CSE4000 - How the conditions are to be interpreted: Direct Reimbursement of Costs: If the direct tax transfer pricing rules apply will they preclude use of the exemption as affected transactions may not comply with the 'exact reimbursement of costs' rule?

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No. HMRC accepts that pricing or repricing transactions under direct tax transfer pricing rules will not preclude use of the exemption.

However, if the actual pricing of the charge by the CSG to its members exceeds the cost of the expenses incurred (e.g. an uplift is charged for transfer pricing purposes), such transactions would not qualify for the exemption. This was confirmed by the Advocate General’s Opinion in the case of DNB Banka (case C-326/15) and remains the position after 31 December 2020.

Where a CSG includes connected members for transfer pricing purposes, regardless of the tax position of the connected members, the unconnected members will still have to receive ‘qualifying supplies’ without a margin or mark-up to meet this condition and to benefit from the exemption.

However if any transfer pricing adjustment is only included in the appropriate direct tax returns, and the charging remains at cost, then we don’t consider that this breaches the ‘exact reimbursement’ condition, provided of course that the direct tax cost is met by the appropriate member.

Please note: a transfer pricing adjustment is not in itself a supply nor consideration for a supply. It is an indication that transactions or arrangements may not have been undertaken at an ‘arm’s length’ price. It may therefore point to an under valuation of the underlying supply for VAT purposes. Further information regarding transfer pricing and VAT can be found in VAT Guidance, V1-12: Valuation.