The European Commission to have further discussions on the possible VAT implications of transfer pricing
carolineheath 9 May 2018 No comments
The European Commission has issued a new working paper asking for the views of the VAT Committee on the subject of the possible VAT implications of transfer pricing rules. This follows discussions on the matter within the VAT Expert Group (VEG) resulting in their adoption of a paper on the topic for discussion. In this paper the VEG conclude that Transfer Pricing Adjustments (TPAs) should be treated as outside the scope of VAT where both parties have a full right to recover VAT.
The European Commission now wishes to hold an exchange of views within the VAT Committee based on the content of the VEG’s paper.
In March 2017 the European Commission published its first working paper on the issue of whether transfer pricing rules could have VAT implications. Member States were requested to give their opinion on the issues raised in the paper – see our earlier blog article for further information.
Following an initial discussion within the VAT Committee, the issue was tabled for further discussion at a future meeting of the VEG. The VEG is a body that was set up to assist and advise the Commission on VAT matters. Having considered the subject in more detail, the VEG has produced its paper on the topic for discussion which includes a VAT analysis of the subject and their opinion on the correct VAT treatment of TPAs.
The main issue the Commission was concerned about was whether a TPA could be seen as consideration given in exchange for a supply, and therefore potentially be subject to VAT.
The VEG’s Opinion
The VEG’s paper highlights that direct tax and VAT are conceptually totally different taxes.
TPAs are direct tax driven. The transfer pricing rules are aimed at ensuring that transactions within a multinational enterprise group are treated the same as under open market conditions, such that profits and losses are divided between the various jurisdictions in which the multinational enterprise operates in the same way they would have been if the transactions had taken place between unrelated third parties.
VAT on the other hand is a transaction based tax, with businesses merely acting as tax collector and the VAT being borne by the final consumer.
A TPA carried out for corporation tax purposes to replicate open market conditions does not usually result in an adjustment in the consideration for any supply. This is despite a profit adjustment possibly being an indirect consequence of goods being bought or sold, and other kinds of costs being incurred.
The VEG’s view is that, the VAT neutrality principle should be recognised when defining the VAT treatment of a TPA. Under this principle, neither businesses nor tax administrations should suffer negative consequences from the proposed treatment (although exceptions can apply, for example when there is an abuse of law).
In summary, the VEG’s opinion is that:
- TPAs should be considered as outside the scope of VAT where both parties have a full right to recover VAT, accordingly they have recommended a simplification practice be adopted by the Member States,
- it is only when one of the traders does not have a full right of recovery, that TPAs might require a VAT adjustment if there is a sufficiently direct link between any payments resulting from an adjustment and specific supplies,
- TPAs resulting from a tax audit should always be treated as outside of the scope of VAT unless the parties agree to change the consideration.
Unless it has been otherwise contractually agreed, the VEG recommends treating all types of TPAs as outside the scope of VAT for B2B transactions where all parties have a full right to deduct VAT.
In the VEG’s opinion, TPAs do not lead to a new taxable transaction nor do they adjust a past transaction. TPAs should not be and, generally, can’t be directly linked to a previous transaction. Therefore, unless there is a contractual provision requiring a modification in the consideration originally due, even where a direct link can arguably be established TPAs should in practice be considered to be outside scope of VAT, where both parties are taxable persons with the full right to deduct VAT.
No negative consequences where the taxable basis for VAT should be amended
The VEG concludes that TPAs should not have adverse VAT impacts on businesses.
Even if adjustments are required for VAT purposes these should not lead to the application of:
- late payment interest, and
- if the adjustment is within the scope of VAT, the statute of limitations should be the same for the payment of VAT and the right to refund/or deduct VAT due that arises from the adjustment.
What does this mean for businesses?
If the VAT Committee agree with the VEG’s opinion then this would be good news for businesses as in most cases TPAs would not be subject to VAT.
Businesses should continue to monitor the issue and look out for further information on the matter following the exchange of views within the VAT Committee.
We will of course keep you up to date with new developments as they arise in future blog articles.