General Transfer Pricing (TP) and VAT concepts
In the normal course of business, the objective of selling goods and services is to maximise corporate profits, while remaining competitive in the market. Having said that, when goods and services are transacted between related parties within a group, the intention may shift from maximising profits to minimising the group’s global tax burden. Therefore, prices charged between related parties may not be at arm’s length.
The aim of TP rules is, among others, to regulate the price of such intra-group transactions, and ensure that for tax purposes such price is in line with the arm’s length principle.
In terms of the OECD TP Guidelines, an internationally accepted framework, the arm’s length principle must be applied to transactions between related parties. This should ensure that related parties apply market-conformant prices as they would if transacting with third parties. As a result, from a tax perspective, TP adjustments to the original intra-group price may be required for tax purposes.
VAT is an indirect consumption tax which normally flows through businesses so that it is the final consumer who bears the VAT burden, and not the business. In principle, VAT should be charged on all supplies (goods and services) including intragroup transactions. Therefore, regardless of whether the supply of services or goods takes place between related or independent parties, generally, such transactions should be subject to VAT.
Could the TP Rules have an impact on VAT?
TP is generally a direct tax concept driven by considerations which do not necessarily align with VAT considerations. Under established VAT principles, a TP adjustment should arguably only give rise to VAT implications insofar that the TP adjustment may be regarded as consideration for a supply or possibly the value of a supply is also adjusted contractually.
Rule 8 of the Maltese Transfer Pricing Rules sets out that “without prejudice to the provisions of any other law, any adjustments made in furtherance of the requirements of these rules shall be relevant only for the purposes of the Income Tax Act”.
In other words, a TP adjustment, solely for direct tax purposes, is not expected to impact the value of the supply for VAT purposes, since the Rules specifically apply to income tax matters and VAT is excluded from the purport of the said Rules.
However, Rule 8 should not be interpreted as a restriction on the powers of the Commissioner for Revenue to intervene in circumstances in which a TP adjustment, in terms of the TP Rules, may give rise to VAT implications.
Furthermore, VAT adjustments may have been reported by other taxpayers in a Member State (other than Malta) as a consequence of a TP adjustment on a supply involving a taxpayer established in Malta. This adjustment may need to be considered from a VAT perspective by the taxpayer in Malta.
Way forward
When faced with a TP adjustment, taxpayers are typically focused on the income tax impact. However, taxpayers should not lose sight of the potential VAT impact of such TP adjustments. Cooperation between the TP and VAT audit departments is clearly on the rise within Europe and TP documentation may potentially be used for VAT investigations.
When TP adjustments are required the impact that such an adjustment may have from a VAT perspective must also be considered.
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