A ruling issued on November 2 2018 by the Central Revenue
has provided clarification regarding the application of the VAT
regime to transfer pricing (TP) year-end adjustments occurring
between related companies belonging to the same multinational
The group is implementing a new integrated development plan
aimed at the creation of products and platforms necessary for
the production and marketing of X-branded goods.
The legal and economic ownership of the X brand and the
related know-how belongs to a non-EU related company (Beta),
which operates as 'principal' and assumes all the risks
associated with the production and distribution of the goods,
granting the exploitation of brand and know-how free of charge
to subsidiaries engaged in the production and marketing of
Alfa (the Italian entity submitting the ruling to the
Central Revenue) signed an inter-company agreement with Beta
under which the former undertakes to act as contract assembler
for the latter. In this agreement, Alfa undertakes also to make
available its equipment to Gamma, which acts as contract
manufacturer within the group.
Subsequently, the products are commercialised by Beta in
North America and in the rest of the world, and by Delta in
Europe, the Middle East and Africa.
The X-branded goods, produced by Gamma, are purchased by
Alfa at what are deemed arm's-length prices, and the sales
prices from Alfa to Beta and Delta are meant to be in line with
both the group policy and the market.
In accordance with the TP policy applied within the group,
the agreement provides that when the profit margin of Alfa in a
given fiscal year falls outside the inter-quartile range,
specific adjustments must be made.
Accordingly, under the inter-company agreement, Beta must
pay upward contributions to Alfa whenever the latter incurs
operational losses. Those operational losses might result from
the activities carried out and from the substantial costs
incurred (also) for the purchase of equipment and machinery
used in the manufacturing cycle.
Considering the background described above, the question
Alfa submitted for clarification to the Italian Central Revenue
was whether similar adjustments were relevant for VAT
In line with Working Paper No. 923/28.02.2017 of the
European Commission, the Revenue Agency clarified that such
adjustments may have an impact on the VAT taxable base if the
following conditions are met:
- A consideration is agreed among
- The transactions for the provision of
goods or services are duly identified; and
- There is a direct link between the
transactions and the consideration.
Furthermore, as regards the interaction between TP and VAT,
according to the European Commission's Working Paper No.
923/28.02.2017, the TP adjustments (upwards or downwards) could
have VAT implications when:
"the transfer pricing adjustment could be seen as
more or less consideration given in exchange for a taxable
supply of goods or services already made (i.e. as an adjustment
to a price already paid), leading to a modification of the
taxable amount of that transaction for VAT purposes.
If an adjustment is found to constitute more or less
consideration for a supply of goods or services, this could
arguably lead to an increase or decrease in the VATable amount
of such transactions, at least where the VAT to be paid is
calculated according to Article 73 of the VAT Directive.
For there to be any VAT implications, the rules as regards
the existence of a supply for consideration pursuant to Article
2(1) of the VAT Directive, there must be a supply made in
exchange for consideration, and a direct link has to be
established between them. This would have to be assessed on a
Based on the above, the Central Revenue did not identify a
direct link between the TP adjustments and the supply of goods
and services. Consequently, the adjustments under review could
not be considered to have led to a modification of the VATable
basis in relation to the transactions analysed.
Moreover, as regards the inter-company agreement, the
Central Revenue took the position that – in light of
the domestic provisions about VAT – the payment of the
contribution/adjustment from Beta to Alfa did not constitute a
remuneration for a specific service (so, in this case, was not
subject to the VAT regime). In fact, in the situation under
review, it was not possible to detect a direct connection with
other identified flows, considering that the inter-company
prices for goods and services had been specifically stated
according to the TP policies of the Group whose arm's-length
nature was proved by appropriate studies.
Gian Luca Nieddu (firstname.lastname@example.org) and Barbara
Tel: +39 02 7780711