BenQ Italy SRL is part of a multinational group headed by the Taiwanese company BenQ Corporation that sells and markets technology products, consumer electronics, computing and communications devices. BenQ Italy’s immediate parent company was a Dutch company, BenQ Europe PV. Following an audit the tax authorities issued a notice of assessment for FY 2003 in which the taxpayer was accused of having procured goods from companies operating in countries with privileged taxation through the fictitious interposition of a Dutch company (BenQ Europe BV), the parent company of the taxpayer, whose intervention in the distribution chain was deemed uneconomic. On the basis of these assumptions, the tax authorities found that the recharge of costs made by the interposed company, were non-deductible. The tax authorities also considered that, through the interposition of BenQ BV, the prices charged by the taxpayer were aimed at transferring most of the taxable income to the manufacturing companies of the BenQ Group located in countries with privileged taxation. Thirdly, the costs recharged by the Dutch company to the taxpayer for the insurance of the solvency risk of its customers was denied. Not agreeing with the assessment BenQ Italy filed a complaint which was rejected first by the provincial court and later by the regional court. The regional court held – in relation to purchases from non-EU countries – that there were no economic reasons for the interposition of the parent company in relation to such purchases. Secondly, the court found that the taxpayer did not allocate the income earned in Italy according to the market values of the goods purchased from the group’s distribution chain, which resulted from the variability of the unit prices and the application by the seller under Dutch law of negative mark-up prices, constituting circumstantial evidence of the transfer of the economic advantage to group companies located in other countries. Finally, it held that the insurance costs were not inherent. BenQ then filed an appeal with the Supreme Court based on ten grounds. In the forth ground of appeal BenQ Italy alleged that the judgment under appeal held that the rules on transfer prices had been infringed. BenQ Italy argues that the burden of proof is on the tax authorities, in order to overcome the documentary (and negotiated) element of the purchase price agreed between the seller and the other companies in the group, to provide evidence that such price constitutes a breach of the arm’s length principle. BenQ also points out that none of the methods advocated on the basis of the OECD Guidelines and the Circular of the tax authorities No 32/9/2267 of 1980 has been applied in the present case, with a consequent breach of the rules governing placement of the burden of proof. Judgement of the Supreme Court The Supreme Court granted the appeal on the fourth ground. The judgment of the regional court was therefore set aside and referred back to the regional court for reconsideration. Excerpts “5 – The fourth ground is well-founded. 5.1 – The judgment appealed against found, on the basis of the contested notice, that “the interposition of the parent company appears to be for the purpose of circumventing the tax rules – which is not economically justifiable – and consequently the mark-up applied to the aforementioned imports loses the requirement of inherence in that it is not necessary or causally/mente connected with the income-producing activity under Article 11O(7) of the TUIR”. While drawing inspiration from the recovery of the non-deductibility of the cost of recharge (based on the different and distorted assumption of the uneconomic nature of the interposition of the company under Dutch law), the CTR hypothesizes the existence of an element of alleged tax avoidance and evaluates in this sense the “inconsistent and unexplained marked variability of the prices charged by the parent company, as well as [. …] the application of the alleged negative margins’, in order to derive the ‘presumption’ that the BenQ Group ‘did not allocate the income earned in Italy according to market values […] but concentrated it in the producers’ countries of residence’. Therefore, despite the fact that the Office did not adopt any method of calculating normal value (by comparing, for example, the prices charged by the taxpayer with the other non-resident companies in the group with respect to transactions concluded by and with independent parties), the CTR found that the normal value pursuant to art. 110, seventh paragraph, TUIR, the excessive variability of unit prices and the application of negative mark-ups by the parent company, as a “symptom of pathological conduct”, inducing evidence of the “transfer of the actual economic advantage to companies with lower production costs”. 5.2 – The CTR arrives, therefore – after deducting the negative mark-up percentage of a 5% flat-rate margin – to consider the burden of proof met by the Office regarding the assessment of a normal value of the prices charged (generically indicated as “both in purchase and sale”), as an exception to the contractual prices charged by the taxpayer, in terms of the indicated provisions of the TUIR (art. 76, paragraphs 2 and 5 of the TUIR, corresponding to Article 110, paragraphs 2 and 7 of the TUIR pro tempore and Article 9 of the TUIR) without having made any reference to the methodologies which, according to the OECD Guidelines, allow the comparison of the margin of the resident intra-group company with that which would be achieved by the same in case of transactions with independent companies (such as, for example, the resale price method and the cost-plus method). 5.3 – It should be noted that this Court has long pointed out that the rule of assessment of the normality of the transaction price, as well as the relative burden of proof, are the responsibility of the Office (Court of Cassation, Section V, 2 March 2020, No. 5645), without the taxpayer’s avoidance purpose being relevant, since the tax authorities do not have to prove the assumption of higher domestic taxation compared to cross-border taxation. 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While living in France, Israel Daniel Amram (IDA) devised an idea for the development of a unique and efficient computerized interface that would link insurance companies and physicians and facilitate financial accounting between medical service providers and patients. IDA registered the trademark “SEPHIRA” and formed a company in France under the name SAS SEPHIRA . IDA then moved to Israel and formed Sephira & Offek Ltd. Going forward the company in Israel would provid R&D services to SAS SEPHIRA in France. All of the taxable profits in Israel was labled as “R&D income” which is taxed at a lower rate in Israel. Later IDA’s rights in the trademark was sold to Sephira & Offek Ltd in return for €8.4m. Due to IDA’s status as a “new Immigrant” in Israel profits from the sale was tax exempt. Following the acquisition of the trademark, Sephira & Offek Ltd licensed the trademark to SAS SEPHIRA in return for royalty payments. In the books of Sephira & Offek Ltd, the trademark was labeled as “goodwill” and amortized. Following an audit the tax authorities determined that the sale of the trademark was an artificial transaction. Furthermore, they found that part of the profit labeled by Sephira & Offek Ltd as R&D income (subject to a lower taxation in Israel) should instead be labeled as ordinary income. On that basis an assessment was issued. Sephira & Offek Ltd and IDA disapproved of the assessment and took the case to Court. Judgement of the Court The court ruled in favor of the tax authorities. The trademark  transaction was artificial, as commercial reasons for the transaction (other than tax optimization) had been provided. The whole arrangement was considered non-legitimate tax planning. The court also agreed that part of the income classified by the company as R&D income (subject to reduced taxes) should instead be taxed as ordinary income. Click here for English translation Click here for other translation ...

In this case, the Swiss tax authorities had refused to refund A SA withholding tax on an amount of the so-called distributable reserves. The refund was denied based on the Swiss “Old Reserves-doctrin”. “…the doctrine relates the existence of the practice of the Federal Tax Administration of 15 November 1990, known as the “purchase of a full wallet” (“Kauf eines vollen Portemonnaies” or the “old reserves” practice… According to this practice, “tax avoidance is deemed to have occurred when a holding company based in Switzerland buys all the shares of a company based in Switzerland with substantial reserves from persons domiciled (or having their seat) abroad at a price higher than their nominal value, …” The doctrin is applied by the tax authorities based on a schematic asset/liability test: if there are distributable reserves/retained earnings prior to the transfer of shares from a jurisdiction with a higher residual withholding tax to a jurisdiction with a lower one, the previous higher rate still applies on these reserves/retained earnings. Judgement of the Swiss Supreme Court The court ruled in favor of A SA and set aside the decision of the tax authorities. According to the court, the “Old Reserves-doctrin” only applies to cases of actual tax avoidance. According to previous case law, there is tax avoidance: when the legal form chosen by the taxpayer appears to be unusual, inappropriate or strange, and in any case unsuited to the economic objective pursued, when it must be accepted that this choice was abused solely with the aim of saving taxes that would be due if the legal relationships were suitably arranged, when the procedure chosen would in fact lead to a significant tax saving insofar as it would be accepted by the tax authorities. In this regard, the burden of proof is on the tax authorities. Click here for English translation Click here for other translation ...

A non-interest-bearing loan had been granted by GI Group S.p.A., to a related company – Goldfinger Limited – in Hong Kong, in order to acquire a 56% shareholding in the Chinese company Ningbo Gi Human Resources Co. Limited. The Italien tax authorities had issued an assessment, where an interest rate on the loan had been determined and an amount equal to the interest calculated on that basis had been added to the taxable income of GI Group S.p.A. GI Group brought this assessment to the Regional Tax Commission where a decision was rendered setting aside the assessment. This decision was appealed to the Supreme Court by the tax authorities. Judgement of the Supreme Court The Supreme court upheld the appeal of the tax authorities and referred the case back to the Regional Tax Commission. According to the Supreme Court, the decision of the Tax Commission dit not comply with the principles of law concerning the subject matter of evidence and the burden of proof on tax authorities and the taxpayer. Excerpts: “…In conclusion, according to the Court, “such discipline, being aimed at repressing the economic phenomenon of transfer pricing, i.e. the shifting of taxable income as a result of transactions between companies belonging to the same group and subject to different national laws, does not require the administration to prove the avoidance function, but only the existence of “transactions” between related companies at a price apparently lower than the normal one” “according to the application practice of the Italian Revenue Agency (Circular No. 6/E of 30 March 2016 on leveraged buy-outs), the reclassification of debt (or part of it) as a capital contribution should represent an “exceptional measure”. Moreover, it is not excluded that free intra-group financing may have a place in the legal system where it can be demonstrated that the deviation from the arm’s length principle is due to “commercial reasons” within the group, related to the role that the parent company assumes in supporting the other companies of the group; “ “…the Regional Commission did not comply with the (aforementioned) principles of law concerning the subject-matter of the evidence and the criterion for sharing the burden of proof, between the tax authorities and the taxpayer, on the subject of international transfer pricing. In essence, the examination of the trial judge had to be oriented along two lines: first, it had to verify whether or not the tax office had provided the evidence, to which it was entitled, that the Italian parent company had carried out a financing transaction in favour of the foreign subsidiary, as a legitimate condition for the recovery of the taxation of the interest income on the loan, on the basis of the market rate observable in relation to loans with sufficiently “comparable” characteristics and provided to entities with the same credit rating as the associated debtor company (see the OECD Report 2020), the determination of which is quaestio facti referred to the judge of merit; secondly, once this preliminary profile had been established, also on the basis of the principle of non-contestation, it had to be verified whether, for its part, the company had demonstrated that the non-interest-bearing loan was due to commercial reasons within the group, or in any event was consistent with normal market conditions or whether, on the contrary, it appeared that that type of transaction (i.e. the loan of money) between independent companies operating in the free market would have taken place under different conditions. Instead, as stated above (see p. 2 of the “Findings”), the C.T.R. required the Office to demonstrate facts and circumstances extraneous to the onus pro bandi of the Administration, such as the existence of an interest of Goldfinger Ltd in obtaining and remunerating the loan and, again, that there had been other similar onerous intra-group loans; Click here for English translation Click here for other translation ...