The VAT treatment of transfer pricing adjustments has become one of the most topical tax issues of recent years. Due to the modification of Hungarian accounting rules and the contradictory judgments of the Court of Justice of the European Union (CJEU), the intersection of transfer pricing and VAT involves increasing interpretative uncertainty and potential risks – especially in light of the Hungarian tax authority’s recently published tax inspection plan, which places transfer pricing in the centre of its focus. Corporate groups therefore need to reconsider their existing practices.
A contradictory and intricate area
Recent CJEU case-law clearly illustrates the complexity of the VAT treatment of transfer pricing corrections:
- In C‑726/23 Arcomet-case, the Court concluded that, subject to certain conditions, even adjustments intended to ensure a guaranteed profit margin may fall within the scope of VAT.
- By contrast, the Advocate General’s Opinion in C‑603/24 Stellantis-case emphasises that profit sharing, in itself, cannot be regarded as consideration for a service.
The common message is that the VAT treatment of transfer pricing adjustments cannot be handled mechanically: the decisive factors are always the economic substance of the legal relationship and the contractual structure.
How to account for year-end transfer pricing adjustments
In Hungary, retrospective transfer price adjustments may be carried out in several ways:
- by amending invoices retroactively,
- by adjusting consideration through an accounting document, or
- by making a corporate income tax base adjustment only.
The chosen technique is not merely an administrative formality; it also affects the precise point within the arm’s length range to which the adjustment must be made.
A recent modification of the Hungarian legal framework introduced a more favourable interpretation: applying the median is no longer automatically required when the adjustment is made via an accounting document. At the same time, the timing of the adjustment has become more stringent: from 2025 onwards it must be performed no later than the balance sheet preparation date.
Applying the arm’s length principle is relevant not only for corporate income tax but also for other income-type taxes, which further increases the importance of appropriate documentation.
A new approach to transfer pricing adjustments and indirect taxes
The key difficulty in the VAT treatment of transfer pricing adjustments is that corporate income tax and VAT follow fundamentally different logic. While the former is designed to allocate profits, VAT taxes the consideration for specific economic supplies. Earlier professional approaches presumed that a VAT correction could arise primarily where a direct link existed between the adjustment and a specific transaction. However, Member State practices may differ, resulting in enhanced interpretative and compliance risks for companies.
The Arcomet-judgment: rethinking the concept of consideration
One of the core messages of the Arcomet-case is that profit‑based pricing mechanisms do not automatically exclude tax obligation. Where the contract specifies particular services and the pricing mechanism is clear and mandatory, the balancing payment may become part of the consideration for the service. At the same time, the Court reaffirmed that the existence of tax liability requires an objective and direct link between the supply and the payment, to be assessed in light of all relevant circumstances.
The judgment also highlights the practical conditions of exercising the right to deduct VAT. This right is not automatic: the tax authority may request further evidence proving that the service was actually supplied and served the taxable activity of the taxpayer. This makes the following documents indispensable, particularly for intra‑group services:
- detailed contractual background,
- performance confirmations,
- internal reports,
- cost allocation calculations.
The Stellantis-case: the need to move beyond a purely case-by-case approach
The Stellantis-case shows that the economic substance of the arrangement is decisive in determining the VAT treatment of transfer pricing adjustments. In the model examined, intra-group purchases were made at a predefined reference price, and at year‑end a retrospective adjustment was carried out based on actual costs and a target profit margin. The legal dispute centred on whether these balancing payments modified the taxable amount of previous supplies or should instead be viewed as financial settlements intended to ensure group‑level profitability.
The lesson of the case is that price corrections refining the consideration for the original transactions must be distinguished from adjustments serving a profit reallocation function. The former may trigger a VAT base modification, while the latter typically fall outside the scope of VAT.
For proper classification, the level of detail in the contractual pricing mechanism and the degree to which the adjustment is linked to specific supplies are determining. This requires companies to design their documentation and invoicing practices consciously.
Transfer pricing adjustments and customs valuation
Transfer pricing adjustments may also be relevant for customs valuation. According to the latest direction in EU case-law, profit‑driven adjustments may affect customs obligations even without modifying the price of specific transactions, creating additional compliance and administrative burdens for companies.
In light of recent CJEU decisions, a comprehensive review of corporate groups’ current transfer pricing and invoicing practices may be warranted. Coordinated management of corporate income tax and VAT requirements, clear contractual definition of pricing mechanisms, and detailed documentation of supplies have become essential to mitigate risks – especially given the increasing scrutiny of the authorities. Should you require professional support regarding the VAT treatment of transfer pricing adjustments, the transfer pricing advisers of WTS Klient Hungary are ready to assist.
This article provides general information and does not constitute advice.
