Following an audit of “Tin Cup Ltd” for FY 2016 and 2017 an assessment was issued by the tax authorities regarding excessive amounts of waste materials and pricing of intra-group transactions. On the issue of excessive amounts of waste materials, tax deductions was denied by the authorities as the costs was not considered to have been held in the interest of the company, i.e. it did not take place with the purpose of increasing “Tin Cup Ltd” income. On the second issue, the tax authorities found that the most appropriate method for the transactions in question (sales to a related party) was the CUP method. Applying the CUP to the controlled transactions (instead of the TNMM) resulted in additional income of approximately 392.000 EUR in total for FY 2016 and 2017. A complaint was filed by “Tin Cup Ltd” with the Dispute Resolution Board. Decision of the Board The Board upheld the assessment of the tax authorities both in regards of denied deductions of costs related to excessive waste materials and in regards of the transfer pricing adjustment. Excerpts Issue of excessive waste materials “The applicant further submits that the audit is not entitled to disallow the excess consumption for tax purposes, since it is a real amount, which can only be considered to be in the interest of the undertaking, since the processing of the raw material results in the products to be sold. Since, however, the applicant’s above individual allegation is well-founded only to the extent that the purchases of raw and auxiliary materials are made within reasonable and expected limits and taking as a reference technical specifications and the data of common experience. Because in the present case, the products for which a difference was calculated show overruns of consumptions from 8,43% to 53,96% in excess of the normal consumption according to the accounting records. Because as it follows from the relevant Audit Report, the audit established with full and clear arguments that the excessive consumption of raw and auxiliary materials, which affected the cost of sales and the net results, did not take place in the interest of the company, i.e. it did not take place with the purpose of increasing its income and therefore, the condition of para. (a’) of Article 22 of Law 4172/2013. The applicant’s claim is therefore rejected as unfounded.” Issue of transfer pricing “…Because, as is clear from the relevant Audit Report (pp. 28-35), the audit provides full and sufficient reasons for the rejection of the applicant’s documentation, namely: · the sample of external comparables selected by the applicant concerns EU-28 countries, whereas the transaction at issue is between two Greek undertakings and the geographical area is a factor which materially affects the comparability of the transactions. · the audit preferred the comparable uncontrolled price (CUP) method, not only because it is the preferred traditional method in accordance with the above provisions, but also because it found that internal comparables with independent/unrelated companies existed. · the transactional net margin method (TNMM) has the disadvantage that the net profits taken into account are affected by factors not related to intra-group transactions, such as extraordinary income and expenses, thus reducing its reliability (OECD Guidelines 2017, para. 2.70 and 2.72). Indeed, in the present case, specifically in the 2016 tax year, the applicant incurred extraordinary expenses of €1.5 million, with the result that the net profit margin ratio is approximately half of what it would have been without them. Because the applicant also claims that there is a comparability deficit in the sample of the audit, since the way and time of payment of the sales invoices differs. In particular, unlike other independent/unrelated customers, which have open balances for a significant period of time, the related company………..normally advances 50 % of the annual turnover from the previous year. Since, however, because of this preferential method of collection, the applicant incurs significant amounts of interest payable to the abovementioned affiliated company, amounting to: · 2016: 200.121,00 € · 2017: 103.000,00 €, transaction which has also been documented and contributes to the elimination of any difference in comparability. Since the methodology and the conclusion of the audit, as reflected in the relevant Audit Report, are hereby found to be valid, acceptable and fully justified. The applicant’s claim is therefore rejected as unfounded. Click here for English translation Click here for other translation ...

The regional court had set aside an assessment issued by the tax authorities concerning controlled transaction between P.V. s.r.l. and related parties. An appeal was filed by the tax authorities with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court set aside the decision of regional court and referred the case back to the regional court in a different composition. Excerpts “Equally well-founded are the fourth and fifth pleas, which can be dealt with together because, under the different headings of infringement of the law and defective reasoning, they focus on the same issue, namely on the fact that the judgment of the regional court wrongly ruled out that the transactions involving the sale of goods by the taxpayer to foreign companies controlled by it could be classified as transfer pricing, instead framing them as part of a tax planning programme. The Office had identified two anomalies in the aforesaid transactions, namely the application of prices lower than average prices and the excessive deferment of payments, which occurred not only with significant delays, but without the payment of interest. This led the Agency to consider that the transfer price deviated from the normal value, thus fulfilling the hypothesis provided for by TUIR, Article 110, paragraph 7, for the existence of which the appellant would have fulfilled its burden of proof, while it was up to the taxpayer to provide suitable reasons to justify the commercial anomalies found. On this issue, the judgment under appeal stated that “the documentation produced shows that there was no transfer pricing but rather that the company was pursuing a tax planning programme. Moreover, the Office does not provide any evidence of the assumptions of the alleged avoidance, such as the more favourable taxation in Germany, Belgium, England and the United States, countries in which the non-Italian resident companies operated, compared to the Italian taxation system, and the undue tax advantage obtained by applying prices lower than market prices in transactions with foreign subsidiaries, in the absence of valid economic reasons’. Well, apart from the absence of specific arguments on which to base the conviction that the transactions for the sale of the assets were part of a tax planning programme rather than transfer pricing, the regional court did not take into account that the case law of the Court has long held that on the subject of the determination of business income, the legislation, already provided for by Presidential Decree No. 917 of 1986, Article 76, paragraph 5, and now by Article. 110(7), does not constitute an anti-avoidance regulation in the strict sense, but is aimed at repressing the economic phenomenon of transfer pricing (understood as the shifting of taxable income following transactions between companies belonging to the same group and subject to different national laws) in itself considered, so that the proof incumbent on the tax authorities does not concern the higher national taxation or the actual tax advantage obtained by the taxpayer, but only the existence of transactions, between related companies, at a price apparently lower than the normal price, it being instead incumbent on the taxpayer, in accordance with the ordinary rules of proximity of proof pursuant to Article 2697 of the Civil Code and on the subject of tax deductions, the taxpayer has the burden of proving that such transactions took place for market values to be considered normal in accordance with the specific provisions of TUIR, art. 9, paragraph 3 (Cass, judgment no. 10742/2013; judgment no. 18392/2015; ord. no. 9673/2018). The judgment under appeal ruled without taking into account these principles, and moreover without providing answers to the points raised punctually in the Office’s notice of appeal, as reported in the appeal for cassation. The fourth and fifth grounds of appeal must therefore also be upheld.” Click here for English translation Click here for other translation ...

Lender S.A had granted a loan to a related entity but had not collected the agreed interest payments and not added the interest to its taxable income. The tax authorities stated that granting an interest-bearing loan to a related entity but not collecting the interest still results in taxable revenue. The reason Lender S.A. did not collect interest on the loan was due to the group relationship. Lender S.A. filed an appeal where it argued that since the interest was not received, it could not be taxed. Judgement of the Court The Supreme Administrative Court stated that the arm’s length principle applies to agreements concluded on arm’s length terms, where these are not implemented in accordance with there wording. Hence, the arm’s length standard also applies when the parties do not follow the agreement. Click here for English translation Click here for other translation ...

In Baker International the court concluded that if interest is not charged in respect of deferrals of payments granted to a related company, it is considered either an abnormal act of management or is subject to Section 57 of the tax code. Excerpt “…it is clear from the investigation that the share of the applicant company’s turnover corresponding to sales of equipment to its subsidiary decreased significantly during the years under investigation, as did sales to Elf; whereas, on the other hand, the above-mentioned provisions of Article 57 prevented S.A. BAKER INTERNATIONAL FRANCE from charging its subsidiary sales prices that differed from the public prices; finally, neither the operating conditions decided by the company “Bi-Gabon” with regard to stocks and the taking back of equipment, nor the fact that the financial health of this subsidiary was able to provide it with income, can suffice to justify the interest that S. A. would have had in this matter. A. BAKER INTERNATIONAL FRANCE to grant interest-free payment deadlines; that, consequently, the administration, and then the first judges, were right to consider that the disputed payment terms constituted, regardless of how they were financed by the applicant company, a financial advantage granted without consideration to the “Bi-Gabon” subsidiary and, consequently, a transfer of profits within the meaning of the provisions of Article 57 of the General Tax Code;” Click here for English translation Click here for other translation ...