The tax authorities had notified the companies GKN Driveline Firenze s.p.a. and GKN Italia s.p.a. of four notices of assessment, relating to the tax periods from 2002 to 2005, as well as 2011. The assessments related to the signing of a leasing contract, concerning a real estate complex, between GKN Driveline Firenze s.p.a. and the company TA. p.a. and the company TAU s.r.l.. A property complex was owned by the company GKN-Birfield s.p.a. of Brunico and was leased on an ordinary lease basis by the company GKN Driveline Firenze s.p.a. Both companies belonged to a multinational group headed by the company GKN-PLC, the parent company of the finance company GKN Finance LTD and the Italian parent company GKN-Birfield s.p.a., which in turn controlled GKN Driveline Firenze s.p.a. and TAU s.r.l. GKN Driveline Firenze s.p.a. expressed interest in acquiring ownership of the real estate complex; the real estate complex, however, was first sold to TAU s. s.r.l. and, on the same date, the latter granted it to the aforesaid company by means of a transfer lease. Further negotiated agreements were also entered into within the corporate group, as the purchase of the company TAU s.r.l. was financed by the company GKN Finance LTD, at the instruction of GKN- PLC, for an amount which, added to its own capital, corresponded to the purchase price of the property complex. The choice of entering into the transferable leasing contract, instead of its immediate purchase, had led the tax authorities to suggest that this different negotiation had had, as its sole motivation, the aim of unduly obtaining the tax advantage of being able to deduct the lease payments for the nine years of the contract while, if the property complex had been purchased, the longer and more onerous deduction of the depreciation allowances would have been required. The office had therefore suggested that the transaction had been carried out with abuse of law, given that the transfer leasing contract had to be considered simulated, with fictitious interposition of TAU s.r.l. in the actual sale and purchase that took place between GKN Driveline Firenze s.p.a. and GKN Birfield s.p.a. The companies filed appeals against the aforesaid tax assessments, which, after being joined, had been accepted by the Provincial Tax Commission of Florence. The tax authorities then appealed against the Provincial Tax Commission’s ruling. The Regional Tax Commission of Tuscany upheld the appeal of the tax authorities, finding the grounds of appeal well-founded. The appeal judge pointed out that the principle of the prohibition of abuse of rights, applicable also beyond the specific hypotheses set forth in Art. 37bis, Presidential Decree no. 600/1973, presupposes the competition of three characterising elements, such as the distorted use of legal instruments, the absence of valid autonomous economic reasons and the undue tax advantage. In the case at hand, the distorted use of the negotiation acts was reflected in the fact that the leasing contract had been implemented in a parallel and coordinated manner with a plurality of functionally relevant negotiation acts in a context of group corporate connection in which each of these negotiation acts had contributed a concausal element for the purposes of obtaining the desired result. In this context, it was presumable that the company TAU s.r.l., which had been dormant for a long time and had largely insufficient capital, had been appropriately regenerated and purposely financed within the same group to an extent corresponding to the cost of the deal and that, therefore, the leasing contract had been made to allow GKN Driveline Firenze s.p.a. to obtain the resulting tax benefits. The appeal court nevertheless held that the penalties were not applicable. GKN Driveline Firenze s.p.a. and GKN Italia s.p.a. filed an appeal with the Supreme Court. Judgement of the Supreme Court The Supreme Court set aside the decision of the Regional Tax Commission and refered the case back to the Regional Tax Commission, in a different composition. Excerpts “The judgment of the judge of appeal moves promiscuously along the lines of the relative simulation of the agreements entered into within the corporate group and the abuse of rights, with overlapping of factual and legal arguments, while it is up to the judge of merit to select the evidentiary material and from it to derive, with logically and legally correct motivation, the exact qualification of the tax case. In the case in point, the trial judge reasoned in terms of abuse of rights, assuming that the leasing transaction was carried out in place of the less advantageous direct sale, in terms of depreciation charges, but, in this context, he also introduced the figure of relative simulation, which entails a different underlying assumption: that is, that the leasing transaction was not carried out, since the parties actually wanted to enter into a direct sale. Also in this case, no specification is made, at the logical argumentative level, of the assumptions on the basis of which the above-mentioned relative simulation was deemed to have to be configured. Having thus identified the legal terms of the question, the reasoning of the judgment does not fully develop any of the topics of investigation that are instead required for the purposes of ascertaining the abuse of rights, both from the point of view of the anomaly of the negotiating instruments implemented within the corporate group and of the undue tax advantage pursued, while, on the other hand, it appears to be affected by intrinsic contradiction, because it is based simultaneously on both categories, abuse of rights and relative simulation, so that it is not clear whether, in the view of the appeal court, the tax recovery is to be regarded as legitimate because the leasing transaction was aimed exclusively at the pursuit of a tax saving or because that undue tax advantage was achieved through the conclusion of a series of fictitious transactions, both in relation to the financing and to the aforementioned leasing transaction in the absence of any real transfer of immovable property. In conclusion, the sixth plea in law ...

K.P. is active in retail sale of computers, peripheral equipment and software. In December 2013 it had transfered valuable trademarks to its subsidiary and in the years following the transfer incurred costs in form of licence fees for using the trademarks. According to the tax authorities the arrangement was commercially irrationel and had therfore been recharacterised. Not satisfied with the assessment an appeal was filed. Judgement of the Provincial Administrative Court. The Court decided in favor of K.P.  According to the Court recharacterization of controlled transactions was not possible under the Polish arm’s length provisions in force until the end of 2018. Click here for English translation Click here for other translation ...

In 2016 the European Commission found that a Spanish tax regime constituted illegal state aid. The tax regime allowed for the deduction of goodwill in the case of acquisitions of shares in foreign companies. Spain and several companies appealed the decision. Judgement of the General Court The Court annulled the decision of the Commission. Click here for unofficial English translation ...

Tiger Flex was a fully fledged footwear manufacturer that was later restructured as a contract manufacturer for the Gucci Group. It had acquired goodwill which was written off for tax purposes, resulting in zero taxable income. The tax authorities disallowed the depreciation deduction. It found that the acquired goodwill had benefited the group as a whole and not just Tiger Flex. Tiger Flex filed an appeal with the Regional Tax Commission. The Regional Tax Commission decided in favour of Tiger Flex. The tax authorities then filed an appeal with the Supreme Court. Judgement of the Supreme Court The Court set aside the decision of the Regional Tax Commission and refered the case back to the Regional Tax Commission in a different composition. Excerpt “It is not disputed that the Tiger and Bartoli factories were profitable assets, endowed with productive and earning capacity. What is disputed, however, is the recorded purchase value which, legally spread over the decade, anaesthetises any contributory capacity, resulting in repeatedly loss-making activities. Hence the various censures on the quantitative, qualitative and inherent deductibility of such costs.” (…) “In the present case, an asset in surplus and capable of producing income was transformed into a loss-making asset with the entry of a depreciation value capable of absorbing its profits; whence the repeated conduct of the loss-making activity legitimised the Office to recover taxation, disallowing a cost that it considered to be to the advantage of the group and not inherent (solely) to Tiger Flex, recalculating it in its amount, with reversal of the burden of proof to the taxpayer who was unable to give a different answer, re-proposing the payment value entered in the balance sheet. On the other hand, the board of appeal imposed the burden of proof of inherence and consistency on the Office, whereas it had long been held that the breach of the precept set forth in Article 2697 of the Civil Code It has long been held that a violation of the precept set forth in Article 2697 of the Italian Civil Code occurs when the judge has attributed the burden of proof to a party other than the one that was burdened by the application of said provision, whereas, where, following an incongruous assessment of the preliminary findings, he erroneously held that the party burdened had discharged such burden, since in this case there is an erroneous assessment of the outcome of the evidence, it can be reviewed in the court of legitimacy only for the defect referred to in Article. 360, no. 5, c.p.c. (Court of Cassation no. 17313 of 2020). And finally, with regard to the assessment of income taxes, the burden of proof of the assumptions of the deductible costs and charges competing in the determination of the business income, including their pertinence and their direct allocation to revenue-producing activities, both under the provisions of Presidential Decree No. 597 of 1973 and Presidential Decree No. 598 of 1973, and Presidential Decree No. 917 of 1986, lies with the taxpayer. Moreover, since the tax authorities’ powers of assessment include the assessment of the appropriateness of the costs and revenues shown in the financial statements and returns, with the denial of the deductibility of a part of a cost that is disproportionate to the revenues or to the object of the business, the burden of proof of the inherent nature of the costs, incumbent on the taxpayer, also relates to the appropriateness of the same (see Court of Cassation V, no. 4554/2010, followed, e plurimis, by no. 10269/2017). The judgment under examination did not comply with this principle, which, finally, in its last paragraph, performs a sort of “resistance test”, i.e. that even if the burden of proof is placed on the taxpayer, it remains undisputed that after a number of years commensurate with the economic effort made, the balance sheet profit was achieved. This is not the profile of the decision, since the Office disputes precisely that for many years there was repeated loss-making conduct, Tiger Flex having taken on burdens not (exclusively) its own, but for the benefit of the entire Gucci group, so that – if ritually distributed – they would have enabled correct profitable conduct, with the consequent discharge of tax burdens.” Click here for English Translation Click here for other translation ...

K. S.A. had made an in-kind contribution to a subsidiary (a partnership) in the form of previously created or acquired and depreciated trademark protection rights for individual beer brands. The partnership in return granted K. S.A. a licence to use these trademarks (K. S.A. was the only user of the trademarks). The partnership made depreciations on these intangible assets, which – due to the lack of legal personality of the partnership – were recognised as tax deductible costs directly by K. S.A. According to the tax authorities the role of the partnership was limited to the administration of trademark rights, it was not capable of exercising any rights and obligations arising from the licence agreements. Therefore the prerequisites listed in Article 11(1) of the u.p.d.o.p. were met, allowing K. S.A.’s income to be determined without regard to the conditions arising from those agreements. The assessment issued by the tax authorities was later set aside by the Provincial Administrative Court. An appeal and cross appeal was then filed with the Supreme Administrative Court. Judgement of the Supreme Administrative Court. The Supreme Administrative Court upheld the decisions of the Provincial Administrative Court and dismissed both appeals as neither of them had justified grounds. The Provincial Administrative Court had correctly deduced that Article 11(1) of the u.p.d.o.p. authorises only adjustment of the amount of licence fees, but not the nature of the controlled transactions by recognising that instead of a licence agreement for the use of the rights to trademarks, an agreement was concluded for the provision of services for the administration of these trademarks. Excerpts “The tax authorities, in finding that the applicant had not in fact made an in-kind contribution of trademark rights to the limited partnership, but had merely entrusted that partnership with the duty to administer the marks, referred to Article 11(1) of the u.p.d.o.p. (as expressed in the 2011 consolidated text. ), by virtue of which the tax authorities could determine the taxpayer’s income and the tax due without taking into account the conditions established or imposed as a result of the links between the contracting entities, with the income to be determined by way of an estimate, using the methods described in paragraphs 2 and 3 of Article 11 u.p.d.o.p. However, these are not provisions creating abuse of rights or anti-avoidance clauses, as they only allow for a different determination of transaction (transfer) prices. The notion of ‘transaction price’ is legally defined in Article 3(10) of the I.P.C., which, in the wording relevant to the tax period examined in the case, stipulated that it is the price of the subject of a transaction concluded between related parties. Thus, the essence of the legal institution regulated in Article 11 of the u.p.d.o.p. is not the omission of the legal effects of legal transactions performed by the taxpayer or a different legal definition of those transactions, but the determination of their economic effect expressed in the transaction price, with the omission of the impact of institutional links between counterparties”  “For the same reasons, the parallel plea alleging infringement of Articles 191, 120 and 121(1) of the P.C.P. by annulling the tax authority’s legal rulings on the grounds of a breach of the aforementioned rules of evidence in conjunction with Articles 11(1) and 11(4) of the u.p.d.o.p. and holding that the tax authority did not correct the amount of royalties and the marketability of the transaction, but reclassified the legal relationship on the basis of which the entity incurred the expenditure, is also inappropriate. In fact, the assessment of the Provincial Administrative Court that such a construction of the tax authority’s decision corresponds to the hypothesis of the 2019 standard of Article 11c(4) of the u.p.d.o.p. is correct, but there was no adequate legal basis for applying it to 2012/2013 and based on Article 11(1) and (4) of the u.p.d.o.p. in its then wording. Failure to take into account a transaction undertaken by related parties deemed economically irrational by the tax authority violated, in these circumstances, the provisions constituting the cassation grounds of the plea, as the Provincial Administrative Court reasonably found.” “Contrary to the assumption highlighted in the grounds of the applicant’s cassation appeal, in the individual interpretations issued at its request, the applicant did not obtain confirmation of the legality of the entire optimisation construction, but only of the individual legal and factual actions constituting this construction, presented in isolation from the entire – at that time – planned future event. Such a fragmentation of the description of the future event does not comply with the obligation under Article 14b § 3 of the Code of Civil Procedure to provide an exhaustive account of the actual state of affairs or future event, and therefore – as a consequence – the applicant cannot rely on the legal protection provided under Article 14k § 1 or Article 14m § 1, § 2 (1) and § 3 of the Code of Civil Procedure.” Click here for English translation Click here for other translation ...

ESAB CZ was a contract manufacturer for ESAB Europe. The contract set ESAB CZ’s target profit margin for 2014 and 2015 at between 2,5 % and 3,5 %, with an adjustment to 3 % if the actual profit margin achieved was outside that range. Those values were determined on the basis of a benchmarking analysis which produced a minimum profit margin of 0,41 % and an interquartile range of profit margins between 2,14 % and 5,17 %. The benchmarking analysis were not disputed, but the tax authorities held that the cost base on which the markup was calculated should have included annual amortisations/depreciations. ESAB CZ disagreed and filed a complaint with the Regional Court. Judgement of the Court The court ruled in favour of the tax authorities. Excerpts “51. Furthermore, it should be emphasised that the applicant has not demonstrated that the asset allowance does not relate to the applicant’s contract manufacturing and has not demonstrated that it relates to any other activity, failing to identify any other specific activity relating to the allowance and the income generated from it. Nor is any such thing apparent from the applicant’s accounts, where the write-down of the impairment is booked in the area of contract manufacturing for a ‘related party’. The tax authorities and, consequently, the defendant, therefore, reached the lawful conclusion that the cost item of the asset impairment charge in the tax years under review was related to the applicant’s contract manufacturing activities and that there was therefore no objective reason for excluding it from the cost base when calculating the profitability indicator. The applicant did not incur any real expenditure either on the valuation difference or on the assets as such. It merely took over the assets from its predecessor and included the depreciation of the remaining assets in the calculation of its profitability, so that it acquired assets for which it would have had to pay the purchase price if it had bought them. There is no doubt that those assets generate income for the applicant and that, if sold, their residual value will be an expense and the sale itself will generate income. Therefore, the applicant’s argument that the amortisation of the valuation difference does not constitute, by its very nature, a real cost incurred in the transaction under assessment and is an exceptional item caused by the conversion carried out cannot be upheld. 52. The Regional Court agrees with the defendant’s views and considers it beyond doubt that the depreciation relates to the revaluation of assets whose transfer resulted from the project and was the substance of the spin-off and those assets are related to the contractual production. Thus, the revaluation of the assets was the result of the project and the difference in the revaluation of the assets and the subsequent depreciation of the revaluation of those assets could not have been influenced by the applicant. Nor did it determine its position as a manufacturer or that this activity was its only source of profit. The defendant’s view that the consequences of decisions taken by another company in the group cannot be passed on to the applicant and thereby reduce its profits by those items excluded from the cost base is lawful. In those circumstances, the costs in the form of depreciation on the difference in the revaluation of assets should be included in the calculation of the applicant’s profitability because of the relationship of that depreciation to assets related to the applicant’s production activities.” (…) “…The TNMM method was chosen as the profitability indicator and the net operating cost margin (NCPM) as the indicator. The resulting interquartile range, which the applicant considered to be market normal and to which it referred, was set between 2,14 % and 5,17 %. This analysis was accepted and relied upon by the tax authority, which concluded that the data obtained in the comparative analysis were sufficiently reliable and that the difference between the negotiated price and the normal price within the meaning of Article 23(7) of the ITA was demonstrated by the tax authority…. (…) 57. As is apparent from the foregoing, the defendant assumed that the sufficiently large sample of 56 comparable companies identified included companies with revalued assets. In the present case, the Benchmarking Analysis took into account a multi-year sample (2013 to 2015) of data on independent companies. The independent companies reflect the development of the market, whereby they register their assets in both historical and real valuation, acquire new technologies or technically upgrade their assets, etc. The defendant thus concludes that the data obtained in the Benchmarking Study is sufficiently reliable and that the difference between the agreed price and the normal price within the meaning of Art. § The tax administration fulfilled its burden of proof with regard to all the relevant facts (there is no dispute as to the proof of the transaction between the related parties) and by the Call for Evidence it shifted the burden of proof to the claimant, who did not satisfactorily prove the price difference in relation to the item of the write-down of the valuation difference, although it had sufficient time to do so. 58. The Regional Court agrees with the defendant’s conclusions thus expressed. The defendant has commented in detail on the comparative analysis submitted by the applicant and has given proper reasons why it considers it sufficiently reliable. The defendant has also dealt properly with the question of why it is necessary to determine a value at the mid-point between two extreme values in order to guarantee the best possible comparability, when it is appropriate to base the value on a mean trend in order to eliminate outliers or inaccuracies. The Regional Court was therefore unable to uphold the applicant’s plea that the defendant acted unlawfully by applying a profit margin at the level of the bottom quartile rather than at the level of the minimum resulting from the comparative analysis, that minimum being only 0.41 %. The applicant supports that argument by citing ...

Dart Sudamericana S.A. (now Dart Sudamericana SRL) imported so-called EPS T601 pellets from related party abroad for use in its manufacturing activities. The controlled transactions had been priced using the CUP method. Following an audit the tax authorities made a transfer pricing adjustment where it had applied the transactional net margin method (TNMM). According to the tax authorities, the price paid for the pellets in the controlled transaction was higher than the arm’s length price. The adjustment resulted in an assessment of additional taxable income. Not satisfied with the assessment Dart Sudamericana filed a complaint. Tax Court Ruling The court upheld the assessment issued by the tax authorities and dismissed Dart Sudamericana’s appeal. Excerpts “In short, the appellant merely tried to prove the similarity of the product in order to carry out the price comparison, which is not sufficient for a proper study of the comparability of the transactions. At the risk of being reiterative, the transactions should be analysed, not only the products being traded. Therefore, the tax authority is right – as stated above – in its challenge to the application of the Comparable Price Method between Independent Parties – CUP or Uncontrolled Price – as a method of price analysis for the importation of EPS pellets and the application – entirely in accordance with the position taken by the appellant in the 2003 period – of the Transactional Net Margin Method for the 2004 tax period. “ “…In this regard, and as the Tax Court rightly pointed out, the OECD Committee on Fiscal Affairs has stated in its report that multi-year data are useful for providing information about the relevant business cycles and product life cycles of comparables. Differences in the business cycle or product cycle may have a substantial effect on transfer pricing conditions that must be assessed to determine comparability. Accordingly, in order to gain a full understanding of the facts and circumstances surrounding a controlled transaction, it may be useful to examine data for both the year under review and prior years. This type of analysis may be particularly useful when using one of the profit-based methods, as is the case here. The facts and circumstances of the particular case will determine whether differences in economic circumstances significantly influence the price, and whether reasonably accurate adjustments can be made to eliminate the effects of such differences” (Vid. CNACAF, Sala I, “Volkswagen Argentina S.A.”, 26/12/2019. The emphasis is my own). In this context, it is noted first of all that it is not clear from the appeals made, both in administrative proceedings and before this Court, that the use of multi-annual data was due to differences in the economic cycle of the industry under test. Likewise, it has not been proven that the economic situation the country went through in 2001 and 2002 existed in the countries of the companies used for the comparability study. The experts say nothing in their reports on the issue, limiting themselves to stating that national legislation does not prevent the use of multi-annual data, which – as mentioned above – is not in dispute. Therefore, and considering that the inclusion of data from 2001 and 2002 would inevitably increase the differences in comparability with companies abroad, I consider that the tax authority is right.” Click here for English Translation Click here for other translation ...

The German BASF group is active in the chemical industry and has subsidiaries all over the world including Italy. In FY 2006 BASF Italia s.p.a. was served with two notices of assessment by the tax authorities. The tax assessments formulated three findings. 1. non-deductibility of the cancellation deficit – arising from the merger by incorporation of Basf Agro s.p.a. into Basf Italia s.p.a., resolved on 27 April 2004 – which the acquiring company had allocated to goodwill, the amortisation portions of which had been deducted in tenths and then, from 2005, in eighteenths. The Office had denied the deductibility on the ground that the company, in the declaration submitted electronically, had not expressly requested, as required by Article 6(4) of Legislative Decree No. 358 of 8 October 1997, the tax recognition of the greater value of goodwill recorded in the balance sheet to offset the loss from cancellation, as allowed by paragraphs 1 and 2 of the same provision. Moreover, as a subordinate ground of non-deductibility, the assessment alleged the unenforceability to the Administration of the same merger pursuant to Article 37-bis of Presidential Decree No 600 of 29 September 1973, assuming its elusive nature. 2. non-deductibility of the annulment deficit – arising from the merger by incorporation of Basf Espansi s.p.a. into Basf Italia s.p.a., resolved in 1998 – which the acquiring company had allocated partly to goodwill and partly to the revaluation of tangible fixed assets, the depreciation portions of which had been deducted annually. The Office, also in this case, had denied the deductibility due to the failure to express the relative option, pursuant to Article 6(4) of Legislative Decree No. 358 of 1997, in the company’s declaration. 3. non-deductibility of interest expenses arising from a loan obtained by the taxpayer to carry out the transactions above. The Provincial Tax Commission of Milan partially upheld BASF’s appeals against the tax assessments, upholding the latter limited to the finding referred to in the second finding, concerning the non-deductibility of the cancellation deficit arising from the merger by incorporation of Basf Espansi s.p.a.. The Lombardy CTR, accepted the first and rejected the second, therefore, in substance, fully confirming the tax assessments. BASF then filed an appeal with the Supreme Court against the judgment, relying on seven pleas. The sixth plea related to lack of reasoning in the CTR judgement in regards of non-deductibility for interest expenses arising from the intra group loan. Judgement of the Supreme Court The Supreme Court found that the (first and) sixth plea was well founded and remanded the judgement to the CTR, in a different composition. Excerpts “7. The sixth plea in law criticises, pursuant to Article 360(1)(3) of the Code of Civil Procedure, the judgment under appeal for breach of Article 110(7) of Presidential Decree No 917 of 1986, in so far as the CTR held that the interest expense incurred by the appellant in connection with the loan obtained from another intra-group company for the purchase of the share package of Basf Agro s.p.a. was not deductible. The plea is well founded. In fact, the CTR reasoned on this point solely by stating that the deduction was ‘held to be inadmissible on the basis of the thesis underlying the contested assessment, that is, the intention to evade tax’. Such ratio decidendi is limited to the uncritical mention of the Administration’s thesis, which, however, as far as can be understood from the concise wording used by the CTR, does not relate to the financing in itself, but to the transaction, referred to in the first relief, in which it was included. A transaction whose evasive nature was not even appreciated by the CTR, the question having been absorbed by the non-deductibility, for other reasons, of the negative component arising from the merger by incorporation of Basf Agro.” Click here for English translation Click here for other translation ...

Following an audit, Mauser S.p.A. received four notices of assessment relating to the tax periods from 2004 to 2007. These notices contested, in relation to all tax periods, the elusive purpose of a financing operation of Mauser S.p.A. by the non-resident parent company, as it was aimed at circumventing the non-deductibility of interest expense pursuant to Article 98 pro tempore of Presidential Decree No. 917 of 22 December 1986 (TUIR) on the subject of thin capitalisation. The loan, which began in 2004, had resulted in the recognition of €25,599,000.00 among other reserves, indicated as a payment on account of a future capital increase, as well as €55,040,474.29 as an interest-bearing shareholder loan, the latter of which was subsequently partly waived and also transferred to reserves. The loan had also contributed to the generation of losses in the years in question, which had been covered through the use of the aforementioned reserve (as a reserve), whose interest paid to the parent company had then been deducted from taxable income. According to the tax authorities the payment on account of a future capital increase constituted a financial debt towards the sole shareholder and not (as indicated by the taxpayer) a capital contribution, which therefore would not have contributed to the determination of the relevant net equity pursuant to Article 98 TUIR; as a result, the equity imbalance between loans and adjusted net equity pursuant to Article 98, paragraphs 1 and 2, letter a) TUIR pro tempore (net equity increased by the capital contributions made by the shareholder) would have been configured. Consequently, the tax authorities had concluded that the financing transaction as a whole was elusive in nature, as it was of a financial nature and aimed at circumventing the prohibition of the remuneration of the shareholders’ loan in the presence of the thin capitalisation requirements. With the notice relating to the 2006 tax year, Mauser S.p.A. was also charged with a second finding, relating to the infringement of the transfer pricing provisions pursuant to Article 110, paragraph 7 in relation to transactions involving the sale of intra-group assets. The tax authorities, while noting that Mauser S.p.A. had used the cost-plus computation method for the purpose of the correct application of the OECD rules on transfer pricing, had observed that following the merger of Gruppo Maschio SPA – for whose acquisition the above mentioned financing was intended – a merger deficit had resulted, partly allocated to goodwill of the target company. The tax authorities considered that the portion of goodwill amortisable for the year 2006 should be included in the cost base, increasing the percentage of overhead costs as a percentage of production costs, contributing to increase the total cost for the purpose of determining the arm’s length remuneration. Mauser S.p.A. raised preliminary issues relating to the breach of the preventive cross-examination procedure and the forfeiture of the power of assessment, considering the provision of Article 37-bis of Presidential Decree No. 600 of 29 September 1973 to be inapplicable to the case at hand, and also considering the existence of valid economic reasons consisting in the purpose of the acquisition of the company, which was then effectively merged. He then deduced that the method of calculating the transfer prices was erroneous insofar as the Office had included the amortisation quota of the goodwill allocated to the merger deficit. The C.T.P. of Milan upheld the merits of the joined appeals of Mauser S.p.A. An appeal was then filed by the tax authorities and in a ruling dated 19 May 2015, the Lombardy Regional Administrative Court decided in favour of the tax authorities, holding that the loans “were not used in accordance with the rules envisaged in such cases, but were instead used to cover the company’s losses”, and then held that the transfer price recovery was also correct, on the assumption that the amortisation of goodwill was legitimate. Mauser S.p.A. then filed an appeal with the Supreme Court, relying on six grounds. In the first ground of appeal Mauser S.p.A. points out that the grounds of the judgment do not contain adequate evidence of the logical path followed, also in view of the failure to transcribe the judgment at first instance and the arguments of the parties, as well as the statement of the facts of the case. Mauser S.p.A. observes that the confirmation of the finding as to the evasive nature of the financing transaction shows mere adherence to the position of one of the parties to the proceedings without any statement of reasons, nor does it consider what the regulatory provisions subject to assessment would be in relation to both profiles. It also observes how the reasoning relating to the confirmation of the transfer pricing relief refers to facts other than those alleged by the Office. Judgement of the Supreme Court The Supreme Court upheld the first ground of appeal and declared the other grounds of appeal to be absorbed; set aside the judgment under appeal and refered the case back to the Lombardy Regional Administrative Court, in a different composition. Excerpts “The first ground is well founded, agreeing with the conclusions of the Public Prosecutor. The two recoveries made by the Office presuppose – the first – the qualification (for the purposes of the financial imbalance referred to in Art. The two recoveries made by the Office presuppose – the first – the classification (for the purposes of the financial imbalance referred to in Article 98 TUIR pro tempore) of the future capital contribution made by the sole shareholder of the taxpayer company as a debt item and not as a capital reserve item (entered among the other reserves), a fundamental circumstance for the purposes of considering whether or not it contributes to the portion of adjusted shareholders’ equity ‘increased by the capital contributions made by the same shareholder’, capable of constituting the financial imbalance referred to in Article 98 TUIR cited above. Similarly (considering that the Office has moved in the direction of an overall elusive activity), proof is ...

The tax authority conducted an inspection of Groklin-Carpathians LLC, which revealed that the company had failed to file a controlled transactions report for 2015. On this basis, the tax authority issued a documentation penalty notice to the company. Groklin-Carpathians LLC appealed the decision, which was upheld by both the District Court and the Court of Appeal. The tax authorities then appealed to the Supreme Court. Judgement of the Supreme Court The Supreme Court dismissed the appeal. “Taking into account the circumstances of this case, as well as the officially expressed position of the fiscal authority on the procedure for determining the transaction as a controlled one, the panel of judges agrees with the conclusions of the courts of previous instances that the plaintiff has no statutory obligation to reflect the return of intangible assets in the TP Report, since such transactions do not in any way affect the increase or decrease of the plaintiff’s taxable object, which in turn indicates that the challenged tax notice is unfounded.” Click here for English translation Click here for other translation ...

Microsoft Ibérica S.R.L is responsible for distribution and marketing of Microsoft products in Spain. According to an agreement concluded between Microsoft Ibérica and MIOL (Microsoft’s Irish sales and marketing hub) with effect from 1 July 2003, Microsoft Ibérica would received the largest amount of either a commission based on sales invoiced in Spain or a markup on it’s costs. In support of the remuneration according to the agreement, Microsoft had provided a benchmark study. The Spanish tax authorities found that Microsoft Ibérica had not been properly remunerated due to the fact that goodwill amortisations had been eliminated by in the transfer pricing analysis. By including the goodwill amortisations in the analysis, the result of the local company was below the interquartile rang. The authorities further held that the selected comparables in the benchmark study suffered from comparability defects, in that they had less functions and risk than Microsoft Ibérica. An assessment was issued where the results were adjusted to the upper quartile of the benchmark results. The Court of first instance held in favor of Microsoft and set aside the assessment. This decision was appealed to the High Court by the authorities. The High Court overturned the decision and decided in favour of the tax authorities. Excerpts from the Judgement: “We understand that the appellant’s conduct was deliberate, seeking to make the inspection proceedings time-barred. For a year, the Inspectorate was unable to carry out its work normally; in fact, what the Inspectorate did was to waste many hours of work examining the various incomplete accounts which did not comply with the Spanish accounting plan, which the appellant was handing in, wasting hours of work paid for out of the State’s general budget. The appellant, with only two days left, submitted a copy of the accounts which replaced “the computer copies of the accounts on CDs submitted to the inspection on 21/05/20 10, 9/09/2010 and 26/11/2010 which contained errors in the conversion of the accounts from the American chart of accounts to the Spanish chart of accounts”. The Chamber cannot support this conduct of the party by declaring the inspection procedure time-barred, as the delay is attributable to the taxpayer’s conduct. In finding that there is a delay attributable to the taxpayer for 344 days, it is unnecessary to examine the rest of the delays. The Inspector procedure took 705 days, discounting 344 days, the procedure finalised in 361 days, therefore, even if the other delays that are questioned are not attributable to the taxpayer, which in many cases overlap with the delay for not handing over the accounts, the Inspector procedure would have concluded before one year had elapsed.” “The Inspectorate indicated that there was another compelling reason to weigh in support of the application of a value located in the upper interquartile range of the study carried out by the Inspectorate, since within the sample of companies considered comparable there are some, five in particular that carry out service activities (CNAE activity codes 7221-7222), which are more similar than the rest to the activity formally assumed by MICROSOFT IBÉRICA – the provision of marketing services – and whose net margins were higher. The Inspectorate considered this sample of entities to be the most appropriate in terms of comparability, as it would yield a margin with a median of 6.15% (weighted average for the period). The reasoning of the Inspectorate, which was complemented by everything else it argued in the agreement, is considered to be correct, but it should also be considered that this reasoning is complementary to the criteria of the Chamber, which has considered that the contract signed by Microsoft fixed a commission that had to be settled monthly.” “The Chamber cannot share the criteria of the report for the following reasons. The expert assumes an interpretation of the contract signed in 2003 that is contrary to the one we have set out in the corresponding legal basis of this Judgment. It is the function of the Chamber to interpret contracts. The increase in the taxable bases derives directly from those agreed by Microsoft and MIOL, any other consideration being unnecessary. Furthermore, the expert considers that companies with losses have been eliminated without reasonable criteria, when this Chamber has endorsed that this criterion was in accordance with the law. Furthermore, the expert assumes that the appellant does not perform strategic functions, whereas the Chamber has concluded otherwise.” “WE RULE 1) That we DISMISS AND REVERSE the present contentious-administrative appeal number 337/2014, brought by the Solicitor Ms. Sonsoles Díaz-Varela Arrese, on behalf of MICROSOFT IBÉRICA, S.R.L, assisted by the Lawyer Ms. Cristina Fernández Rodríguez against the decision dated 8 May 2014 issued by the Central Economic Administrative Court, and we CONFIRM AND CONFIRM the said decisions as being in accordance with the legal system. 2) The plaintiff is ordered to pay the costs incurred in these legal proceedings.” Click here for English translation Click here for other translation ...