Further considerations on the assessment of transfer pricing and VAT adjustments – Opinion of the Advocate General in Case C-603/24 Stellantis Portugal

Last year, we informed you about the conclusions of the CJEU in Case C-726/23 (Acromet Towercranes), where the Court considered an additional payment by a subsidiary to the managing parent company on grounds of exceeding the agreed operating margin as a payment for the provision of a service.

In the present case, however, the situation is different. General Motors group includes a company that manufactures cars and spare parts and accessories for them (hereinafter the “Manufacturer”) and a company that distributes them (hereinafter the “Distributor”). The distributor supplies cars to independent dealers who then sell them to end customers. In the case of manufacturing defects, the end customer will contact the dealer, who will repair the defects on its own premises, and the dealer will then invoice the Distributor for the repair of the vehicles.

The Distributor’s remuneration is determined in accordance with an intra-group transfer pricing agreement. The Distributor shall report to the Manufacturer the total costs incurred by the Distributor for the distribution of the vehicles, which shall include the cost of repairs to the vehicles as set out above. At the end of each period, an adjustment is made for transfer pricing so that the actual operating profit corresponds to the expected and predetermined operating profit. In connection with this price adjustment, the Manufacturer shall issue to the Distributor a credit note or debit note for the cars sold.

The Portuguese tax authority carried out a tax audit on the Distributor and concluded that the Manufacturer was responsible for the repairs because it manufactured or assembled the vehicles and the spare parts. It further held that bearing the cost of defective vehicles purchased and resold by the Distributor constituted a service provided to their Manufacturer. It therefore charged VAT on the repair, warranty and roadside assistance costs incurred by the Distributor in the period under review.

In the context of the present dispute, the preliminary question therefore arises as to whether the concept of “provision of services for consideration” includes a contractual adjustment of the selling price of vehicles with the aim of achieving a minimum profit margin.

Advocate General Juliane Kokott commented on the question referred by the Portuguese court that the mere adjustment (upwards or downwards) of the selling price for the supply of vehicles is never in itself, in principle, a supply of a service subject to VAT. According to the lawyer, there is no need to artificially create fictitious services provided outside the scope of the supplies made, all the more so if those services could lead to negative prices. If, as in the present case, the adjustment of profit is made by means of a variably agreed purchase price determined precisely for that purpose, which applies to a specific delivery of goods, this constitutes an adjustment of the tax base in relation to the supply made.

The Advocate General also dealt with other situations concerning VAT and transfer pricing adjustments. The following conclusions emerged from the opinion:

• Separate supply of services – if the adjustment of profits is made by means of a separate supply of services for consideration and it is not a fictitious service, it would be a supply of services for consideration subject to VAT.
• Retrospective adjustment of transfer prices by the tax administration – if the adjustment of profits is made unilaterally and retrospectively by the tax administration, solely for the purpose of proper allocation of profits between the countries concerned, it would be an irrelevant adjustment for VAT purposes.

It will undoubtedly be interesting to see whether the Court’s decision will match the Advocate General’s assessment. We will of course keep you informed of the decision in this matter.