When profit adjustments become taxable: reframing transfer pricing true-ups in low-risk models

As multinational enterprises rely on year-end adjustments to address growing volatility in low-risk transfer pricing models, a critical boundary comes into focus: when does a year-end adjustment remain a price adjustment to existing intercompany transactions, and when might it be viewed as a separate taxable transaction no longer linked to the original transaction?

Recent case law of the Court of Justice of the European Union (CJEU) illustrates that the answer does not depend on transfer pricing logic alone. It depends on whether the adjustment is coherently anchored in the contractual pricing mechanism, the functional and risk profile of the tested party, the actual transactions performed, and the way the adjustment is described and documented across tax frameworks. This article analyses why this distinction matters for low-risk models and how multinational groups can manage the resulting risks.

Low-risk operating models have long been a cornerstone of multinational group structures. Whether implemented as limited-risk distributors, contract manufacturers, or other routine entities, these models are built around a simple principle: entities with limited functions and risks should earn stable, routine returns that are consistent with their functional and risk profile. Transfer pricing systems seek to implement this principle through intercompany prices that, when applied consistently, should result in arm’s-length profitability over time.

The operating environment in which these models function has become more volatile. Global supply chains, sourcing patterns, and cost bases are more difficult to forecast, and these effects are particularly visible in industries such as automotive, where long value chains and significant after-sales obligations amplify volatility. As a result, the prices set during the year do not always lead to the intended arm’s-length outcome at year-end. Multinational groups therefore rely more frequently on year-end adjustments, or true-ups, to align the tested party’s actual result with the target return under the applicable transfer pricing method.

This is why true-ups are necessary in practice. They serve as a correction mechanism where ex ante price setting, based on budgets and forecasts, does not fully reflect the actual economic developments of the year. This does not mean that year-end adjustments are questionable as such. They are a common feature of transfer pricing systems, particularly where the arm’s-length nature of prices is tested by reference to the profitability of a routine tested party under a method such as the transactional net margin method (TNMM).

The practical question is therefore not whether year-end adjustments have tax consequences. The more relevant question is whether the adjustment merely changes the price of existing intercompany business relationships, or whether it is deemed to constitute an additional transaction that is separately taxable; for example, as consideration for an additional service.

This question is central in light of recent case law of the CJEU; i.e., the judgments in Stellantis (Case C-603/24, of May 13 2026) and Arcomet (Case C-726/23, of September 4 2025), which may draw greater attention to this issue in tax audits. Rather than turning these judgments into the full subject of the article, they are useful reference points for a broader transfer pricing message. The more a year-end adjustment is detached from the original price-setting mechanism, the greater the risk that it will be analysed under transaction-tax concepts as a separate transaction.

Both cases were driven by VAT disputes. For present purposes, however, their relevance is not limited to VAT. They illustrate a broader transfer pricing issue. If a year-end adjustment is applied to an aggregated result, tax authorities may ask whether it can still be allocated to the original transaction or whether specific activities, cost items, or services should be identified separately.

This is where the different perspectives of transfer pricing and VAT become relevant. Transfer pricing typically assesses whether the remuneration for a controlled transaction, or for an appropriately defined group of controlled transactions, is at arm’s length. In low-risk models, this assessment is often performed at the level of an aggregated transaction group or business relationship. VAT, by contrast, looks at the individual transaction level and asks for what a specific payment is made. The VAT question is therefore not only whether an arm’s-length remuneration has been achieved but what the remuneration is consideration for. This requires a more granular definition of the relevant supply, the payment, and their contractual link as opposed to transfer pricing outcome testing.

In Stellantis, year-end adjustments were made under a target-margin mechanism for a routine distributor. The Portuguese tax authority argued that the adjustments remunerated repair or after-sales services allegedly provided by the distributor to the manufacturers. The CJEU did not accept that characterisation on the facts, because the required direct link to an identifiable service relationship was missing. The important point for transfer pricing is that the dispute arose because specific cost elements, including warranty-related costs, were used to question the character of an adjustment that was intended to achieve an overall target margin.

Arcomet illustrates the same issue from another angle. In that case, the Romanian tax authorities interpreted a year-end equalisation payment as remuneration for services received by the Romanian entity from another group entity. The court accepted that contractually described services remunerated through a transfer pricing mechanism may fall within the scope of VAT where the relevant legal relationship involving reciprocal performance exists. For transfer pricing purposes, the case shows that the contractual and factual description of the underlying activity matters. Where an adjustment is linked to identifiable services, it may be difficult to maintain that it merely adjusts the price of a broader aggregated transaction set.

The combined lesson is not that true-ups are inherently taxable with VAT, nor that a TNMM adjustment is automatically safe. The more relevant lesson is that a year-end adjustment must be explainable as part of the pricing of the relevant controlled transactions. If the adjustment can no longer be linked to the original transaction or transaction group, it may be viewed as something different from a price adjustment.

The issue becomes most acute where the initial price-setting mechanism does not deliver the expected arm’s-length outcome by year-end. The low-risk model itself is not necessarily the problem. The problem is the practical implementation of price setting in a volatile environment. Prices for goods, components, or services are set during the year based on budgets and forecasts, but actual developments may deviate materially from plan. Supply chain disruption, changes in local sourcing, cost inflation, warranty developments, product mix effects, or market pressures may all affect the tested party’s result.

Transfer pricing generally starts with the controlled transactions and the functions, assets, and risks of the parties. In many low-risk models, the arm’s-length character of the prices charged during the year is tested by reference to the profitability of the routine tested party. If the tested party earns an arm’s-length routine return, this is often taken as support that the underlying prices have been set at arm’s length, all else being equal. However, this logic does not mean that all activities of a legal entity can be aggregated without further analysis or that any year-end payment can be allocated to that aggregation level.

In these circumstances, the target margin is increasingly achieved through lump-sum year-end price adjustments rather than through the prices charged for goods or services throughout the year. This raises the central characterisation question: if the adjustment is no longer clearly linked to the price of the goods or services originally supplied, what exactly is being adjusted?

Low-risk business models may involve numerous individual transactions, cost elements, and operational developments that are reviewed on an aggregated, sometimes ‘whole-of-entity’ basis for transfer pricing purposes. This aggregation may be appropriate under the TNMM where the transactions are sufficiently connected and the aggregation is properly justified. However, aggregation for transfer pricing outcome testing is not a substitute for transaction-level characterisation. A transfer pricing analysis may support that the overall remuneration for a transaction group or business relationship is at arm’s length. It does not, by itself, answer the VAT question of what a specific year-end payment is consideration for. The adjustment therefore still needs a coherent contractual and economic link to the controlled transactions in which the prices are being adjusted.

The answer must be found by working through the model in layers:

• The contract should specify the relevant activities and transactions, including goods supplies, services, distribution activities, manufacturing activities, or other functions;

• The contract and policy should describe the price-setting mechanism and the role of year-end adjustments;

• The functional and risk profile should support why the tested party is entitled to a routine return and why deviations from that return are corrected through pricing;

• Deviations between plan and actual results should be analysed to determine whether they are pricing deviations within the agreed mechanism or reflect new facts that require a different characterisation; and

• Outcome testing should be performed at an appropriate level of aggregation, rather than by reference to isolated cost items that could create the impression of a separate service charge.

The automotive warranty example illustrates the point. If a distributor’s target margin is achieved through a year-end price adjustment under a resale or purchase-price mechanism, the fact that warranty or repair costs are one of many operating cost elements considered in determining the distributor’s profitability should not by itself turn the adjustment into a service fee. The analysis changes if the contract, invoice, or internal narrative states that the payment is made to reimburse repair expenses or compensate the distributor for after-sales services. In that case, the wording creates a causal link between payment and performance and may support the view that a separate service has been remunerated.

The same concern arises in loss situations. A routine entity may incur losses because actual market or cost developments differ from plan. If the resulting adjustment is described and calculated as a year-end price adjustment under the agreed transfer pricing mechanism, it can remain part of the pricing system. If, however, the payment is described as loss compensation, financial support, or a subsidy, the link to pricing becomes weaker. The payment may then be analysed as a separate transfer, and the underlying functional profile may also need to be revisited if losses recur or if the adjustment mechanism repeatedly bears no clear relationship to the prices of the controlled transactions.

The practical implication is that the transaction being adjusted must be named and explained. A year-end price adjustment should make clear whether it adjusts the price of goods, products, components, contract manufacturing services, or another defined category of controlled transactions. If that cannot be articulated, the adjustment may be vulnerable to being treated as a new deemed transaction rather than a correction of existing pricing, which may lead to double taxation if the original transaction does not achieve an arm’s-length outcome without the year-end adjustment.

Managing the risk of recharacterisation requires alignment across contract, transfer pricing design, calculation, documentation, and internal communication.

Contractual design is the starting point. Intercompany agreements should define the relevant activities and transactions, including goods supplies, services, distribution activities, manufacturing activities, warehousing, or other local support functions. They should also define the year-end adjustments as part of the pricing mechanism for existing controlled transactions. This contractual description must be sufficiently precise to bridge the different levels of analysis. For transfer pricing purposes, it should support the remuneration and outcome testing of the relevant transaction group or business relationship. For VAT purposes, it should clarify for what a specific payment is made and whether it relates to an identifiable new supply or to the adjustment of previous prices of the same supply.

The contract should specify the transaction category to which the adjustment relates, the tested party, the profitability indicator, the target or range, the timing of the adjustment, and whether credit or debit notes adjust the relevant intercompany prices. The contract should avoid language that suggests a standalone service relationship unless such a service relationship is intended and documented.

The technical design of the transfer pricing system should reinforce this logic. The price-setting mechanism should be described clearly; for example, through a resale-minus, cost-plus, or other mechanism that is linked to the relevant transactions and the tested party’s functional and risk profile. The outcome-testing approach, such as TNMM, should then be applied consistently and should specify the tested party, the aggregation level, and the treatment of extraordinary or non-routine items.

The implementation process should also explain plan-versus-actual deviations. A robust year-end analysis should show why the initial price did not lead to the target outcome, how the adjustment was calculated, which transaction category was adjusted, and how the result after adjustment falls within the arm’s-length range. This differential analysis helps demonstrate that the payment is an ex post price adjustment rather than a new service charge or financial support payment.

Only after this analysis should the year-end adjustment be determined and implemented. The recharge should be made through credit notes, debit notes, or invoices that include clear reference to the transaction category, period, and pricing mechanism being adjusted. The invoice wording should make clear what is being adjusted and why the payment is made. This is particularly important because while transfer pricing documentation may focus on whether the tested party’s remuneration falls within an arm’s-length range, VAT analysis may focus on the specific payment and the supply, if any, to which it relates. Unspecific terms such as compensation, reimbursement, cost coverage, support, or subsidy should therefore be avoided where the intended treatment is a price adjustment.

Terminology is critical. If the intended treatment is a price adjustment, internal and external documents should consistently use price-adjustment language. This is not merely a drafting preference. Recent developments in German audit practice – including the German Federal Fiscal Court’s decision in case XI R 15/23, of April 30 2025 (emails constitute retainable business records and tax authorities may request comprehensive access to tax-relevant email correspondence) – underline that internal documents and communications may become relevant in tax audits. What is said internally can therefore influence how the payment is characterised.

Finally, governance should extend beyond the tax department. Finance, business, and operational teams often prepare the calculations, invoices, and explanations that tax authorities later review. They need practical guidance on permitted terminology, required documentation, and escalation points for atypical adjustments, losses, or business events that do not fit the standard pricing mechanism. Where appropriate, the position should be prepared in a way that can be explained to or discussed with the tax audit team.

Low-risk models remain a viable and widely used element of transfer pricing structures. Increased volatility does not invalidate those models. It does, however, make their practical implementation more demanding. Where prices set during the year do not lead to the intended arm’s-length result, year-end price adjustments may be necessary and appropriate.

The risk does not arise from the existence of a true-up itself. It arises when the adjustment is not coherently connected to the pricing mechanism, the controlled transactions, the functional and risk profile, and the way the group described the payment. Lump-sum adjustments, margin support payments, and cash transfers that cannot be linked to existing intercompany prices may trigger VAT or withholding tax implications and may also be challenged in tax audits when it comes to the review of transfer pricing policies and the delineation of transactions.

Stellantis and Arcomet should therefore be understood as triggers for this broader discussion. They do not mean that every year-end adjustment is a separate taxable transaction. Rather, they may encourage tax auditors to challenge the aggregation of different transactions, to isolate specific cost items, and to question whether the year-end adjustment can be allocated to the aggregation level used to test the arm’s-length character of a remuneration for low-risk operating entities.

For multinational groups, the decisive factor is consistency across agreements, remuneration schemes, and documentation reports. The contract, the functional analysis, the price-setting mechanism, the actual transactions, the outcome testing, the differential analysis, the invoice wording, and the internal narrative must all point in the same direction.

This consistency must bridge the different perspectives of transfer pricing and VAT. Transfer pricing must support that the remuneration for the relevant transaction or transaction group is at arm’s length, while VAT requires clarity on what a specific payment is made for. If this alignment exists, year-end adjustments can retain their character as price adjustments. If it does not, there is an increased risk that tax auditors challenge the aggregation of transactions and the allocation of the year-end adjustment to the relevant transaction set.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (DTTL), its global network of member firms, and their related entities (collectively, the “Deloitte organization”). DTTL (also referred to as “Deloitte Global”) and each of its member firms and related entities are legally separate and independent entities, which cannot obligate or bind each other in respect of third parties. DTTL and each DTTL member firm and related entity is liable only for its own acts and omissions, and not those of each other. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more.

Deloitte provides leading professional services to nearly 90% of the Fortune Global 500® and thousands of private companies. Our people deliver measurable and lasting results that help reinforce public trust in capital markets and enable clients to transform and thrive. Building on its 180+-year history, Deloitte spans more than 150 countries and territories. Learn how Deloitte’s over 470,000 people worldwide work together every day to make an impact that matters at www.deloitte.com.

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited (DTTL), its global network of member firms or their related entities (collectively, the “Deloitte organization”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No representations, warranties or undertakings (express or implied) are given as to the accuracy or completeness of the information in this communication, and none of DTTL, its member firms, related entities, employees or agents shall be liable or responsible for any loss or damage whatsoever arising directly or indirectly in connection with any person relying on this communication. DTTL and each of its member firms, and their related entities, are legally separate and independent entities.

© 2026. For information, contact Deloitte Global.