C‑726/23. – S. C. Arcomet Towercranes SRL

A subsequent transfer pricing adjustment invoiced by the service provider also constitutes consideration subject to VAT, provided that the contracting parties have agreed on a settlement based on the arm’s length price. The tax authority may examine the actual underlying supply in relation to the invoice at the level of the recipient.

The plaintiff in the case is the Romanian subsidiary of a multinational enterprise group engaged in crane rental and sales. The cranes intended for lease and sale are leased or procured by the plaintiff in its own name from independent suppliers; however, the contractual terms and financing arrangements relating thereto are negotiated at group level by the Belgian parent company for the benefit of its subsidiaries. The subsidiaries – including the plaintiff – pay consideration for the coordination activities of the parent company. The plaintiff agreed with the parent company that the remuneration must conform to the arm’s length price. For this purpose, the parties prepared a benchmark study concerning the plaintiff’s activities, determining its arm’s length profitability and stipulated contractually that, if the plaintiff fails to achieve such profitability on the basis of the actual consideration (i.e. if it pays “too much” for the service), it is entitled to compensation, while if its profitability exceeds the arm’s length range (i.e. if it pays “too little” for the service), the parent company shall subsequently invoice the additional remuneration necessary to reach the arm’s length profitability. In the case at hand, upon settlement, the parties concluded that the plaintiff had purchased the service below the arm’s length price, and therefore the parent company invoiced the difference as a transfer pricing adjustment. The plaintiff treated this as an imported service in its VAT return and, under the international reverse charge mechanism, self-assessed the output VAT while simultaneously deducting it (+/–). The Romanian tax authority denied the deduction of input VAT on the grounds that the plaintiff had not substantiated the underlying supply corresponding to the subsequently issued invoice. The matter was brought before the Bucharest Tribunal and subsequently the Bucharest Court of Appeal. The administrative courts were required not only to assess the evidentiary burden applicable to the deduction of VAT, but also to determine whether a subsequently invoiced transfer pricing adjustment qualifies as consideration for VAT purposes. Consequently, the Bucharest Tribunal requested a preliminary ruling from the Court of Justice of the European Union (CJEU).

The CJEU held that where the service provider and the service recipient agree on the application of the arm’s length price, any adjustment required for this purpose forms part of the remuneration for the service, and thus constitutes consideration directly linked to the service supplied. The Court emphasised that although remuneration under such circumstances contains a variable element, it is neither voluntary nor uncertain; nor is the amount difficult to quantify or uncertain within the meaning of the CJEU case-law. The requirement that consideration be determined on the basis of clear and pre-established criteria is therefore also satisfied. Consequently, the price adjustment invoiced by the parent company formed part of the service fee and was thus taxable consideration for VAT purposes.

The CJEU further confirmed that where the service recipient claims a right to deduct input VAT on the basis of an invoice received, the tax authority is entitled to examine the underlying supply and may require supporting documentation evidencing such supply. (In the present case, this means that, in order to justify its VAT deduction, the taxpayer must be able to demonstrate that the transfer pricing adjustment relates to a genuine service and constitutes remuneration therefore.)

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