Stellantis Portugal judgement: what it means for VAT and transfer pricing
The European Court’s (CJEU’s) judgment in Stellantis Portugal (C-603/24) is the latest case to offer useful insights into the interaction between VAT and transfer pricing (TP). It shows the importance of considering indirect taxes when implementing and operating a TP policy.
Stellantis Portugal: case background
Stellantis Portugal (SP) purchased vehicles from affiliated manufacturers (original equipment manufacturers or OEMs) which were initially priced using a resale price method - expected sales price less gross margin. Periodically, there would be adjustments to ensure SP achieved a target profit margin, taking into account its distribution functions (the ‘transactional net margin’ method, 'TNMM’).
These adjustments considered various SP costs, including repairs under warranty. Such repairs were carried out by Portuguese dealers, which charged them to SP. SP would then true up its profits through the TNMM adjustment considering the warranty repair costs amongst other costs.
The Portuguese tax authorities found that, because the OEMs issued the warranties and were responsible for providing the repairs, they must have received a repair service from SP. Thus, the tax authorities’ contention was that SP should have charged Portuguese VAT to the OEMs.
What did the European Court decide in Stellantis Portugal?
The CJEU ruled in favour of Stellantis. There was no contractual obligation for SP to provide repair services to the OEMs, and the court could not conclusively find that the TP adjustments were directly linked to the cost of the repair services. Consequently, the TP adjustments should be considered as changes in the price paid for the vehicles and parts supplied. SP had not provided repair services. Instead, the CJEU found that a third party acting in the same capacity as SP would have demanded a price reduction for purchasing a faulty vehicle. SP should be treated in the same way.
While the court’s decision seems sensible, it is clear that a carefully prepared TP agreement was central to its analysis. The judgment drawn by the tax authorities might have been logical, but it did not allow them to invent a legal relationship between SP and the OEMs which was not apparent from the TP agreement.
The court’s inability to find a direct link between the TP adjustment and any ‘repair services’ was based on the evidence before it. In many similar situations, it will be possible to isolate third party costs incurred by a national sales company like SP and use them as a basis for valuing a supply of services. If a legal relationship for the supply of services exists, then ignoring it by denying the existence of a direct link, as the court found in this case, is likely to be challenged.
What is the impact on import declarations?
The treatment of TP adjustments may have significant consequences for valuations used in import declarations. Reductions in import values due to the need for repair under warranty are often possible if there is a contractual basis for the reduction. For this reason, it is advisable that the nature of any payment is clearly documented.
Unfortunately, the treatment of retrospective TP adjustments is contentious for import valuations. Some customs authorities consider them to be unrelated to the customs value of goods, while others allow customs value adjustments. In the UK, for example, HMRC largely ignores retrospective price adjustments for duty valuation purposes. However, the introduction of Advance Valuation Adjustment Agreements is currently being considered, which would provide a legal basis for adjustments to customs values in the future.
How does this affect VAT on services?
VAT challenges may also arise for those who are not entitled to full VAT recovery. Such organisations might suffer significant VAT costs on services from related companies based abroad unless care is taken. Valuation issues might also affect the calculation of the VAT recovery enjoyed by partly exempt taxpayers serving other group companies.
Key actions following Stellantis Portugal judgement
Stellantis, like other recent CJEU judgments such as Arcomet Towercranes, confirms that TP adjustments can have an indirect tax impact.
It is crucial that TP work is part of a holistic tax analysis. It must be consistent with, and complementary to, the approach that is adopted for VAT and customs duty purposes. In some cases, there must be a recognition at the planning phase that the necessity for a TP adjustment will negatively affect the customs duty position – but not in every supply chain.
While many organisations disregard domestic TP matters, including in the UK, it is worth noting that in some cases the value of transactions can affect VAT valuation questions when HMRC might otherwise challenge the value of a supply by applying domestic anti-avoidance powers.
If you would like to discuss how the Stellantis Portugal judgement may affect your business, reach out to Philip Munn, or your usual RSM representative.