Transfer prices – year-end assessments

Transfer prices – year-end assessments

Approaching the end of the year in international corporate groups raises the problem of evaluating transfer pricing.

Verification on transfer prices

Regardless of the method chosen for the determination of transfer prices, in fact, at the end of the year it is necessary to check whether the price applied to the transaction is infra-group, whether it is free to compete or not.

If, in fact, after due verification, the price applied is inconsistent with respect to the concept of free competition, adjustments will be necessary, through variation notes.

The VAT of the variation notes

In this regard, it is also worth highlighting the impact on VAT that such adjustments may have. In fact, the variation notes are relevant for VAT purposes when the following three conditions are verified: 1) the transaction to which the adjustment (the variation note) refers is clearly identifiable, 2) there is a consideration ( in kind or in cash), 3) there is a direct link between one and the other; that is to say that if the variation note is not referable (as often happens to us in the operations that we follow) to any transaction, the same is out of VAT.

On this point see the response of the Revenue Agency of 2 November 2018 and the working paper of the EU n. 923 of 28 February 2017.

The inherence of the chargeback for cost deductibility

A second theme that arises, at the end of the year, is the verification of the inference of intragroup charges that are made. In particular, the problem arises for the companies of the group residing in Italy that they are re-debited the costs and can deduct them only if the said costs respect the requirement of the inertia.

In more detail, the checks that must be carried out are two: in fact, first of all, regardless of the existence of a contract that provides for the recharging, the year-end check must firstly report the actual provision of intragroup services, through the production of all supporting documentation useful for this purpose.

Secondly, it will be necessary to demonstrate the necessity or otherwise the usefulness or functionality of these services to the activity of the resident company. In short, as mentioned, the inherent nature of the infragroup services provided must be demonstrated, ie their functionality to the activity of the company that benefited from it. In the absence of proof of these two elements (effective disbursement and functionality of the beneficiary company), the Italian company will not be able to deduct the intra-group costs.

At work therefore.
Daniele Di Teodoro
Chartered accountant
Statutory auditor