Home

Internal

Global

Contact

de|en|it

Rödl & Partner Italy: 2024 turnover grows to a record level of 33.3 million euros |

Worldwide

We use cookies to personalise the website and offer you the greatest added value. They are, among other purposes, used to analyse visitor usage in order to improve the website for you. By using this website, you agree to their use. Further information can be found in our data privacy statement.

VAT treatment of TP adjustments: the key role of the direct link to the concerned transactions

published on 12 September 2024 | reading time approx. 4 minutes

Transfer pricing adjustments are often perceived as mere alignments from a tax/accounting perspective. But how do they impact VAT? The recent Response no. 214/2025 from the Italian Tax Authorities puts the spotlight back on a crucial issue: the direct link between TP adjustments and individual transactions concerned.

It is well known that routine companies (very often so-called “limited risk distributors”) in particular are monitored at the net margin level (usually on the basis of “return on sales,” “ROS”) by applying the Transactional Net Margin Method (“TNMM”). If the prices charged during the year for the purchase of goods from affiliated foreign companies result in the corresponding ROS not being in line with the arm's length principle, periodic transfer pricing adjustments in the form of compensation payments (so-called “TP adjustments”) are made to ensure to bring the result in line with the arm's length principle.

In its Response No. 214 of 20 August 2025, the Italian Tax Authorities once again expressed its opinion if TP adjustments are relevant from a VAT perspective or not, confirming the position already highlighted at national and international level (ex multis, EU Commission Working Paper No. 923 of 2017, Responses to requests for rulings nos. 60/2018 and 529/2021).

For a TP Adjustment to be relevant for VAT purposes, three conditions must be met: the transaction must be onerous, the transaction to which the consideration relates must be clearly identified, and there must be a direct connection between the TP Adjustment and the underlying goods or services supply. Conversely, if one of these conditions are not met, a TP Adjustment is treated as outside the scope of VAT. This is particularly evident in the following scenarios:

It is not possible to identify a supply of goods or services for which the TP adjustment could represent the remuneration. In this context, Italian Tax Authorities have analyzed in a number of administrative letters (including: “risposte e interpello nn. 60/2018 e 884/2021”) scenarios in which the adjustment merely serves to guarantee companies with routine, low-risk activities an arm's length net operating margin determined by a benchmark analysis. In these cases, the TP adjustments do not relate to specific goods or services subject to VAT and are therefore excluded from the scope of VAT.
A VAT transaction to which the TP adjustment relates can be identified; however, there is no direct link between the supply of goods or services and the TP adjustment. This is the case, for example, if - despite a periodic adjustment of the transfer price for goods delivered or services provided between two companies within a group - the manner in which the adjustment is determined does not allow for a clear link between the individual VAT-relevant transactions and the TP adjustment. Since there is therefore no actual connection between the TP adjustment and the individual goods deliveries or services, the TP adjustment cannot be regarded as an increase or decrease in the VAT assessment basis and therefore does not fall within the scope of VAT.

The content of Response No. 214/2025 essentially reiterates the above. The taxpayer submitted the application to the Office following the adjustment of its Intercompany Agreement governing the price adjustment of products sold by one entity of the Group to another operating as a routine distributor.

Specifically, the remuneration due to the distributor is determined on the basis of the Transactional Net Margin Method, comparing an arm’s length ROS determined through a benchmark analysis with the ROS actually achieved. Subsequently, the price adjustment is allocated to the individual sales transactions, as reported in a specific document summarising the breakdown and list of invoices to be adjusted (called “breakdown”). Finally, the manufacturer issues a credit note or debit note for each invoice.

The amendment to the agreement to introduce the obligation to draw up the breakdown stems from the taxpayer's desire to demonstrate the existence of a direct connection between the TP adjustment and the individual sales of goods, arguing that such adjustments are relevant for VAT purposes. The tax authorities agreed with the applicant's position, stating that the TP adjustment in question is directly related to the sales of goods and therefore falls within the scope of VAT.

The outcome of the Response to the ruling confirms the need to proceed with a case-by-case assessment. In practice, transfer pricing adjustments are often calculated on a flat-rate basis, which makes it impossible to attribute the price change to the specific underlying transactions. As a result, such adjustments are often excluded from the scope of VAT. However, the ruling highlights that such exclusion is not automatic, leaving room for circumstances where VAT may still be applicable.