Transfer Pricing & VAT: Where Two Tax Worlds Collide

Transfer pricing and VAT are usually handled by separate teams who barely speak the same language – and that gap creates real risk for multinational groups.

In this episode, Paweł Mikuła is joined by Francisco Javier Sánchez Gallardo and Gorka Echevarría Zubeldia to untangle where the two worlds collide. They work through Articles 72 and 80 of the VAT Directive, the recent CJEU rulings in Högkullen, Arcomet and Stellantis, the VAT treatment of transfer pricing adjustments in domestic and cross-border transactions, and the practical steps needed to keep contracts, TP documentation and invoicing aligned.

The newest book by Gorka Echevarria and Francisco Javier Sánchez Gallardo „Memento VAT and International Trade” is available here:

https://lefebvre.es/formacion/jornada/vat-and-international-trade/

This article summarizes a podcast conversation and does not constitute legal advice or a sourced academic paper. The analysis presented reflects the speakers’ views as expressed in the discussion rather than comprehensive research.

Where Transfer Pricing Meets VAT: Untangling Intra-Group Transactions in Light of Recent CJEU Case Law

Two Systems, Two Mindsets: Why TP and VAT Sit in Separate Silos

TP and VAT spheres are often seen as something separate. Ask a transfer pricing specialist about VAT and the answer is often that VAT is somebody else’s department. Ask a VAT specialist about transfer pricing and the response is the mirror image. The two disciplines are kept in separate drawers, and the people who work in them rarely speak the same language.

The two systems operate by fundamentally different logics. Transfer pricing belongs to direct taxation. Its purpose is the correct allocation of profits between the entities of a multinational group, it applies the arm’s length principle anchored in Article 9 of the OECD Model Convention, it is profit-oriented, it frequently works on an aggregated basis, and it admits ex post adjustments at year-end. 

VAT does not tax profits at all — it taxes consumption. It is built around a different unit of analysis: the specific supply, a concrete delivery of goods or provision of services for consideration, assessed transaction by transaction. Crucially, the VAT taxable amount is not an arm’s length estimate; it is a subjective value, the consideration actually agreed by the parties.

The Court of Justice drew this distinction long ago, confirming in earlier case law that the OECD Model Convention has no effect in VAT because it addresses direct, not indirect, taxation. On that basis the two worlds should indeed work separately. But, as Echevarría stresses, a collision becomes unavoidable the moment a transfer pricing adjustment is made. 

Someone then has to ask the VAT questions: Is the adjustment taxable? Is it a new supply, or does it modify a previous transaction? Can the authorities substitute the agreed consideration with another value? Those are the questions this text is set to answer.

Articles 72 and 80 of the VAT Directive: The Exception, Not the Rule

The first substantive issue is a pair of provisions that are frequently misread and improperly mixed: Articles 72 and 80 of the VAT Directive.

Article 73 establishes the general rule for the VAT taxable amount. That rule is that the taxable amount is a subjective value, expressed in money — not an estimate and not an objective value. The taxable amount can be fixed only when this subjective value can be established. This is the foundation of the „direct link” doctrine developed by the Court of Justice in case law that, while old, remains decisive.

Against that background, Article 80 is an exception — not an alternative route, but an exception that applies only when its conditions are met. It authorises Member States to apply the open market value to transactions between related parties, and only then if three conditions are satisfied. First, the parties must be related — linked by management, ownership or control. Second, the agreed price must diverge from the open market value, whether below or above it. Third, and decisively, there must be a risk to tax revenue, which arises only where there is some limitation on the right of deduction. If there is no restriction on the right to deduct, Article 72 does not come into play at all. Only once Article 80 is engaged does one turn to Article 72, which contains the definition of open market value. The order of analysis matters — Article 80 first, Article 72 second.

There are three scenarios in which open market value can apply, but the first is by far the most common: the customer does not have a full right to deduct VAT. This covers supplies to financial institutions, insurers, the public sector and educational institutions, as well as supplies to private consumers. The two remaining scenarios are narrower and concern taxable persons applying a pro-rata, where transactions giving a right to deduct are over-valued or exempt transactions are under-valued so as to distort the pro-rata. For most practical purposes, however, the touchstone is a restriction on the right to deduct combined with a consideration set below the corresponding open market value.

Högkullen: When a Bundle of Intra-Group Services Is Not a Single Supply

The judgment of the Court of Justice in Högkullen AB (C-808/23, 3 July 2025) concerns a setup familiar to any group: a holding company supplying services to its subsidiaries.

Högkullen was the parent company of a real estate group and was genuinely engaged in managing its subsidiaries — in the older vocabulary of the Court, a directing holding rather than a merely participating one. It supplied a whole range of services: corporate management, finance, real estate management, technology and human resources. It used a cost-plus method to set the consideration. The key feature of the case is that certain costs of the parent were left out of the basis on which that consideration was calculated — audit expenses, the cost of preparing the annual accounts, fundraising expenses, and services connected with a possible IPO. Despite excluding those costs from the charge to the subsidiaries, Högkullen deducted all of the input VAT it had borne.

The Swedish tax authorities reacted by arguing that the services supplied by the parent had no market comparable: they formed a single composite supply with no equivalent available between independent parties. On that basis the authorities turned to the fallback rule, which requires the open market value to be built up from the full cost incurred. Article 72 contains two methods for establishing open market value — the comparable, being the value of the same service at the same commercial stage in the same Member State, and the fallback, being the full cost capable of being attributed to the supply.

The Court rejected the authorities’ premise. It held that this was not a single composite supply. Returning to its case law on composite supplies, the Court found that the various services did not form an indivisible economic whole; their separation was not artificial. Each service had its own distinct and identifiable character and had to be treated according to that character. The Court added that the existence of a single global price was not, in itself, decisive — otherwise taxpayers could choose how to fix their taxable amount simply by adjusting their pricing policy. Because the services were separate, the authorities’ assertion that no comparable existed fell away.

Two further points emerge from the discussion. First, where the services are separate, comparables can typically be found on the market — financing against the financial market, HR services against the HR services market, and so on — so the taxable amount will, in most cases, correspond to the market value of comparable supplies. Second, and importantly, the Court did not address whether Högkullen had a full right of deduction, because it was not asked. The question of whether all the input VAT was in fact deductible was left open.

Stellantis: Transfer Pricing Adjustments and Customs Value

The Stellantis Portugal (C-603/24) case involved a classic distribution arrangement. Stellantis Portugal was the national distribution entity within the former General Motors group. It purchased vehicles from other European group manufacturers and resold them to independent Portuguese dealers. On the after-sales side, when manufacturing defects appeared, the dealers carried out the repairs themselves and invoiced Stellantis, which in turn communicated the warranty and operational costs to the manufacturers. The transfer pricing arrangement was a familiar one: provisional prices were set at the start of each fiscal year, and at year-end an adjustment was pushed down so that Stellantis achieved a target margin, with warranty and distribution costs folded into the calculation. The adjustment was documented through a credit note issued to Stellantis Portugal.

The Court declined to engage with what he sees as the central issue — that the adjustment was a retrospective price adjustment on the supply of the vehicles — and instead left that question to the national authorities.

The purchase price was never fixed; it was contractually variable from the outset, the agreement always providing that it could be adjusted by reference to profitability parameters. What the year-end close modifies is the final consideration for the original vehicles. In VAT terms, this should be treated as an adjustment to an intra-Community transaction — zero-rated in the country of dispatch and taxable as a retroactive adjustment to the intra-Community acquisition. It was therefore not irrelevant for VAT, and it was not a supply of services; it was a retroactive price adjustment. The ambiguity of the judgment allows different readers to reach different conclusions — which is part of why the discussion is worth having.

What the judgment does not do is declare a structural incompatibility between transfer pricing and customs value. It rejects the idea that a global, retroactive adjustment untied to any specific import declaration can rest on an aggregated profitability method. But it leaves room for adjustments to have customs consequences where the purchase contract includes price-revision clauses, where the adjustment can be allocated to specific declarations, and where the customs mechanisms for provisional and supplementary declarations are used.

That points to the practical customs framework. The starting point is that an adjustment must be capable of being linked to specific consignments. Beyond that, the importer must use the simplified procedure under Articles 166 and 167 of the Union Customs Code: declaring an initial, provisional value under a simplified declaration, then filing a supplementary declaration with the final value within the permitted (and extendable) period. An intercompany purchase contract should include explicit price-revision clauses signalling the provisional nature of the prices. Duty managers should coordinate with logistics and supply chain so that simplified declarations are used systematically — otherwise reporting adjustments later becomes very difficult. Adjustments, whether upward or downward, must be allocable to specific import entries rather than to a global P&L line. And upward and downward adjustments must be treated symmetrically: an importer that claims refunds for downward adjustments but never self-declares additional duties for upward ones creates exactly the asymmetry the Court disapproved of. Some national authorities are happier to collect additional duties than to grant refunds, which can make the symmetrical approach harder to operate in practice than in theory.

The Court of Justice is not a supreme court of the Spanish, Portuguese or Polish kind; it answers the question put to it and tends to avoid broader conclusions when it is not forced to reach them. If adjusting the selling price of the cars was the proper route — which he would accept — that route may itself be blocked by Article 80, because the transaction is an intra-Community acquisition with a full right of deduction, and Article 80 would not authorise such an adjustment.

Arcomet: Does a Financial Flow Within a Group Create a Taxable Supply?

The third case is Arcomet Towercranes (C-726/23, 4 September 2025), which addresses a question close to that in Stellantis, but with a different twist: whether the redistribution of profit between group companies constitutes a taxable supply.

The principle is that a financial transfer between related parties is a taxable supply only if it remunerates an identifiable service rendered to a specific beneficiary. A pure profit-pooling or cost-sharing payment, with no underlying distinct supply, does not satisfy that condition. Read together, Stellantis and Arcomet form a coherent framework: the mere existence of a financial flow within a group — even one economically motivated by transfer pricing rules — does not automatically create a VAT supply. The question is always whether there is an identifiable, real supply underlying the payment.

The practical consequence is that the contractual architecture is everything — provided it is aligned with the transfer pricing documentation and with the invoicing protocols actually used. One has to examine what the intercompany agreement says: whether the price is provisional, and what the arrangement is intended to achieve. Where an adjustment is not reflected in the original contract, disputes with the tax authorities become far more likely. Recommendation to practitioners is to start there — reviewing the contractual position carefully — even if transfer pricing colleagues or clients regard it as unnecessary, because litigation will follow if the groundwork has not been done in time.

Transfer Pricing Adjustments in Practice: Domestic and Cross-Border

A transfer pricing adjustment between two related domestic entities is visibly difficult: the parties must ask whether to charge VAT on the adjustment, whether to revise the price up or down, and what follows for the recipient’s deduction or for any arrears. But where the underlying transaction is an intra-Community supply and acquisition, businesses often assume the issue disappears, because the position looks neutral — a zero-rated supply, VAT due on the acquisition, matched by input VAT recovery. Does that comfort hold?

It depends entirely on how the adjustment is cascaded. If it is pushed through an entity with multiple VAT registrations as a single lump sum, rather than allocated across the registrations that actually made supplies to a given affiliate, it becomes very hard to conclude that there has been an adjustment to a specific intra-Community acquisition and supply. But if the adjustment is allocated properly — proportionally to the underlying sales made during the year — it should be reported. He recommends doing so even where there is a full right of deduction, because a failure to report VAT on an intra-Community acquisition attracts penalties in many jurisdictions. He cites figures of around 10% in Spain and, historically, up to 100% of the VAT amount in Italy.

In Poland the position is likely different — there would generally be no specific sanction beyond penal-fiscal consequences for incorrect reporting — but the point is precisely that one cannot always carry out a jurisdiction-by-jurisdiction assessment, so a single EU-wide safe approach is preferable. In practice, that means allocating the lump sum proportionally to the underlying sales to each affiliate, issuing the appropriate credit or debit notes, and capturing the result in the VAT returns and in the EC Sales and Purchase Listings where those exist — treating the matter as a retrospective adjustment to the intra-Community acquisitions made during the year. The worst outcome of that approach is an authority saying the adjustment was unnecessary; the worst outcome of the alternative is a finding that intra-Community acquisitions went unreported.

Two more points can be added. In some sectors the difficulty is sharper — IT support services supplied into the financial sector, for instance, may not be eligible for deduction, so an intra-Community acquisition of such services is itself non-deductible. And the analysis is not confined to the taxable amount: the place of supply and the construction of the pro-rata can also be in play, as the JP Morgan case illustrates. Where there is no full right of deduction, the problems in cross-border settings are as significant as in domestic ones — and, given that some Member States operate VAT grouping schemes that ease the domestic position, sometimes more so.

Practical Conclusions: Aligning Contracts, Documentation and Invoicing

Transfer pricing and VAT are different systems — different mindsets, even — and should not be conflated. The teams responsible for each should be made to talk to one another. Article 80 is an exception: for B2B supplies with a full right of deduction, transfer pricing simply does not apply in VAT.

In customs valuation, the case law now runs from Hamamatsu (C-529/16) through to Tauritus (C-782/23, 15 May 2025), and the lesson is a case-by-case, transactional analysis combined with appropriately adapted declaration methodologies — provisional declarations followed by supplementary ones where an adjustment is anticipated, and a coherent, symmetrical treatment of upward and downward adjustments.

Outside customs, in intra-group supplies, a supply-by-supply analysis is again the rule, informed by Högkullen, Arcomet and Stellantis. Practitioners should attend both to the contracts and to the underlying economic analysis: contracts must reflect the real economic flows, and there must be coherence between the contracts, the intercompany agreements and the transfer pricing documentation. A recurring weakness, he notes, is that transfer pricing documentation is prepared with income taxes in mind — and the existence and relevance of VAT is forgotten.

Final Takeaways

Practical advice for in-house tax advisers: recommendation is to build a genuine relationship with transfer pricing colleagues — to understand their drivers and to explain, in their terms, where transfer pricing and VAT need to move together. This takes time: colleagues from a different domain will not grasp the VAT concerns overnight, and the right approach is patience, a change in communication style, and a willingness to learn from the other side. The reward is the standing needed to improve intercompany agreements and transfer pricing documentation so that they become more VAT-friendly — work that cannot be done by confronting colleagues with a handful of alarming cases.

Closing point is that the case law on the subject is now consistent and substantial — Högkullen, Arcomet and Stellantis have arrived within a short span — and that tax administrations and courts are paying close attention. The response, for practitioners, is to look at the whole picture, to get the different teams talking, and to accept that none of this is easy. It is, however, the way the system now works — and coherence across contracts, documentation and invoicing is the price of staying on the right side of it.

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