Terex Italia s.r.l. is a manufacturer of heavy machinery and sold these products to a related distributor in the UK. The remuneration of the distributor had been determined based on application of the TNM-method. Following an audit for FY 2009 and 2010 the tax authorities served Terex a notice of assessment where adjustments was made to the taxable income in respect of a transfer pricing transaction, and in particular contesting the issuance of a credit note, in favour of the English company GENIE UK with the description “sales prices adjustment” recorded in the accounts as a reversal of revenue, in that, according to the Office, as a result of the adjustment made by the note, Terex would have made sales below cost to the English company, carrying out a clearly uneconomic transaction. In the same note, the non-deductibility of costs for transactions with blacklisted countries was contested. Terex lodged appeals against the assessments, but the Provincial Tax Commission upheld them only “in respect of the purchases from Hong Kong”, implicitly rejecting them in respect of the purchases made in Switzerland and explicitly rejecting them in respect of the disputed credit notes. An appeal was later rejected by the Regional Tax Commission. An appeal was then filed by Terex with the Supreme Court. In this appeal Terex stated that “The CTR, for the purposes of identifying the ‘normal value’ of the intra-group transactions relating to the relations with the English company GENIE UK, wrongly disallowed the applicability of the TNMM method (of the ‘net margin’), used by the taxpayer for the years 2009 and 2010 and presupposed the issuance of the contested credit notes and the relative reduction of the declared income, on the other hand, the Office considered that the CUP method (of the ‘price comparison’), used by the tax authorities in the findings relating to the same tax years, was applicable, with the consequent emergence of a higher taxable income, compared to that declared. The same Administration, on the other hand, with reference to the intra-group relations with the same company, located in the tax years 2007 and 2008 and subject to control without censure in the same audit, had not denied the applicability of the TNMM method, used by the taxpayer, which in such cases had led to the issuance of debit notes, with the relative increase in declared income.” Judgement of the Court The Supreme Court upheld part of the judgement (black listed costs) and refered part of it (Transfer pricing method and “sales prices adjustment”) back to the Regional Tax Commission for reconsideration. Excerpts in English 5.1. In particular, with regard to the method applicable for the purpose of determining the “normal value”, it has been clarified, with specific reference to the one referred to as the “TNMM”, that “On the subject of the determination of business income, the regulations set forth in Article 110, paragraph 7, of Presidential Decree no. 917 of 1986, aimed at repressing the economic phenomenon of “transfer pricing”, i.e. the shifting of taxable income following transactions between companies belonging to the same group and subject to different national regulations, requires the determination of weighted transfer prices for similar transactions carried out by companies competing on the market, for which purpose it is possible to use the method developed by the OECD which is based on the determination of the net margin of the transaction (so-called “TNMM”), which is based on the determination of the net margin of the transaction. “TNMM”), provided that the period of investigation is selected, the comparable companies are identified, the appropriate accounting adjustments are made to the financial statements of the tested party, due account is taken of the differences between the tested party and the comparable companies in terms of risks assumed or functions performed, and a reliable indicator of the level of profitability is assumed.” (Cass. 17/05/2022, no. 15668; the principle was shared by, among others, Cass. 12/09/2022, nos. 26695, 26696, 26697 and 26698; Cass. 28/04/2023, no. 11252).” “The adoption of the TNMM is particularly reliable when the functional analysis shows the existence of a party (tested party or tested party) to the controlled transaction that performs simpler functions and assumes less risk than the other party to the transaction (para. 2.64 et seq. OECD). In analogy to the RPM (Resale Price Method) or CPM (Cost Plus Method), it focuses on the profitability of the tested party in the controlled transaction, whereas it differs from it in that it operates at the level of net margins and not gross margins.” “Indeed, according to the OECD Guidelines (OECD, Guidelínes,1995), ‘The selection of a transfer pricing method is always aimed at finding the most appropriate method for a particular case. For this purpose, the following should be taken into account in the selection process: the respective advantages and disadvantages of the methods recognised by the OECD; the consistency of the method considered with the nature of the controlled transaction, as determined in particular through functional analysis; the availability of reliable information (especially on independent comparables) necessary for the application of the selected method and/or the other methods; the degree of comparability between controlled transactions and transactions between independent companies, including the reliability of comparability adjustments that are necessary to eliminate significant differences between them. No method can be used in all eventualities and it is not necessary to demonstrate the non-applicability of a given method to the circumstances of the particular case. Ministerial Circular No. 42 of 12 December 1981 also pointed out that the appropriateness of a transfer pricing method is assessed on a case-by-case basis.” “5.6. The importance that the TNMM has assumed in practice, as the most widely used means of determining transfer prices, has made it the subject of interest of the Eu Joint Transfer Pricing Forum (JTPF) body, set up by the European Commission, which, in 2019, drew up a document (EU JOINT TRANSFER PRICING FORUM, DOC: JTPF/002/2019/EN, SECTION 2), in which it describes its essential characteristics, among which, substantially tracing the ...

“B-Production” is a subsidiary in a US multinational group and engaged in production and sales. “B-Production” pays services fees and royalties to its US parent. Following an audit, the tax authorities issued an assessment where deductions for these costs had been reduced which in turn resulted in additional taxabel income. An appeal was filed by “B-Production” with the Administrative court which in a judgement of June 2015 was rejected. An appeal was then filed by “B-Production” with the Supreme Administrative Court. In the appeal “B-Production” contested the findings of the Administrative Court that there was a hidden distribution of profits by means of the payment of management fees and duplication (overlapping) of the services at issue under the management contract and the other two agreements between the B-Production and the parent company. B-Production further argued that the evidence in the case refutes the conclusions in the tax assessment and the contested decision that the services rendered did not confer an economic benefit and in addition argues that the costs of royalties and the costs of engineering and control services under the other two contracts are not a formative element of the invoices for management services, a fact which was not considered by the court. Judgement of the Supreme Administrative Court The Supreme Administrative Court decided in favour of the tax authorities and dismissed the appeal of B-Production as unfounded. Excerpts “The dispute in the case concerned the recognition of expenses for intra-group services. The NRA Transfer Pricing Manual (Fact Sheet 12) states that intra-group services in practice refers to the centralisation of a number of administrative and management services in a single company (often the parent company), which serves the activities of all or a number of enterprises of a group of related parties selected on a regional or functional basis. The provision of such services is common in multinational companies. The concept of intra-group services covers services provided between members of the same group, in particular technical, administrative, financial, logistical, human resource management (HRM) and any other services. In the present case, the costs in question relate to a contract for the provision of management services dated 26.11.2002, paid by the subsidiary [company], registered in the Republic of Bulgaria, to the parent company, [company], registered in the USA. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (‘the OECD Guidelines’) should therefore be taken into account in the analysis of those costs and, accordingly, in the interpretation and application of the substantive law. According to paragraph 7.5 of the OECD Guidelines, the analysis of intra-group services involves the examination of two key questions: 1/ whether the intra-group services are actually performed and 2/ what the remuneration within the group for those services should be for tax purposes. In the present case, the dispute in the case relates to the answer to the first question, since it is apparent from the reasoning of the audit report, the revenue authorities and the ultimate conclusion of the court of first instance that the services did not confer an economic benefit on the domestic company and constituted a disguised distribution of profits within the meaning of section 1(5)(b) of the Act. “a” of the Tax Code. Therefore, the arguments in the cassation appeal for material breaches of the rules of court procedure – lack of instructions concerning the collection of evidence related to the amount of the price of the intra-group service and the allocation of the burden of proof to establish this fact – are irrelevant to the subject matter of the dispute. Paragraph 7.6 of the OECD Guidelines states that, according to the arm’s length principle, whether an intra-group service is actually performed when an activity is carried out for one or more group members by another group member will depend on whether the activity provides the group member concerned with an economic or commercial advantage to improve its commercial position. This can be determined by analysing whether an independent undertaking would, on comparable terms, be willing to pay for the activity if it were carried out for it by an independent undertaking or whether it would only have carried it out with its own funds. It is correct in principle, as stated in the appeal in cassation, that the analysis of intra-group services and their recognition for tax purposes is based on the facts and circumstances of each particular case. For example, the OECD Guidelines lists activities which, according to the criterion in point 7.6, constitute shareholding activities. According to paragraph 7.10, b. “b” of the OECD Guidance, expenses related to the accounting requirements of the parent company, including consolidation for financial statements, are defined as such. The evidence in this case established beyond a reasonable doubt that the management services covered by the contract at issue in this case included the compensation of a responsible financial and accounting manager, including cash flow planning and reporting, preparation of monthly, quarterly and annual reports (American Accounting Standards accounting. These activities, which there is no dispute that they were performed, fall within the definition of Section 7.10 for “shareholder activities.” The remaining activities included in management services, including the costs associated with the use of the software programs referred to in the expert report, are imposed by the parent company’s requirements for control and accountability of the subsidiary under the three sets of activities – managing director, production and finance. There is no merit in the objection in the cassation appeal that the management contract services do not duplicate the costs of the other two contracts. It is established from the conclusion of the FTSE that the costs of engineering and control services and royalties (know-how and patent) are not a formative element of the invoices for management services. The conclusion of the experts was based only on the fact that separate contracts had been concluded for the individual costs and not on an analysis of the elements that formed the fees. According to Annex 6 to the expert report, ...