In the case of a retrospective discount or transfer pricing adjustment there may be VAT consequences for both parties involved in a transaction. In the recently decided World Comm Trading case, the European Court of Justice (ECJ) ruled that if a rebate is given on an overall invoice for both intra-Community and domestic supplies, the customer must correct the VAT deducted. This judgement is also of importance for retrospective transfer pricing adjustments.
World Comm purchased mobile phone products from Nokia. These included both supplies of products from other EU Member States (intra-Community supplies) and domestic supplies. Nokia charged VAT on its domestic supplies to World Comm, which World Comm deducted. Each quarter World Comm received quantity discounts by means of a single credit note when it purchased a certain quantity of products from Nokia. The credit note did not specify the type of supplies for which the discount was given. World Comm did, however, deduct the rebate in full from intra-Community supplies made during that period. In dispute was whether the rebate should also be attributed to domestic supplies and whether the VAT deducted should, therefore, be adjusted as a result. The ECJ held that an adjustment must be made because the rebate reduced the taxable amount of the domestic supplies. The fact that World Comm had a single credit note did not change that. Similarly, according to the ECJ, the fact that Nokia did not revise the VAT (and Nokia did not apply for a refund of VAT) does not mean that World Comm does not need to adjust the VAT deducted.
The question raised by the decision is how to revise the deductible VAT now that there is a quantity rebate that covers all goods in a period. In our opinion, an allocation based on the number of goods is most appropriate if the quantity discount is based on the quantity of products sold. However, if the quantity discount is based on the sales made by the seller to the buyer, then an allocation based on the fees paid is most appropriate.
The situation in which a single amount is invoiced that relates to different transactions also is relevant in the case of year-end adjustments in the field of transfer pricing. Such an adjustment, which results in a price adjustment for VAT, may have an impact on the adjustment of VAT deductions. In the case of transfer pricing adjustments, it is clear that the adjustments relate to transactions that took place in a given period. Where VAT has been charged to the customer by the supplier for some transactions, it would appear from the World Comm case that an adjustment of the deducted VAT should take place. Prior to the World Comm case, scholars held that an attribution to an individual supply is required for a VAT adjustment in the case of transfer pricing adjustments. The World Comm case shows that, according to the ECJ, it is not required that an allocation be made on an individual basis for each supply. As a result, we believe companies should carefully consider the VAT consequences of their transfer pricing adjustments and consult their VAT advisor.
Madeleine Merkx
madeleine.merkx@bdo.nl
Anne Janssen
anne.janssen@bdo.nl