- Parties Involved:
- ALFA: A company with its legal seat in an EU country, registered for VAT in Italy.
- Beta USA: A US-based company that is part of the same multinational group as ALFA.
- Nature of Transactions:
- ALFA imports goods into Italy, processes them, and exports finished products to Beta USA, which handles their distribution in the US market.
- Transactions between ALFA and Beta USA are governed by the Group’s Transfer Pricing (TP) policy, ensuring Beta USA’s profitability aligns with the arm’s length principle.
- Transfer Pricing Adjustments:
- ALFA makes TP adjustments to ensure Beta USA’s operating margin is consistent with its functional profile and the arm’s length principle.
Pre-November 2023 Practice:
- Invoicing Method:
- Initial Invoice: Issued at the time of export, covering about 5% of the total amount due from Beta USA.
- Second Invoice: Issued later (between five months to a year and a half after the initial invoice), covering the remaining 95% of the total amount. This second invoice is intended to adjust Beta USA’s margin to meet the arm’s length principle.
- TP Policy:
- The TP adjustments are made to align Beta USA’s profitability with the arm’s length standard.
Post-November 2023 Practice:
- Invoicing Method:
- First Invoice: Issued at the time of export, including the full TP value of the goods.
- Second Invoice: An additional true-up invoice issued later to adjust the total invoiced amount to the final TP value, ensuring Beta USA’s margin is within the arm’s length range.
- TP Adjustments:
- The second invoice (true-up invoice) is meant to bring the total amount invoiced to the final TP value.
Tax Authority’s Analysis and Conclusion:
- General VAT Principles:
- VAT is based on the actual consideration received, not an estimated value.
- TP adjustments are relevant for VAT if they modify the originally agreed consideration for specific intra-group transactions.
- Pre-November 2023:
- The tax authority concluded that the entire amount of the second invoice (95%) should be considered as part of the consideration for the exported goods, making it relevant for VAT purposes.
- Both invoices should be issued under the non-taxable regime for exports as per Article 8 of the Italian VAT Decree.
- Post-November 2023:
- If the second invoice is purely for adjusting Beta USA’s margin and not directly related to the consideration for the goods exported, it may not be relevant for VAT.
- The tax authority requires clear documentation to substantiate the nature of the second invoice.
Source: agenziaentrate.gov.it
Note that this post was (partially) written with the help of AI. It is always useful to review the original source material, and where needed to obtain (local) advice from a specialist.
