The Italian tax authority issued an assessment to EPTA S.p.A. for FY 2015, adjusting its taxable income by €4,119,149.00 in relation to a controlled transaction with a Hungarian company, Epta International KFT. The adjustment was linked to the fact that the Hungarian subsidiary’s financial statements for the year ended 31 December 2015 reflected that the Hungarian tax authorities recognised a tax benefit allowing a downward tax adjustment of €4,742,659.00 under the heading “transfer price” (18 par), and the tax authority treated the absence of a corresponding increase in Italy as supporting the upward adjustment in Italy.
EPTA S.p.A. challenged the assessments. The Provincial Tax Commission of Milan rejected the joint appeals. On appeal, the Lombardy Court of Appeal upheld the company’s appeal and considered, in substance, that the tax authority had not demonstrated a determination of “normal value” and had not proven a transaction at an under price compared with normal value, so it treated the arm’s length provision relied upon by the tax authority as not relevant on the facts.
An appeal was then filed by the tax authority with the Supreme Court.
Judgment
The Court of Cassation upheld the tax authority appeal, quashed the Lombardy Court of Appeal judgment, and remitted the case for a new assessment on the merits. It reasoned that the arm’s length provision for cross border related party transactions is aimed at preventing artificial profit shifting. It held that the tax authority bears an initial burden to show that intra group transactions occurred at a price below normal value, after which the taxpayer may provide evidence to the contrary. It considered that, on the facts described, the tax authority had provided evidence of a price reduction through the Hungarian downward adjustment based on OECD criteria, and that the absence of a corresponding upward adjustment in Italy supported the finding of double non taxation. It stated that if the taxpayer contested the adjustment, it needed to prove that the agreed consideration or lack of consideration corresponded to market values and that the tax authority’s assumption was incorrect.
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