The transfer pricing policies adopted by multinational groups may require companies involved in intragroup transactions to revise their prices at the end of the year in order to bring them into line with the “arm’s-length principle”.

The Italian Revenue Agency recently commented on the VAT regime with specific reference to the amounts necessary to implement the revision of the prices charged and paid as “compensating adjustments”.

In the case examined by the Revenue Agency, the assets produced by the Italian company (transferor) were purchased by a foreign company (transferee) at a price in line with the policy adopted by the group, consistent with the “arm’s-length principle”.

However, the group policy provided for a precise obligation for the transferee company to pay a “contribution” in favor of the transferor company in the presence of a gap in the final balance between the profit made by the latter (deriving from the sale of assets within the group) and the profit determined according to the “arm’s-length principle”.

In this specific case, the Revenue Agency stated that in light of the “contractual clauses”, such “contribution” did not constitute a remuneration to which VAT could be autonomously applied because the transferor company did not have any obligation to do, not to do or permit.

Moreover, in this specific case, the “contribution” was not considered to qualify as an increase or decrease in the prices applied during the year, given the absence of a direct link between the amounts paid as “compensating adjustments” and the intragroup transactions carried out. This approach is in line with the European Commission Working Paper (28/2/2017) - Working Paper no. 923, which states that in order for year-end “compensating adjustments” to have an impact on the determination of the VAT taxable base (by increasing or decreasing the amount originally applied), there must be: i) monetary or in-kind regulations (which was the case); ii) the supply of goods/services to which the amount refers must be precisely identified; iii) a direct link between the supplies of goods/services carried out. A case by case assessment is therefore required to determine whether the above requirements are met, without which the sums paid as “compensating adjustments” are to be considered irrelevant for VAT purposes.

In the presence of group policies that provide for the obligation to pay “compensating adjustments” it is therefore necessary to carefully evaluate contractual clauses in order to apply the correct VAT regime to any amounts paid at the end of the year, also in order to provide appropriate evidence in any documentation prepared with the aim of benefiting from the penalty protection regime.