In November 2023, the Bucharest Court of Appeals sought clarity from the Court of Justice of the European Union (CJEU) on the VAT implications of transfer pricing adjustments as per the OECD Guidelines. Identified as case C-726/23, this referral bears significance for MNCs navigating VAT obligations within the EU.
The case centers around a Romanian entity operating within an international crane rental group. Procuring and leasing cranes, the company transacts within the group under the direction of its Belgian parent company, which oversees supplier relations and contract negotiations.
In 2010, a transfer pricing study indicated a profit margin range between -0.71% and 2.74% for associated entities, aligning with transfer pricing norms. Subsequently, the Romanian company reported surplus profits for 2011-2013, receiving equalization invoices from the Belgian entity without VAT. Under the reverse charge mechanism, the Romanian entity self-assessed VAT on these invoices, attributing them partially to intra-EU service purchases.
However, tax authorities, following an audit, contested this treatment. They characterized the invoices as payments for management services, disallowing VAT deduction while retaining collected VAT, citing inadequate justification for the necessity of the services in taxable transactions.
The CJEU referral addresses two pivotal queries:
- Does the payment from a principal company to an associated entity, aiming to align the latter’s profit with its operations and risks, constitute a VAT-relevant service per Article 2(1)(c) of the Directive?
- Should tax authorities demand additional documentation beyond invoices to justify VAT deduction, or is a direct link between purchase and economic activity sufficient?
These questions highlight the need for clarity on VAT treatment amid transfer pricing adjustments, particularly for EU-based MNCs. While sporadic guidance exists from member states, EU-wide directives remain elusive. The EU VAT Expert Group’s 2017 Working Paper on the topic awaits translation into concrete guidelines or legislative actions.
The outcome of this CJEU referral holds implications beyond VAT treatment alone. Should transfer pricing adjustments fall under VAT jurisdiction, it could trigger compliance requirements such as mandated e-invoicing for cross-border transactions, amplifying administrative burdens for affected taxpayers. The resolution of this case stands to shape VAT obligations and documentation standards for MNCs operating within the EU.
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