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)