The interaction between transfer pricing adjustments and VAT has long been a grey area in both EU and domestic tax law. While transfer pricing is fundamentally a matter of direct taxation, recent developments have made it increasingly clear that certain adjustments can have significant VAT implications – particularly when they are tied to the pricing of specific supplies of goods or services.
Italian ruling on TNMM adjustments
With Ruling No. 214 of August 19 2025, the Italian tax authorities once again addressed the VAT implications of transfer pricing adjustments, highlighting in this case that VAT relevance may arise even when the transactional net margin method (TNMM) is selected as the applicable transfer pricing methodology.
This ruling also pre-dates a significant judgment by the Court of Justice of the European Union (CJEU) on September 4 2025, in the case of Arcomet Towercranes (C-726/23).
In that decision, the CJEU held that payments made by Arcomet Romania to its parent company – based on the application of the TNMM as outlined in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations – fell within the scope of VAT, given the specific contractual framework and the existence of a direct link between the payment and services rendered.
In the case examined by the Italian tax authorities, the Italian company operated as a distributor of products manufactured by a foreign multinational group. The group’s transfer pricing policy selected the TNMM as the most appropriate method to evaluate the arm’s-length nature of the Italian distributor’s return on sales (RoS).
On a quarterly basis, the RoS is compared against that of a selected panel of comparable companies. If the Italian entity’s RoS falls outside the arm’s-length range, price adjustments are implemented.
The taxpayer submitted a ruling request to confirm whether such adjustments could be considered relevant for VAT purposes.
In line with earlier responses to similar ruling requests, the Italian tax authorities reiterated that three cumulative conditions must be met for transfer pricing adjustments to fall within the scope of VAT, consistent with EU-level clarifications issued by the VAT Committee (Working Paper No. 923, February 28 2017) and the VAT Expert Group (Document No. 071, April 18 2018):
The adjustment must be made for consideration – i.e., it is not gratuitous;
It must relate to identifiable supplies of goods or services that are themselves subject to VAT; and
There must be a direct link between the adjustment and the original supply’s consideration.
In the case at hand, the Italian Revenue Agency affirmed the VAT relevance of the adjustments.
The parties had agreed, from the outset, to a provisional price, subject to subsequent adjustments. Based on the results:
A debit note is issued by the foreign parent if the Italian company’s profitability exceeds the arm’s-length range; and
A credit note is issued if the RoS achieved by the Italian distributor is lower than the arm’s-length range.
Supporting documentation – including a list of affected invoices and a detailed breakdown of the adjustments by transaction – was provided, clearly demonstrating the linkage between the original supplies and the subsequent adjustments. This was deemed sufficient to establish that the adjustments were not general year-end settlements but direct revisions of specific transaction values, and therefore relevant for VAT.
In a parallel development, the CJEU’s ruling in the Arcomet case reinforces this interpretation. It confirms that transfer pricing adjustments fall within the scope of VAT where there is a contractual framework in place that ties the payment to clearly defined services, even if the pricing is determined ex post through transfer pricing methodologies such as the TNMM.
Both the Italian ruling and the Arcomet judgment highlight that the VAT treatment of transfer pricing adjustments is highly fact-specific and cannot be addressed with a one-size-fits-all approach.
Further guidance may come from the pending Stellantis Portugal case (C-603/24) before the CJEU, which may help delineate VAT treatment under different transfer pricing methods.
Key takeaways for multinational groups
In the meantime, multinational groups should not delay in assessing the VAT implications of intercompany transfer pricing adjustments. In particular, companies should:
Review and update intercompany agreements to ensure that transfer pricing adjustments are contractually provided for in both principle and amount;
Verify if the adjustments relate to identifiable transactions, and that there is clear documentation of the link between adjustments and original supplies;
Align internal accounting and invoicing processes to reflect the correct VAT treatment (e.g., reverse charge, invoice breakdowns, credit/debit notes);
Consider consulting tax authorities (through advance rulings or cooperative compliance programmes) to clarify positions and mitigate future risks; and
Assess whether past adjustments were treated correctly.
As tax administrations across the EU increase their scrutiny of intragroup transactions, proactive compliance in this area can help businesses avoid costly disputes.
