The Arcomet Towercranes case (C-726/23) is based on a Romanian case. SC Arcomet Towercranes SRL (hereinafter: Arcomet RO) leases and sells cranes. The parent company, Arcomet Service NV Belgium (hereinafter: Arcomet BE), carries out strategic service supplies for its subsidiaries, such as looking for suppliers and negotiating contracts with them. Within the Arcomet Group, services are remunerated in accordance with the TNMM in line with OECD guidelines. A transfer pricing study concluded that the operating profit margin should be between -0.71% and 2.74%. Therefore, Arcomet RO and Arcomet BE entered into a contract regulating the services to be provided to each other and stipulating that any excess profit or higher loss would be offset. In all the years in dispute (2011-2013), Arcomet RO's operating profit margin was above 2.74%, so Arcomet BE issued net invoices for the compensation payment and Arcomet RO settled them. Arcomet RO taxed the compensation payments (in part) in Romania under the reverse charge procedure and deducted input VAT in the same amount. The Romanian tax authorities refused to allow the input VAT deduction in the years in dispute on the grounds that Arcomet RO had not proven the actual provision of the services and the necessity of the services for the purposes of its VAT-taxable transactions.
In its ruling, the ECJ stated that a compensation payment to adjust the profit margin in accordance with TNMM may constitute a consideration for a service subject to VAT. In particular, there is no uncertainty regarding the remuneration that would lead to different treatment. The contractually agreed remuneration is variable, as it may also there is none or become due in the opposite direction. However, the terms of remuneration are determined in advance according to precise criteria. The VAT liability of the service depends on whether there is a direct link between a specific supply and a remuneration in the form of a transfer pricing adjustment. The ECJ considered this to be the case in the case in question.
Therefore, transfer price adjustments cannot be dismissed as irrelevant for VAT purposes across the board. Rather, each individual case is to be assessed and evaluated accordingly for VAT purposes.
In addition, the ECJ ruled that tax authorities may also request documents other than invoices (e.g. underlying contracts, proof of work, etc.) as evidence that a supply has been carried out, provided that such evidence is necessary and proportionate in the individual case. The evidence therefore relates to the actual provision of supplies and the (mere) use (not the necessity) for VAT-taxable output transactions.
In order to avoid discussions with the tax authorities, it is important to ensure that appropriate (transfer pricing) documentation is available that clearly and unambiguously demonstrates a direct link between a specific supply provided and the remuneration received. In addition, invoices should be issued that clearly and unambiguously describe the services provided and do not merely contain general service descriptions.
The ECJ's decision provides clarity insofar as transfer pricing and VAT can no longer be considered separately from each other. For the case in question, it also provides (a certain degree) of legal certainty in dealing with the VAT consequences of (TNMM) transfer pricing adjustments. However, the decision also leaves some questions unanswered: For example, there is no indication as to how the facts of the case would be assessed if the operating profit margin had been below -0.71% in individual years and Arcomet BE would therefore have had to make a compensation payment to Arcomet RO.
It should be noted that contractual basis and invoices issued should specify the services rendered as precisely as possible and that general service descriptions should be avoided. Affected companies are advised to review their contractual basis and documentation in connection with transfer pricing in order to be able to make any necessary adjustments.