The implications that adjustments made due to transfer pricing policies may have for VAT has traditionally been a controversial issue. This is a recurring debate in the world of VAT that comes and goes with some frequency and has generated interesting discussions among VAT practitioners.
Despite there not being a unanimous position, it could be said that the interaction of some adjustments for transfer pricing and VAT is a fact because they involve the modification of the taxable amount of a previous transaction. This mainly refers to transfer pricing adjustments that are made on a voluntary basis, known as compensating adjustments.
The reason for this is that, according to Article 73 of the EU VAT Directive, the taxable amount for VAT shall include everything that constitutes consideration obtained, or to be obtained, by the supplier. This consideration is usually agreed by the parties involved in the transaction; therefore, it is a subjective price. If there is a voluntary adjustment (agreed by the parties) of the price of the transaction, it could be said that this has an impact on VAT by affecting the taxable base of the transaction.
It should be assumed that these voluntary adjustments can be, at least theoretically, assigned to a transaction or series of specific transactions (although, in practice, this may not be as easy) and that, therefore, there is a link between the supply and its consideration that is being modified due to the transfer pricing adjustment. This alteration in the price should have an impact on VAT.
The above would mean that, in turn, other adjustments made for transfer pricing that are not voluntary and do not affect the consideration of certain transactions should not have such an impact on VAT; for example, primary and secondary adjustments that are made by the tax administration (hence, not voluntarily) and those carried out due to the allocation of profits in certain jurisdictions with implications just for direct taxation, respectively.
The modification of the taxable amount of a transaction due to transfer pricing adjustments has a series of practical implications that largely depend on the domestic legislation of the countries involved. Some countries are flexible and allow the adjustments to be included in the VAT returns for the period in which they were made (prospective modifications), while other countries may call for the rectification of returns that have already been filed (retrospective adjustments).
In some cases, these rectifications may imply penalties or recharges. On the other hand, some countries allow summary invoices for performing these adjustments in certain cases, when others do not offer that option. All these practical implications are far from being harmonised and create a series of problems for groups of companies that must comply with their transfer pricing policies.
It is not very common for EU member states to make a clear statement on the implications that transfer pricing policies have on VAT. The European Commission has prepared some working papers, but the truth is that it is not very common to see pronouncements from member states.
A welcome pronouncement by the Spanish tax administration
In this regard, a few weeks before the time of writing, the Spanish tax administration published a ruling in which it pronounced its position on this thorny issue in response to a query raised by a multinational group that, logically, had a transfer pricing policy.
The Spanish tax administration points out that to the extent that the adjustments derived from the application of transfer pricing policies can be assimilated to price alterations of transactions previously carried out that were subject to VAT, the taxable base must be modified. The Spanish tax administration added that there must be a specific, prior, and individualised supply of goods or services with its corresponding consideration and a direct link between the two of them. When this occurs, the adjustment derived from the transfer pricing policy should be considered as an adjustment, upwards or downwards, of the consideration and, consequently, will have an impact on VAT. As mentioned above, this may be the case for voluntary adjustments.
This type of pronouncement is undoubtedly welcome as it gives legal certainty to VAT-able persons. However, it may not be enough if they are made at the level of individual member states. Since transfer pricing policies affect multinational groups with operations of an international nature, the adjustments affect different jurisdictions, so a common EU policy in this regard is required, in which not only the theory but also the practical implications of these adjustments should be addressed.
As noted above, this is a recurring debate that occurs in the world of VAT with some frequency, so this will surely not be the last pronouncement on this complex issue. The discussion is far from being closed.
