What has the VAT got to do with transfer pricing?

As the deadline for corporate tax returns approaches (along with the requirement for detailed reporting on related-party transactions), and there may be a need to adjust the applied transfer prices, it is worth considering whether such adjustments also have VAT implications.

At first glance, one might raise an eyebrow: where’s the connection here? VAT is an indirect tax, and the consideration applied by the parties forms the basis for VAT, which they determine subjectively. Transfer pricing forms the basis for direct taxation, or it modifies it, which must be recorded according to objective principles (based on the arm’s length principle). So, the question is justified: what could be the connection between VAT and transfer pricing adjustments? The topic is interesting also because even today, only discretionary considerations can be applied, and EU practices are not necessarily uniform.

Transfer pricing adjustments can be made in three ways in Hungary:

• In the corporate tax (and possibly local business tax or innovation contribution) return: The taxpayers adjust their tax base by the amount of necessary adjustment, with the caveat that tax base reduction at the counterparty is only possible with the conditions and documents prescribed by law. There is no actual money movement between the parties regarding the adjustment.
• With accounting documentation: The adjustment is not linked to a specific transaction, so there are no VAT consequences, but there is money transfer between the parties.
• By issuing a corrective invoice: Since it relates to a previous specific sale of goods or provision of services, it modifies the VAT base, can change VAT, and involves financial settlement.

However, it may be questioned when the adjustment is “specific” in connection with a previous transaction. The EU VAT Expert Committee addressed this in its working document 923 issued in 2017, without mandatory effect due to a lack of complete consensus, already relying on EU case law. While there are obvious cases (such as a tax authority’s admonishment leading to an adjustment of the tax base for market profitability, which does not have VAT consequences), how do we judge a case where someone compensates for a shortfall in the annual minimum purchase quantity, or where there is a retrospective correction of management fees used as income adjustment tools? The former has already been decided by a court, while the latter is awaiting a decision.

However, each case must certainly be evaluated individually. When evaluating, questions such as the following need to be answered:

• Does the agreement between the parties allow for price adjustments?
• Is there money movement between related parties in connection with the adjustment?
• How was the transfer price determined? What kind of methods was used?
• Can the payment be attributed to a specific transaction or transactions?
• Did the transaction within the chain involve the same parties as those settling the consideration?

Therefore, to ensure the correct application of transfer pricing adjustments across all tax types, it is not sufficient to only consider corporate tax, local business tax, and innovation contribution, but one must also proceed with caution regarding VAT. In this regard, in the case of corrections related to cross-border related-party transactions, it is advisable for both the buyer and the seller to handle it in a coordinated manner.

For further questions, please consult our advisors:

Krisztián Vadkerti
Partner
vadkerti.krisztian@pkf.hu

Márta Pénzely
Tax Manager
penzely.marta@pkf.hu

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