VAT treatment of transfer pricing adjustments

The case concerned an automotive group in which manufacturing entities supplied vehicles, parts and accessories to group distributors, who in turn resold them to independent dealers for onward sale to final customers. Under an intra-group transfer pricing agreement, the distributors were guaranteed a pre-determined profit margin. To ensure that margin, the manufacturing companies retrospectively adjusted transfer prices, taking into account various costs incurred by the distributors in that regard, as well as other operating costs, including, i.a., the costs of staff, electricity and marketing, and issued corresponding credit or debit notes.

Where vehicles were defective or subject to warranty or roadside assistance procedures, independent dealers carried out repairs and invoiced the distributor. The distributor then reported these costs, together with the operating costs, to the relevant manufacturing entity.

Against this background, the referring court asked the ECJ whether the distributor should be regarded as supplying repair services to the manufacturing companies, with the transfer pricing adjustments constituting consideration for such services. 

The ECJ held that such adjustments did not constitute consideration for a supply of services where they merely served to ensure that the distributor achieved a pre-agreed profit margin under the transfer pricing arrangement.

In reaching this conclusion, the Court emphasised in particular that:

• the intra-group agreement did not establish any legal relationship under which the distributor was obliged to carry out repairs for the manufacturing companies in return for remuneration;
   
• the adjustments were determined by reference not only to repair costs but also to a broader set of operating expenses, and could result in either credit or debit notes; and
   
• the purpose of taking these costs into account was solely to ensure the previously determined profit margin, without guaranteeing reimbursement of the repair costs.
   

The ECJ therefore found that any link between the repair services and the transfer pricing adjustments was, at most, indirect.

Accordingly, the Court concluded that transfer pricing adjustments of this kind do not constitute consideration for a “supply of services for consideration” within the meaning of the VAT Directive. 

However, this conclusion would differ if there were a legal relationship characterised by reciprocal obligations between the group companies, i.e. where the distributor was required to supply services to the manufacturer, establishing a direct link between the supply of those services and that adjustment.