Stellantis Portugal: TP adjustments, reimbursements and VAT. Why economic cost recovery is not enough

The CJEU judgment in Stellantis Portugal, C-603/24 is potentially very useful when analysing UAE VAT issues around reimbursements, disbursements and compensation-type payments.

The practical issue is familiar: one group company incurs costs, and the commercial or transfer pricing mechanism ensures that another group company economically bears those costs. The question is whether that economic cost recovery creates a VAT-taxable supply, or whether it should instead be treated as outside the scope of VAT or as an adjustment to the price of another supply.

The UAE FTA’s public clarification on Disbursements and Reimbursements No. VATP013 starts from the distinction between expenses incurred as agent and expenses incurred as principal:

a disbursement, where a person pays on behalf of another, is outside the scope of VAT;

a reimbursement, where a person incurs expenses as principal and recovers them, is generally part of the consideration for the main supply.

The clarification also stresses that the analysis must be holistic and based on all facts and circumstances.

The FTA’s clarification on Compensation-type Payments No. VATP001 uses a similar functional test:

VAT is due only where there is a supply of goods or services for consideration;

if the payment does not relate to a supply, it is not subject to VAT.

A taxpayer must examine the underlying arrangements to determine whether the payee has provided anything in return for the payment. The FTA also asks whether the payment is consideration for previously agreed supplies, for a newly created supply, or whether its purpose is to adjust the consideration for a previously agreed supply.

This is where Stellantis Portugal judgement becomes particularly helpful.

In that case, the Portuguese distributor incurred repair and warranty-related costs. Those costs were included in a broader transfer pricing formula designed to ensure that the distributor achieved its agreed arm’s length margin. The tax authority argued that the TP adjustment was, at least in part, consideration for repair services supplied by the distributor to the manufacturers. The CJEU rejected that approach on the facts submitted. The Court held that TP adjustments designed to secure a target margin do not, in themselves, constitute consideration for a separate service; there must be a direct link between an identifiable service and the payment, arising from a legal relationship with reciprocal obligations.

The important point is that the Court did not treat economic compensation of costs as sufficient. The fact that repair costs affected the formula did not mean that the distributor supplied repair services to the manufacturers. The repair costs were only one parameter in a wider profit-level adjustment, together with other operating costs. Any link between the alleged repair service and the TP adjustment was therefore, at most, indirect.

The correct test, in my view, is therefore the following:

Is there a legal relationship with reciprocal commitments under which the alleged supplier undertakes to provide an identifiable service to the payor?

Is there a direct link between that identifiable service and the payment, so that the payment is the actual consideration for that service

If the payment is not consideration for a separate service, is it instead a price adjustment to an earlier supply of goods or services?

This third step is essential and should not be overlooked. Stellantis Portugal is not only relevant because it rejects the taxable-service characterisation. It is also important because the Court recognised that the TP adjustment may instead operate as a subsequent amendment of the price of the vehicles supplied by the manufacturers to the distributor. That issue was left for the national court to assess, but the direction of the analysis is significant.

This matters for both parties.

For the party supplying the goods or services whose price is effectively reduced by the TP adjustment, the adjustment may support a reduction of the VAT taxable amount of that underlying supply, provided the relevant VAT credit note and adjustment rules are satisfied. In an import context, the same economic point may also be relevant to import VAT, and potentially to customs duties or excise, although those consequences require separate analysis under customs and excise rules.

For the party receiving the economic compensation through the TP mechanism, Stellantis Portugal supports the argument that it should not automatically charge VAT as if it had made a separate taxable service, reimbursement or recharge. The decisive question is not whether its costs were economically taken into account, but whether it supplied something identifiable in return for the payment.

Therefore, the practical lesson is not that every TP adjustment is outside the scope of VAT. Nor is it that every cost-based adjustment is a taxable reimbursement. The better conclusion is that a TP adjustment must be characterised by reference to the legal and economic relationship between the parties:

if the adjustment remunerates an identifiable service, it may be taxable;

if it is merely a mechanism for achieving an arm’s length margin, without reciprocal obligations and without a direct link to a specific supply, it should not be treated as consideration for a separate taxable service; and

if the adjustment changes the price actually paid for the underlying goods or services, its VAT effect should be analysed as a possible price adjustment to that underlying supply.

That is why Stellantis Portugal may be a useful authority when dealing with the UAE FTA’s public clarifications on reimbursements, disbursements and compensation-type payments. It reinforces a simple but important proposition: VAT follows the supply and the consideration for that supply, not merely the economic transfer of costs within a group.

VATP001: the missing category between compensation and taxable service

VATP001 does not directly address transfer pricing adjustments or target-margin true-ups. However, its framework is highly relevant. A Stellantis-type adjustment should be tested against the VATP001 questions: is the payment consideration for a previously agreed supply, consideration for a newly created supply, or an adjustment to the consideration for an existing supply?

The CJEU judgment is helpful precisely because it shows that an economic cost-recovery effect is not enough to create a new taxable service. If there is no identifiable service and no direct link between that service and the payment, the adjustment should not be treated as consideration for a taxable service. The remaining question is whether it adjusts the price of the underlying goods or services.

VATP013 and Stellantis Portugal: why “not a disbursement” does not automatically mean “taxable reimbursement”

The interaction between VATP013 and Stellantis Portugal is particularly interesting because, at first sight, the facts in Stellantis do not comfortably fit the UAE FTA’s disbursement examples.

In VATP013, the FTA distinguishes between a disbursement and a reimbursement. A disbursement normally arises where the taxable person pays an amount on behalf of another person, and the third-party supplier is in substance supplying that other person. A reimbursement, by contrast, arises where the taxable person incurs the expense as principal and later recovers it from the customer. In that case, the recovered amount will generally form part of the consideration for the taxable person’s own supply. The FTA’s public clarification therefore looks closely at matters such as who received the supply, who was contractually liable to pay, whose name appears on the tax invoice, and whether the cost was separately identified and recovered at the exact amount.

On the Stellantis facts, the repair services were apparently supplied by dealers to the distributor. The dealers invoiced the distributor, not the manufacturers. That means that, if one applies the VATP013 evidential indicators mechanically, the repair costs would probably not qualify as disbursements. The distributor did not appear to pay the dealers merely as an agent for the manufacturers.

So, under the VATP013 disbursement/reimbursement framework, one might initially be tempted to say:

if this is not a disbursement, it must be a reimbursement; and

if it is a reimbursement, the distributor must charge VAT on the amount economically compensated by the manufacturers.

But that is precisely where Stellantis Portugal becomes useful.

The CJEU’s analysis shows that the conclusion does not stop at “not a disbursement”. Even where the cost-incurring party acts as principal vis-à-vis the third-party supplier, it is still necessary to ask a further VAT question: is the subsequent payment or adjustment consideration for an identifiable supply made by that cost-incurring party to the other group company?

In Stellantis, the Court focused on whether there was a legal relationship with reciprocal performance and a direct link between the alleged service and the consideration. The repair and warranty costs were part of a wider transfer pricing formula designed to secure the distributor’s target margin. They were not, by themselves, proof that the distributor supplied repair services to the manufacturers for remuneration. The Court therefore held that TP adjustments designed to ensure a distributor’s target margin do not, in themselves, constitute consideration for a separate supply of services.

This is an important refinement of the VATP013 analysis. VATP013 may help determine whether a cost recovery is a true disbursement. However, if the arrangement fails the disbursement indicators, the answer should not automatically be that the amount is a taxable reimbursement. The taxpayer must still identify the actual supply for which the alleged reimbursement is consideration.

In other words, there are at least three possible classifications:

Disbursement — the taxpayer pays a third party on behalf of another person. The recovery is outside the scope of VAT.

Taxable reimbursement / recharge — the taxpayer incurs the cost as principal and recovers it as part of the consideration for its own identifiable taxable supply.

Price or transfer pricing adjustment — the cost is economically reflected in a pricing formula, but there is no separate identifiable supply by the cost-incurring party. In that case, the adjustment should not be treated as consideration for a separate service merely because it compensates costs.

This third category is the key Stellantis contribution.

The judgment is especially helpful for TP adjustment cases because the adjustment may economically compensate costs incurred by one party, while legally operating as an amendment to the price of another supply. In Stellantis, once the Court rejected the characterisation of the adjustment as consideration for repair services, it indicated that the adjustment might instead be analysed as a subsequent amendment of the price of the vehicles supplied to the distributor. That is significant for both sides of the transaction.

For the manufacturer or supplier of the underlying goods, the adjustment may support a reduction of the taxable amount of the original supply, subject to the relevant VAT credit note and adjustment rules. In an import scenario, the same commercial logic may also be relevant to import VAT and potentially customs duties or excise, although those areas require a separate analysis under their own valuation rules.

For the distributor or cost-incurring party, the judgment supports the argument that it should not automatically charge VAT on the TP adjustment as if it had supplied a repair, warranty, administrative or cost-recharge service. The decisive question is not whether its costs were economically taken into account, but whether it supplied something identifiable to the payor in return for the payment.

Therefore, a Stellantis-type adjustment may fail the VATP013 disbursement test because the third-party supplier invoiced the distributor and the distributor incurred the cost as principal. But that is not enough to make the adjustment a taxable reimbursement. The next and decisive question is whether the distributor made an identifiable supply to the manufacturer and whether the TP adjustment was consideration for that supply. If not, the adjustment should be analysed not as a taxable recharge, but potentially as a price adjustment to the underlying supply between the parties.

Again, this approach is also consistent with the broader UAE clarification on compensation-type payments, which asks whether the payment is consideration for a previously agreed supply, a newly created supply, or an adjustment to the consideration for an existing supply.

So the usefulness of Stellantis for VATP013 is not that it turns principal-incurred costs into disbursements. It does not. Rather, it shows that “not a disbursement” is only the beginning of the VAT analysis, not the end of it. A cost included in a TP formula is not automatically a taxable reimbursement. VAT still requires a supply, consideration, and a direct link between the two.

Disclaimer

This article discusses VAT rules in the UAE. It should be read with caution. The FTA may issue official guidance, clarifications, public notices, manuals, decisions or directives that affect the interpretation and practical application of the rules discussed in this article.

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”. The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

This article has not been commissioned, reviewed, approved or endorsed by the UAE MoF or the UAE FTA, or any other public authority. The author is not a policy maker and is not authorised to state, interpret or determine the official policy or position of any of those authorities.Accordingly, all interpretations, conclusions, proposals, assumptions, surmises, guesswork, and other comments in this article represent only the author’s humble personal opinion on the matters discussed. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.