Weatherford Atlas: a VAT case with a broader impact?

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.

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.

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 our Baker Tilly International network partners in the Netherlands discuss in this article.