Transfer pricing (TP) adjustments and their implications for Value Added Tax (VAT) in related-party transactions are the focus of this article. Specifically, it examines the position of the Italian tax authorities regarding whether an upward TP adjustment made by an Italian company to its foreign affiliates should be taken into account for VAT purposes. Here are the key points:
General Context:
Transfer prices between related parties are typically seen as a matter of corporate income tax. However, VAT implications of TP adjustments can result in penalties, and in some jurisdictions, like Italy, criminal proceedings may be initiated.
Italian Tax Authorities’ Ruling (December 2021):
The Italian Tax Administration clarified that TP adjustments should be considered for VAT purposes if:
– The adjustment represents the consideration for a new supply, OR
– The adjustment represents an increase to the taxable amount of the original supply.
Criteria for Considering TP Adjustments for VAT:
Existence of a consideration:
– A remuneration must be received for a supply to be recognized under VAT legislation.
– The EU VAT Directive lacks a clear definition of ‘consideration,’ but case law offers guidance.
Direct link between supply and consideration:
– A legal relationship must exist, ensuring reciprocal performance.
EU VAT Expert Group Recommendations (2017):
– A supply for consideration and a direct link to that supply are necessary for TP adjustments to have VAT implications.
– Consideration of the interaction between direct and indirect taxation, the arm’s length principle, consideration, supply, and a direct link between supply and consideration.
Approaches in Other EU Member States:
– The Czech Republic and the UK generally follow the EU approach, considering the existence of a direct link between the supply and the remuneration.
Italian Approach and Uncertainty:
– Italian VAT legislation does not explicitly address the impact of TP adjustments for VAT purposes.
– Incorrect VAT treatment could result in penalties and criminal implications in Italy.
– Taxpayers may file preliminary ruling requests to seek clarification on the VAT treatment of TP adjustments.
Recent Italian Tax Administration Position (December 2021):
– An upward TP adjustment is relevant for VAT if it represents consideration for a new supply or increases the taxable amount of the original supply.
– The direct link between the TP adjustment and the supply is crucial for VAT implications.
Recommended Actions:
– Taxpayers should not only focus on the corporate income tax impact but also consider the potential VAT impact of TP adjustments.
– Incorrect VAT treatment may have significant consequences, and seeking local advice is recommended.
In summary, this article underscores the importance of considering VAT implications when making TP adjustments. It highlights the criteria and conditions under which the Italian tax authorities consider such adjustments relevant for VAT purposes. It is crucial for taxpayers to be aware of the potential VAT consequences and seek appropriate professional advice.
