Transfer pricing adjustments fall outside VAT unless directly tied to specific supplies as price variations; otherwise, they are treated as profit allocations to align with arm’s length margins and not VAT-relevant.
Italy’s revenue agency released Letter No. 214/2025 on 20 August 2025, providing guidance on the VAT treatment of transfer pricing adjustments.
The case concerned an Italy-based distributor within a multinational group that periodically made transfer pricing adjustments to maintain arm’s-length margins, supported by detailed documentation showing the invoices affected. The taxpayer requested clarification on whether such adjustments should be included in the VAT taxable base.
The agency clarified that adjustments are subject to VAT when they directly modify the consideration for specific supplies and are contractually linked to the original transactions.
The European Commission Working Paper No. 923/2017 clarified that transfer pricing adjustments typically fall outside the scope of VAT, except where they constitute (i) payment for a separate service or (ii) an adjustment to the consideration of specific earlier supplies.
The revenue agency, in Ruling No. 60/2018, confirmed that transfer pricing adjustments affect VAT only if:
- They involve a monetary (or in-kind) settlement;
- They are linked to identifiable supplies;
- A direct link exists between supplies and the adjusted consideration.
There is no dedicated EU or Italian legislation governing the VAT treatment of transfer pricing adjustments. However, guidance can be found in the Commission’s Working Paper No. 923/2017 and the VAT Expert Group’s document 081 REV2/2018.
These clarify that transfer pricing adjustments generally fall outside the scope of VAT, except where they are contractually connected to changes in the consideration for specific supplies. In the absence of such a direct link, the adjustments are viewed as profit reallocations made to align with the arm’s length principle, and therefore have no VAT implications.
