For a long time it was generally assumed that VAT and transfer pricing worked independently of one another and did not interact.
In recent years, however, tax authorities have increasingly tried to link transfer pricing adjustments to VAT in order to generate additional revenue. Their argument is usually that adjusting transfer prices changes the value of a transaction and therefore has to affect the VAT on it as well.
In practice this approach creates considerable difficulties and can lead to substantial VAT assessments after the event. Unsurprisingly, companies often reject the interpretation, and disputes have already reached the courts.
Two systems with different purposes
The core problem lies in the fundamentally different purposes of the two systems:
- From a VAT perspective the taxable amount is generally the consideration actually paid for a supply. That often matches the market value, but VAT does not as a rule require pricing at market value — except in certain abuse cases governed by Articles 72 and 80 of the VAT Directive. Those provisions are intended to prevent intra-group transactions from producing unjustified VAT advantages, particularly where input VAT cannot be recovered in full.
- Transfer pricing rules, by contrast, aim to establish the arm’s length price for transactions between associated enterprises. That may involve analysing specific transaction prices or testing profit margins in order to determine the result that would be expected between independent parties.
Because of these different underlying principles, it is not straightforward to determine how transfer pricing adjustments ought to affect VAT.
Why an adjustment usually has no VAT consequence
A transfer pricing adjustment generally indicates that the value of an intra-group transaction was not at arm’s length and has to be corrected. For VAT purposes, however, it is in principle immaterial whether a price is above or below market value — what counts is the consideration actually received, apart from the narrowly defined anti-abuse cases.
VAT also requires a direct link between a supply and the consideration for it. A transfer pricing adjustment could in theory affect the taxable amount, but in practice most adjustments are based on profit analyses rather than on revaluing individual supplies. They therefore often cannot be attributed clearly to particular transactions.
Seen from that angle, VAT adjustments are generally not required — unless the method applied points clearly to specific transactions concerned. Official guidance confirming this view does not currently exist.
A further question is whether adjustments prompted by a tax audit should have VAT consequences at all, since they usually affect only the audited company and not its counterparty in the transaction.
The CJEU cases of 2025
In 2025 more clarity was hoped for from two cases before the Court of Justice of the European Union (CJEU):
Arcomet Tower Crane (Case C-726/23)
Here the CJEU had to decide whether payments by a subsidiary to its parent resulting from a transfer pricing adjustment count as consideration for a supply for VAT purposes. The Advocate General took the view that such payments should be treated as taxable consideration for a service. Although the opinion is not binding, Advocates General’s opinions often carry considerable weight in the Court’s decision — which could suggest that the VAT rules may take precedence over transfer pricing principles.
Högkullen AB v Skatteverket (Case C-808/23)
This case concerned whether services supplied by a holding company to its subsidiaries have to be charged at market value. The Swedish tax authority argued that recharging only part of the cost (without overheads) would produce a VAT advantage. The CJEU made clear, however, that each service has to be examined individually and may not be treated as a single bundled supply.
Both cases show that the CJEU is proceeding cautiously where the complex interface between transfer pricing adjustments and VAT is concerned. Despite these judgments, comprehensive guidance is still not available.
What this means for companies
The greatest risk is that tax authorities in the EU will increasingly classify certain transfer pricing adjustments as taxable supplies. The Advocate General’s view in Arcomet suggests that the VAT rules may override the outcome of a transfer pricing review.
Companies with subsidiaries in the EU should therefore review their transfer pricing adjustments carefully, to make sure they do not trigger VAT obligations unintentionally.