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Insights Italy: Transfer pricing adjustments and value added tax

Italy: Transfer pricing adjustments and value added tax

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​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​published on 9 september​ 2025 | reading time approx. 2 minute​s​
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It is well known that routine companies (very often so-called “limited risk distributors”) in particular are monitored at the net margin level (usually on the basis of “return on sales,” “ROS”) by applying the Transactional Net Margin Method (“TNMM”). If the prices charged during the year for the purchase of goods from affiliated foreign companies result in the corresponding ROS not being in line with the arm's length principle, periodic transfer pricing adjustments in the form of compensation payments (so-called “TP adjustments”) are made to ensure to bring the result in line with the arm's length principle.

 

 

In its letter “Risposta n. 214/2025” dated August 20, 2025, the Italian tax authority once again commented on the issue of whether TP adjustments are relevant for VAT purposes and hereby confirms the prevailing international and national view (see also: “Working Paper n. 923 / 2017” of the EU Commission / Letter “risposte a interpello nn. 60/2018 e 529/2021” from the Italian tax authorities) that three conditions must be met for this to be the case: the transaction must be eligible for remuneration; the transaction to which the transfer pricing adjustment relates must be identified; and there must be a direct link between the goods and services and the TP adjustment.


The reason why TP adjustments are not relevant for VAT in the vast majority of cases is usually linked to the third point, i.e., the requirement that there be a direct link between the goods and services and the TP adjustment. A TP adjustment is generally determined on the basis of the total ROS resulting from the resale of a large number of goods and thus from various transactions with foreign affiliated companies. It is usually virtually impossible to determine how individual products have contributed to the net profit. For this reason, TP adjustments are usually calculated on a flat-rate basis and there is no direct link between the goods and services and the TP adjustment.

 The facts underlying “Risposta n. 214/2025” basically confirm the above. During a tax audit, the Italian tax office denied the VAT relevance of the TP adjustments because the TP adjustment was calculated on a flat-rate basis and therefore no direct link between the goods and services and the TP adjustment could be identified. The taxpayer then changed the intercompany agreement and the billing method to make the TP adjustments relevant for VAT purposes. The main change was that he now creates documentation that includes the individual invoices for the goods deliveries and an allocation of the TP adjustment to the individual invoices (known as a “breakdown”). Only by assigning the TP adjustment to the individual invoices is the requirement that there must be a direct link between the goods and services and the TP adjustment fulfilled. If this “breakdown” did not exist, the TP adjustment would still not be relevant for VAT purposes.

Because TP adjustments are calculated on a flat-rate basis in the vast majority of cases and it is virtually impossible to allocate the TP adjustment to the individual underlying transactions, TP adjustments are generally not relevant for VAT purposes in practice. However, as this is not always the case, it is always advisable to check each individual case.​

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