Facts

Weatherford Atlas Gip is part of the Weatherford group, specializing in oilfield services. On June 6, 2016, Weatherford Atlas Gip acquired Foserco SA (Foserco), a Romanian company. Foserco (now Weatherford Atlas Gip) provides auxiliary services for the extraction of oil and natural gas.

In 2015 and 2016, Foserco provided drilling services in Romania. For this purpose, general administrative services - such as IT, human resources, marketing, accounting, and consulting – were purchased by Foserco from other related companies within the Weatherford group established outside of Romania. The reverse charge mechanism was applied. As these services are also provided to other related companies within the Weatherford group, part of the service cost was allocated to Foserco.

The Romanian tax administration refused the right to deduct VAT on these services charged to Foserco. The reasons for this refusal relate to the absence of a demonstrated link between the perceived services and the taxable activities of Foserco and to insufficient evidence provided by Foserco.

Although the existence of the services was not denied, the Romanian tax administration questioned the necessity of the perceived services for Foserco as the services were not only provided to Foserco, but shared among various members of the Weatherford group. The Romanian tax administration considered these costs as so-called ‘shareholder costs’ and therefore these costs could not be allocated to the subsidiaries, which led to a refusal of the right to deduct VAT.

Referring questions

The case was then brought before the Romanian Regional Court who referred the matter to the Court of Justice. The main question in the proceedings concerned whether the right to deduct VAT paid by Foserco on intracompany services may be denied, given that these services were simultaneously provided to other related companies in the group and that their supply was deemed neither necessary nor appropriate.

Decision

The Court of Justice ruled in favor of Weatherford by stating that the refusal of VAT deduction is contrary to the VAT Directive.

According to well-established case-law of the Court of Justice, the right to deduct input VAT is fundamental to the common system of VAT, reflecting the principle of neutrality. To be entitled to this right, the existence of a direct and immediate link between a particular input transaction and a particular output transaction is, in principle, necessary.

As far as the supplied services in question enabled the taxable person to carry out their VAT taxable transactions, this gives a right to deduct the input VAT. The extent of this right is determined in light of the economic and commercial reality of the supplied services in question, where the burden of proof lies with the taxable person to establish the existence of a connection to the person’s taxable activities.

The Court of Justice considered the fact that the services were provided simultaneously to several related companies as irrelevant in this regard. It is, however, up to the referring court to determine which proportion of the costs relating to the services actually corresponds to the services received for the purposes of the taxable person’s own taxed output transactions.

Lastly, the Court reiterated that the right to deduction is not conditional on the economic profitability of the VAT taxable activity. Thus, the subjective reasoning of whether the supply of the administrative services at issue was necessary or appropriate for Foserco is also left out of consideration.

Relevance for practice

The above judgment highlights the importance of carefully considering the VAT implications of a group’s TP policy. On the one hand, an arm’s length price determined for a given transaction may not necessarily be accepted for VAT purposes (e.g., TP year-end adjustments when applying the TNMM method). On the other hand, an upward TP adjustment imposed by tax authorities could also result in adverse VAT consequences under similar circumstances (e.g., when service cost allocations are challenged from both a direct and indirect tax perspective).

In light of these developments, businesses are advised to maintain robust documentation that supports both the arm’s length nature of their TP policy and the corresponding VAT treatment.

Next?

After the Wheaterford case, the Court of Justice will address other VAT questions on TP matters like the applicability of VAT on TP year-end adjustments (Arcomet Towercranes), taxable amount of services provided by a parent company to its subsidiaries (Hogküllen) or contractual price adjustments (Stellantis Portugal).

We will keep you informed of further developments in this respect. Should you have any questions, please contact a member of our Indirect Tax team or your trusted Loyens & Loeff adviser.