On December 12, 2024, the Court of Justice of the EU (CJEU) passed judgment in a case concerning the VAT deduction of the purchase of intercompany, cross-border administrative services by a Romanian entity. Our experts discuss the Weatherford Atlas judgment and whether it has a broader impact on the interplay between VAT, direct taxes and Transfer Pricing (TP).
Shareholder costs?
Weatherford Atlas Gip (hereinafter ‘WAG’) is a company that provided oil drilling services. WAG is based in Romania and belongs to the Weatherford group. In the context of its economic activities, it purchased administrative services (including IT, marketing, accounting and HR services) from other group companies that were based outside of Romania. The Romanian tax authorities took the position that the costs of these services constituted so-called shareholder costs, and denied deduction of the reverse charged VAT on account of the argument that the services were not linked to the taxed output transactions of WAG. Moreover, the purchase was deemed to be inappropriate and unnecessary for the economic activity of WAG. WAG challenged the decision.
CJEU: necessity and appropriateness irrelevant for VAT deductibility
The CJEU rules that the right to deduct input VAT is dependent on the existence of a direct and immediate link between the costs on the one hand, and the taxed output transactions (or the economic activity as a whole) of the taxable person on the other hand. It is not relevant whether the services are provided simultaneously to several recipient group companies. Furthermore, the deduction of input VAT does not depend on the economic profitability of the purchases, following which their necessity and appropriateness are also deemed irrelevant.
The outcome is that in this case, the Romanian tax authorities are not allowed to deny deduction, as long as the legal criteria of the VAT Directive have been met.
Are VAT and cost deductibility linked?
Although this judgement appears to show an overlap between VAT and direct taxes (and a segue into Transfer Pricing), this is not in fact the case. The Romanian tax authorities take the position that VAT deduction is not possible as a result of allocation issues which appear similar to issues faced in TP and direct taxation. However, due to its firm basis in EU law and taking into account VAT neutrality, VAT is treated as a standalone tax that is independent from other (direct) tax law systems. Therefore, in principle, the non-deductibility for corporate tax purposes should not be leading when looking at input VAT deduction.
In our view, the CJEU judgment in the Weatherspoon case reflects this ‘standalone’ approach. The European Court underlines that VAT deduction is to be judged based on the legal criteria of the VAT Directive.
The tax authorities cannot simply deny VAT deduction if they deem certain purchases to be inappropriate or unnecessary. We agree with this line of reasoning, as deduction would otherwise become dependent on subjective rather than objective criteria – which would not be neutral and consistent.
Do transfer pricing corrections influence VAT deductibility?
In some cases, transfer pricing corrections should be assessed from a different perspective. The Weatherford Atlas case does not change this: it does not mention excluding TP adjustments from influencing the VAT treatment of transactions. It is important to bear in mind that VAT implications should be assessed on a standalone basis. A clear distinction must be made between different types of transfer pricing corrections and their possible effect on the VAT position, as we discuss in this article.
Case closed?
Although the verdict in the Weatherford Atlas case appears clear, we note that there are several more cases on the interplay of TP and VAT currently pending. These include for example the Stellantis and Acromet cases, where it remains to be seen what the outcomes will be. It cannot be excluded that the CJEU will at some point indeed create certain (inter)dependencies between concepts or rules in TP, direct taxes and VAT.
If you would like to know more about what implications this case may have for your VAT position, please contact Marisa Hut or Stevie Mols.
The legislation and regulations in this area may be subject to change. We recommend that you discuss the potential impact of this with your Baker Tilly advisor.
