Spain: Use of cost-sharing agreements to recover input VAT

Spain: Use of cost-sharing agreements

The tax authority (Dirección General de Tributos—DGT) favorably responded to a taxpayer request for recognition of a cost-sharing agreement. The taxpayer (a multinational insurance company) had a structure in Spain that did not allow for the creation of a group for value added tax (VAT) purposes. Thus, it requested that a cost-sharing agreement be recognized so as to enhance the efficiency of the taxpayer’s economic and organizational structure.

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The DGT’s allowance of the use of the cost-sharing agreement opens a new way to structure the provision of shared services between entities that have a limited right to recover input VAT (such as those in the financial and insurance sectors).

Cost-sharing agreements are efficient alternatives for the provision of shared services. The DGT in this situation examined cost-sharing agreements for VAT purposes pursuant to Chapter VIII of the OECD Transfer Pricing Guidelines and also under case law of the Court of Justice of the European Union. Under cost-sharing agreements, each participant makes certain contributions that, in principle, are aligned with the expected benefits. These contributions are made in the form of services rendered for the benefit of other participants. When there is a mismatch of benefits against the contributions made under the agreement, an adjustment by means of a compensatory payment is made.

The DGT considered certain requirements such as that there must be a legal relationship between service provider and its recipient, within which reciprocal benefits are exchanged, and that the remuneration received by the party providing the service matches the value of the service provided to the recipient. The DGT concluded that the reciprocal provision of services, pursuant to a cost-sharing agreement in proportion to the participation in it of each of the participating entities, cannot be considered to be the provision of services for consideration and, therefore, is not subject to VAT.

On the other hand, the DGT found that compensatory payments made to adjust the profit obtained by each of the participating entities would constitute consideration for the services provided and as such would be subject to VAT.


KPMG observation

The conclusions reached by the DGT with regard to cost-sharing agreements may offer useful guidance to taxpayers—in particular, entities in the financial and insurance sectors—as to how they can effectively arrange for the provision of services between entities so as to allow for recovery of input VAT. This treatment may apply even in instances when the services are provided between entities established in different jurisdictions. Thus, the use of qualifying cost-sharing agreements may result in a reduction in the tax base for VAT purposes.

Read an October 2020 report (Spanish) [PDF 130 KB] prepared by the KPMG member firm in Spain

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