Gruppo Illy and its subsidiary Domori received a tax assessment in which the tax authorities had adjusted the pricing of goods sold by Domori to Agriland under application of the Italian arm’s length provision. During the relevant period, Domori had incurred losses. According to the tax authorities, two Agriland directors were also Illy Group directors, and on this basis, the tax authorities held that the transactions were controlled under the definition found in Article 110 of the TUIR (the Italian arm’s length provision). Illy and Domori contested the assessment by filing an appeal, as Agriland was neither part of the group nor otherwise controlled by them. The Provincial Tax Commission cancelled the assessment, a decision which was later upheld by the Regional Court. An appeal was then filed with the Supreme Court. Judgment The Supreme Court upheld the Regional Court’s decision and set aside the assessment. Excerpt in English “In other words, the ruling does not so much resolve the issue on the basis of the symptoms indicated by the office as revealing the absence of influence in the case in question in the light of the principle abstractly identified by the court (control relevant within the meaning of Article 2359 of the Civil Code), but denies at its very root the relevance of such symptoms, which would in fact be relevant for determining mere stable economic influence. In particular, the Court of Appeal: 1) considers that the fact that two directors (Bardini and Degrassi) are common to both companies is not accompanied by the existence of concrete management initiatives that would have led to Agriland’s economic subordination; 2) notes that the latter is not exclusively or predominantly engaged in the distribution of Domori products; 3) in view of the alleged failure to activate the contractual remedies (termination) provided for the breach of the minimum supply and the communication of sales data, notes that the office does not contest the defence of the counterparty, according to which all this was due to Domori’s insufficient production, with significant set-up costs that would justify its negative results; 4) notes that the office did not even contest the data provided by the other side, according to which Agriland has been in the distribution business for thirty years, with a large network of suppliers and customers, distributes high-quality Italian and foreign products, and has extensive logistics facilities and staff, as specified in the judgment. It is true that at the end of this examination, the Court of Appeal observes that “the existence of shareholding or contractual ties would therefore appear to be unproven”, but immediately adds significantly “or even just a stable economic influence, obviously different and additional to mere membership of the same group, relevant for the application of Article 110(7) of the TUIR”. On the basis of this reconstruction, the part of the ground of appeal put forward by the State Attorney’s Office – based on the non-retroactive nature of the amendment to Article 110 cited above and, therefore, on the applicability to the present case of the concept of “control” specific to the original text of the aforementioned provision – is unfounded in that, in fact, the appeal judges fully complied with the obligation to ascertain the existence of a stable economic influence. Nor can the judgment be criticised, as suggested in the ground of appeal, for having erroneously subsumed the case by requiring the office to prove not only the mere “potentiality” of economic influence, but also its “concreteness”. This is because the CGT complied with the specific criterion for verifying the existence or otherwise of the influence in question, in the terms set out above, and because it also conducted its investigation with reference to the overall activity of the company deemed to be influenced, not limiting itself to observations regarding the absence of “concrete” evidence of management initiatives indicating Agriland’s subordination through the two directors in common. All this, moreover, in view of the undoubted burden of proof incumbent on the Administration to demonstrate the existence of actual stable economic influence of one company over another. For the rest, the observations of the Treasury’s defence are all aimed at a review of the findings of fact made by the appeal judge, which certainly cannot be the subject of the present judgment of legitimacy.” Click here for English translation Click here for other translation ...

Global Tea & Commodities (Kenya) Ltd, a subsidiary of Global Tea & Commodities Ltd UK, traded tea on its own account and acted as an agent buying and exporting tea for related entities. The Kenya tax authorities assessed Global Tea & Commodities with a tax liability of Kshs 1,410,128,134 for the years 2015-2018, based on transfer pricing adjustments related to transactions with Tapal Tea PVT Ltd, a Pakistani company. Following an audit, the Tax authorities held the close relationship between Global Tea & Commodities and Tapal Tea PVT was evident through common directorship and significant trade volume without documented contractual agreements. They applied the TNMM based on a proper functional analysis. They also found, that an auction license constituted a valuable intangible asset. An appeal was filed in which Global Tea & Commodities argued it was incorrectly classified as related to Tapal Tea PVT, disputed the use of the Transactional Net Margin Method (TNMM) by the tax authorities, asserting instead that the Cost-Plus Method (CPM) was most appropriate. Global Tea & Commodities further contested the classification of its tea-buying auction license as a valuable intangible asset, challenged the tax authorities’ benchmarking analysis, and objected to the tax authorities’ assertion that the company was structured to avoid taxes due to its consistent losses. Decision The Kenyan Tax Appeals Tribunal dismissed the appeal of Global Tea & Commodities and upheld the tax assessment: Firstly, it found that Global Tea & Commodities and Tapal Tea PVT Ltd were indeed related enterprises. The Tribunal concluded that indirect participation in management was evidenced by common directorship (with overlapping roles in Typhoo Ltd and the parent company), as well as a substantial undocumented trading history spanning over 20 years, making Tapal Tea PVT effectively a related party. Secondly, the Tribunal ruled the transactions between Global Tea & Commodities and Tapal Tea PVT were controlled transactions, subject to transfer pricing adjustments. The absence of arm’s length documentation and formal contractual agreements supported this conclusion. Thirdly, the Tribunal found that the tax authorities was justified in applying the TNMM rather than the CPM. Global Tea & Commodities’ use of transactions with Tapal Tea PVT as comparables was flawed because of the established related-party status, which invalidated those transactions as independent comparables. The Tribunal also supported the tax authorities’ view that the tea auction license represented a valuable intangible asset, justifying the application of Earnings Before Interest and Taxes (EBIT) as the appropriate profit-level indicator. Click here for translation   ...