line with the requirements of the VAT Directive. - to achieve an operating
margin such as to fall within the specific range identified by the TP policy
adopted within the same group, it is necessary, first of all, to ascertain
whether the financial settlements made, in respect of the aforesaid
adjustments, between the petitioner company and its EU subsidiaries constitute:
- the
consideration for an independent supply of goods and/or services, within the
meaning of Articles 2 and 3 of Presidential Decree No 633 of 1972, made by the
party receiving the sums paid by way of TP adjustments; or
- or
whether they represent an increase in the taxable amount, within the meaning of
Article 13 of Presidential Decree No. 633 of 1972, of the original supplies of
goods made by the recipient of the financial adjustment, i.e. the applicant
company.
In this
regard, it should be noted that Article 2(1) of Directive 2006/112/EC provides
that supplies of goods and services carried out for consideration in the
territory of a Member State by a taxable person acting as such are subject to
value added tax.
In the Community
legal order, the definitions of the supply of goods and services are contained
respectively in Articles 14 and 24 of the cited Directive No. 112 of 2006,
provisions which correspond, as also specified by the applicant, to Articles 2
and 3 of Presidential Decree No. 633 of 1972.
Article
14(1) of Directive No. 112 of 2006 defines as "supply of goods" the
transfer of the power to dispose of a tangible asset in the same way as an
owner, whereas Article 24(1) thereof provides that "any transaction which
does not constitute a supply of goods" is deemed to be a supply of
services.
According
to the settled case law of the Court of Justice of the European Union "a
supply of goods or services is effected for consideration, within the meaning
of the VAT Directive, only if there exists between, on the one hand, the
supplier and, on the other hand, the customer, a legal relationship in the
course of which mutual benefits are exchanged; the remuneration received by the
supplier constitutes the actual consideration for the goods or services
supplied to the purchaser or beneficiary" (in this sense, judgment of 18
January 2017 in Case C-37/16 and most recently judgment of 19 December 2018 in
Case C-51/18).
In
particular, the Community Courts have also ruled that, in order to verify
whether there is a legal relationship between the provider of a service and the
beneficiary and/or the principal in the context of which a synallagmatic
exchange of services takes place, it is necessary to find whether 'there is a
direct link between the service provided by the provider and the consideration
received, where the sums paid constitute actual consideration for an
identifiable service provided in the context of such a legal relationship'
(Court of Justice judgment of 5 July 2018, C-544/16, paragraphs 36 and 37 and
case-law cited therein).
In
application of the principles established by Community case law, in order to
establish whether the financial adjustments made in implementation of the TP
adjustments represent the consideration for a transaction relevant for the
purposes of value added tax, it is therefore necessary, first of all, to find
the existence of a legal relationship based on reciprocal supplies between ALFA
S. p.a. and its subsidiaries. p.a. and its foreign subsidiaries and,
consequently, verify whether within the framework of this relationship there is
a direct link between the transfers made by way of TP adjustments and any
supply of goods and/or services rendered by ALFA S.p.A.
In this
regard, it should be noted that the methods for quantifying the amounts due by
way of TP adjustment are regulated by the Group's TP Policy, attached to the
request for interpellation.
Therefore,
as specified by the company in the note submitted with the supplementary
documentation, only if the analysis carried out at the end of the year
"shows that the operating margin of the subsidiary is outside the
interquartile range resulting from the benchmark of comparables are the
necessary adjustments made".
From an
examination of the agreements contained in the TP policy of the BETA group of
companies it emerges that the financial adjustments made as a result of the TP
adjustments, being exclusively aimed at allowing the EU affiliates to achieve
an operating margin within the specific range identified by the benchmark
analysis, do not represent the actual countervalue of either specific sales of
goods or independent services provided by the recipient of the amounts due as
TP adjustments.
Excluding,
therefore, the existence of a direct link between the transfers by way of TP
adjustments made by the Community affiliates and specific supplies of goods
and/or services (other than those already made) rendered by ALFA S.p.A., it is
necessary to investigate whether the aforesaid TP adjustments constitute an
increase in the VAT taxable amount of the original supplies of finished
products made by ALFA S.p.A. itself.
In that
regard, it should be noted that, as a general rule, the taxable amount for VAT
is determined by Article 73 of Directive No 112 of 2006, according to which 'in
respect of supplies of goods and services other than those referred to in
Articles 74 to 77, the taxable amount shall include everything which
constitutes the consideration which has been or is to be obtained by the
supplier for such supplies from the purchaser, the customer or a third party,
including subsidies directly linked to the price of those supplies'.
That
provision - which has been interpreted by the Community Courts - provides that
'the taxable amount in respect of the supply of goods or services for
consideration shall be the consideration actually received by the taxable
person for such supply. That consideration represents the subjective value,
that is to say, the value actually received and not a value estimated on the
basis of objective criteria'. (In this sense, judgments of 7 November 2013, in
joined cases C-249/12 and C-250/12; of 19 December 2012, in case C-549/11; of
26 April 2012, in joined cases C-621/10 and C-129/11).
Article 73
of the aforementioned Directive No. 112 is the expression of a fundamental
principle, the corollary of which is that the tax authorities may not charge
more VAT than the amount received by the taxable person (in this sense,
judgment of the Court of Justice of the EU of 3 July 1997 in case C-330/95, ECR
I-3801, paragraph 15, judgment of 26 April 2012 in case 621/10).
The
aforementioned Article 73 has been transposed into domestic law by Article 13
of Presidential Decree No. 633 of 1972, which provides that "the taxable
amount in respect of the supply of goods and services shall be the total
consideration payable to the supplier in accordance with the contractual terms
and conditions, including charges and expenses incidental to performance and
debts or other charges against third parties incurred by the supplier, plus any
additions directly linked to the consideration payable by other parties".
This being
so, in order to verify whether the TP adjustments under consideration in the
present case constitute an increase in the taxable amount of the supplies of
finished products already made between ALFA S.p.A. and its affiliates, it is
necessary to ascertain the existence of a direct link between the financial
adjustments made by way of TP adjustments and the supplies of goods originally
made, applying in the present case a price identified on the basis of the
internal CUP method.
This is
supported by the provisions of the European Commission's working paper of 28
February 2017 (Working Paper No. 923, taxud.c.1(2016)1280928), referred to
several times by the same applicant, which clarifies that "as regards the
interaction between transfer pricing and VAT, transfer pricing adjustments
(upwards or downwards) may have implications for VAT purposes, for example,
where such an adjustment may be considered more or less as consideration paid
for a taxable supply of goods or services already made. If an adjustment is
considered to be more or less the consideration for a supply, this could
conceivably lead to an increase or decrease in the taxable amount for VAT on
such a transaction, where the VAT payable has been calculated in accordance
with Article 73 of the VAT Directive".
The same
document also states that "In order for there to be VAT implications,
however, it is necessary not only that there is a supply made in return for
consideration, within the meaning of Article 2(1) of the VAT Directive, but
also that the consideration is directly linked to that supply. And that should
be assessed on a case-by-case basis'.
In other
words, as clarified in the answer to interpellation request no. 60 published in
2018 invoked by the same interpellant in support of its argument, in order for
TP adjustments to affect the determination of the VAT taxable amount, 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 that
adjustment;
(b) the
supply of goods or services to which the consideration relates is identified;
(c) there
is a direct link between the supply of goods or services and the consideration.
As pointed
out by the European Commission itself in the mentioned document
No. 923,
"while the arm's length principle 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 arm's length principle
set out in 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 in order to prevent tax evasion and avoidance under well-defined
circumstances" (see paragraph 3.1.1).
Those
circumstances are, as pointed out by the applicant, specifically identified by
Article 80 of Directive No 112 of 2006, transposed in Italy by Article 13(3) of
Presidential Decree No 633 of 1972.
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.
Lastly, it
should be noted that this opinion, which is of an interpretative nature, is not
subject to any consideration regarding the presence of profiles of abuse of law
- pursuant to Article 10-bis of Law No. 212 of 27 July 2000 - which could be
assessed during any audit activities.
Signed by
proxy by the Central Director Vincenzo Carbone
THE HEAD OF
SECTOR
(digitally
signed)