EU Gateway: Year-end TP adjustments & indirect taxes

20/05/25

Transfer pricing adjustments which are processed within a taxpayer’s statutory accounts before they are closed have more than just direct tax implications for multinational groups operating in the EU. The EU Gateway publication “Year-end transfer pricing adjustments and indirect taxes” highlights the importance of aligning transfer pricing outcomes with the arm’s length principle and addresses the potential VAT and customs implications of such adjustments. Furthermore, this EU Gateway publication emphasizes the need for correct and timely adjustments to ensure tax compliance and to reduce administrative burden.

What does this mean for your organisation?

Transfer pricing adjustments made within statutory accounts before closure are crucial for your organization, influencing both direct tax and broader VAT and customs compliance. These adjustments can significantly impact administrative burdens and costs by requiring careful attention to VAT implications, such as avoiding assessments or fines. Correct and timely adjustments are essential to navigate customs duties that may arise from year-end pricing changes, ensuring compliance and preventing unexpected financial liabilities. By prioritizing these adjustments, your organization can reduce risks and streamline tax-related processes.

Transfer Pricing adjustments in general

To achieve consistency with the arm’s length principle, taxpayers and/or revenue authorities may resort to making transfer pricing adjustments. Transfer pricing adjustments may be made in-period as a corrective measure, or after closing the relevant period as a year-end adjustment. These adjustments always need to be documented, and understanding jurisdictional differences is critical. Historically, in some jurisdictions, transfer pricing adjustments have been processed only by adjusting a taxpayer’s taxable base to align with the profits that would have accrued if arm’s length conditions had been applied. In other jurisdictions, particularly within the EU, accurately delineating non-arm’s length transactions and comprehending their consequential impacts is critical for the reasons outlined below.

For the purposes of this EU Gateway publication, we have considered only transfer pricing adjustments which are factored into a taxpayer’s books at or before closure of a relevant period.

VAT Considerations

From an EU VAT perspective, as a starting point the taxable amount is based on the subjective value of the consideration. In other words, it is the value which is actually received for a specific supply of goods or services, rather than a value based on objective criteria. As long as a value is not symbolic, it is considered the applicable transactional value for VAT purposes.

However, if a MNE operating in the EU carries out an (end of year) transfer pricing adjustments, this may also result in an adjustment for VAT purposes. More specifically, the taxable amount for a prior transaction might have to be adjusted downward or upward. In such a case, it should be analyzed for any such potential effects and therefore the issuance of any documentation (e.g. credit notes or invoices) becomes very relevant. If VAT effects are present, they can lead to significant administrative burdens and potential risks of VAT assessments, fines, and late payment interest liabilities if not dealt with properly.

Customs Implications

Transfer pricing adjustments for sales or purchases of products can impact customs valuation, particularly regarding importation, where services are usually not relevant. Payments for services related to imported goods like transportation, insurance, or royalties may be considered in determining customs value under the transaction value method, the most commonly used approach in the EU. Adjusted transfer prices can serve as the transaction value if they are at arm's length, meaning the relationship between entities didn’t influence pricing. Despite differing objectives between customs valuation and transfer pricing, arm's length prices can be acceptable for customs valuation. Year-end transfer pricing adjustments can affect the reported customs value by altering the price paid for imported goods, necessitating allocation to individual import entries. This adjustment must satisfy customs authorities, though EU practices vary following the Hamamatsu judgment of the European Court of Justice, EU customs accept transfer prices with reported adjustments and paid additional duties, though refunds for downward adjustments require prior agreements.

As a result, when year-end transfer pricing adjustments relate to the transfer prices used as the basis for the customs value of imported products, they become relevant for customs purposes. Upward adjustments will result in additional customs duties being charged. Consequently, it is important for companies to manage these adjustments carefully to avoid unexpected costs and ensure compliance with customs regulations.

Relevance for Pillar One (Amount B), Pillar Two and Country-by-Country Reporting

In anticipation of Pillar One (Amount B) and Pillar Two initiatives further progressing, year-end transfer pricing adjustments should also be considered in this context. We note in our publication that in the absence of guidance which outlines the preferred approach for dealing with transfer pricing adjustment post-year end, such adjustments may give rise to an increase in tax and/or administrative burden – double taxation, a requirement to adjust historical Pillar Two calculations, and incorrect CbCR or Pillar Two safe harbour calculations.