This article focuses on the value-added tax (VAT) impact of transfer pricing. Conceived as a consumption tax, generally the economic burden of VAT is only imposed on the end-consumer. Therefore, transfer-pricing decisions between companies or business entrepreneurs do not generate implications from a VAT angle. However, this neutrality principle does not apply to entities carrying on exempt activities. In the exempt sectors, overvaluated or undervaluated transactions may produce the erosion of VAT. The Rationalization Directive (2006/69/EC) constitutes the Community answer to the rising concern of a number of Member States confronted with VAT avoidance practices between related parties, allowing national laws to adopt the objective valuation criterion – the normal market value – although under narrow conditions. Portuguese law recently introduced a VAT transfer-pricing system limited to immovable property operations.
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