CJEU rules transfer pricing adjustments do not automatically attract EU on VAT

Transfer pricing adjustments are often analysed from the perspective of direct taxation; however, their interaction with VAT is no longer a marginal issue. The judgment of the Court of Justice of the European Union (CJEU) of 13 May delivered in Case C-603/24 (Stellantis Portugal) has confirmed that adjustments arising from transfer pricing policies may also have consequences for VAT and provides criteria for determining their treatment.

For a transaction to be subject to VAT as a supply of services, three elements must be present: there must be a contractual relationship between the parties; that relationship must give rise to mutual obligations (in short, one party provides the service and the other pays consideration for it); and the price paid must be directly linked to the service received. If any of these three elements is missing, the transaction should, as a general rule, fall outside the scope of VAT.

Transfer pricing adjustments pose a particular problem, as in many cases they do not fit neatly into this framework. Groups set the prices of their transactions internally so that each entity achieves a profit margin commensurate with its functions and risks and, at the end of the financial year, it is common to make an adjustment upwards or downwards so that the result corresponds to the intended target.

The question put to the CJEU in the Stellantis case is whether these adjustments should be subject to VAT.

The Stellantis case

The case stems from the activities of Stellantis Portugal, then known as General Motors Portugal (GMP), the group’s vehicle distribution company in Portugal. GMP purchased vehicles from the group’s European manufacturers, or original equipment manufacturers (OEMs) and resold them to independent Portuguese dealerships. In cases of manufacturing defects or faults covered by the manufacturer’s warranty, the dealers would carry out the repairs and invoice GMP for the cost. GMP, in turn, would report these costs to the OEMs, along with other distribution costs, such as staff, electricity and marketing.

Under the contract signed between the parties, the OEMs guaranteed that GMP would achieve a pre-agreed profit margin. To this end, at the end of each financial year, transfer prices were adjusted on the basis of GMP's total costs, with the adjustment formalised by means of credit or debit notes.

Following a tax audit, the Portuguese tax authorities considered that this year-end adjustment was, in fact, remuneration for the repair services provided by GMP to the manufacturers, and sought payment of the corresponding VAT. GMP challenged this interpretation, arguing that the adjustment stemmed from the application of the net operating margin method, which attributes a net result to a related entity. As it was a profit-sharing mechanism involving neither the supply of goods nor the provision of services, GMP held that it should not be subject to VAT.

The CJEU’s ruling

In brief, the court ruled in favour of Stellantis and concluded that the adjustment is not subject to VAT. Its reasoning is based on two main arguments and a final point of considerable practical relevance.

First, there is no service agreed between the parties. The CJEU examined the 2004 contract, which was the only documented legal link between GMP and the manufacturers. It found that its sole purpose was to establish the purchase price of the vehicles in order to guarantee a profit margin for GMP. The contract contained no clause obliging GMP to carry out repairs under warranty in return for remuneration. Nor did the case file reveal any other evidence, whether in writing or derived from the parties’ conduct, to support such a conclusion. In the absence of an agreed service, there can be no consideration subject to VAT.

Second, the adjustment had no direct connection with the repairs. The court emphasised that the amount of the adjustment did not depend on the value of the repairs, but on a broad range of operating costs, including payroll, electricity and marketing campaigns, among others, of which repairs are merely one item. Furthermore, once the agreed margin had been reached, there was no guarantee that GMP would recover all of its repair costs. The link between the repairs and the adjustment was, in the court’s own words, "at most, indirect".

The CJEU also left the door open. It noted that, if it is ultimately considered that the adjustments do not remunerate a service but rather correct the purchase price of the vehicles, it would be necessary to examine their impact on the taxable amount of those original supplies, applying the rules on retroactive adjustment provided for in VAT legislation. In practice the court acknowledged the possibility that the adjustment may function as a modification of the original price of the transactions and, therefore, have an impact on VAT.

Three scenarios

The advocate general’s conclusions, presented prior to the CJEU’s judgment, go beyond the specific question raised by the Portuguese court and seek to provide general guidance on determining the VAT treatment of transfer pricing adjustments. She distinguishes between three situations.

• The provision of a genuine service with a variable price. Where there is a relationship involving the provision of services between the parties,  even if the remuneration is calculated on a variable basis, the adjustment may constitute consideration for a service subject to VAT. This excludes so-called "fictitious services", that is, those which merely seek to redistribute profits within the group without corresponding to an actual flow of supply and consideration.
• An adjustment imposed unilaterally by the tax authorities. Where it is the tax authorities themselves who, in the course of an audit, retroactively order a transfer pricing adjustment to reallocate profits between jurisdictions, that adjustment should have no effect on VAT. The reason is that VAT is based on the consideration agreed between the parties, not on the value that the tax authorities deem correct.
• Retrospective adjustment of a contractually agreed variable price. Where the contract provides from the outset that the final price will depend on certain variables that will only be known at the end of the financial year, the adjustment should be interpreted simply as a correction to the original price. In the advocate general’s view, the Stellantis case falls within this category; therefore, the solution should not be to artificially construct a fictitious service in order to charge VAT on it, but rather to apply the mechanism for modifying the taxable amount (an adjustment to the original price of the transaction).

Despite this interpretative framework, the CJEU did not fully adopt the advocate general’s proposal nor does it comprehensively address the interaction between transfer pricing and VAT. It confined itself to resolving the specific case. Nevertheless, its reasoning is consistent with that analytical framework, and it cannot be ruled out that future judgments will develop it further.

Osborne Clarke comment

This judgment reinforces a principle already outlined in previous rulings: transfer pricing adjustments do not automatically give rise to VAT liabilities. A conclusion of general scope appears to emerge from its reasoning: an adjustment must be subject to VAT when it constitutes consideration for services actually rendered between the parties, or when it amounts to a modification of the price originally agreed in the underlying transactions:  in which case, the taxable amount must be adjusted. Outside these two scenarios, adjustments should, in principle, fall outside the scope of the tax.

However, there is no single rule. The practical conclusion will always depend on the circumstances of each case. In the Stellantis case, for example, the CJEU attaches decisive importance to the content of the intra-group contract clauses: it is precisely the absence of service obligations in return for remuneration that leads the Court to rule out VAT liability.

The message for multinational groups is therefore clear: it is essential to pay particular attention to the wording of intra-group contracts and the nature of the adjustments arising from them, as these will be the primary line of defence or the main risk factor against potential claims by the tax authorities.