ING Bank SPA received interest on a loan granted to a Dutch group company, Ing Lease Interfinance B.V.. The tax authorities considered that the interest rate on the loan was significantly lower than an arm’s length interest rate and issued a notice of assessment, changing the interest rate from 3.90% to 6.81%, resulting in additional taxable income. ING Bank disagreed with the assessment and appealed to the Provincial Tax Commission and later to the Regional Tax Commission, which ruled in favour of the tax authorities. ING Bank then appealed to the Supreme Court. Judgement of the Court The Supreme Court referred the case back to the Regional Tax Commission for a more detailed explanation of why the tax authorities’ arguments for an upward adjustment of the interest rate were considered decisive for the decision issued. “6.7. In the present case, both parties pointed to evidence supporting the correctness of the loan interest rate as stated by them. Neither party has rigorously proved what the normal interest rate would have been in the free market between independent operators. 6.7.1. The CTR, however, did not clarify why the arguments put forward by the tax administration to estimate the correct interest rate should be considered decisive, while the additional ones acquired at the trial (rate recorded by the Bank of Italy, coeval intra-group financing rate, etc.) should be considered without any doubt recessive. 6.8. The reasoning proposed by the CTR therefore appears to be so incomplete and lacking in several passages as to be merely apparent. The second and third grounds of appeal are therefore well founded and must be allowed.” Click here for English translation Click here for other translation ...

Empresa Minera Los Quenuales S.A. had used the transactional net margin method to determine the arm’s length price for its controlled transactions consisting of sales of zinc concentrates to a related party, Glencore International AG, domiciled in Switzerland. The tax authorities disagreed with the choice of method and instead applied a CUP method, on the basis of which an assessment of additional taxable income was issued. Not satisfied with the assessment, Empresa Minera Los Quenuales S.A. appealed to the Tax Court. The Tax Court ruled mostly in favour of Empresa Minera Los Quenuales S.A. According to the Tax Court, the tax authorities had not taken into account various comparability factors in determining the arm’s length price of the zinc concentrate under the chosen method – such as weight, percentage of humidity, loss, ore grade, recovery factor, etc. The tax authorities then appealed. Judgment The Supreme Court overturned the Tax Court’s decision and decided in favour of the tax authorities. According to the Supreme Court, the tax authorities had analysed the relevant components of the zinc concentrate price and not only a single component consisting of the “international zinc quotation”, as the Tax Court erroneously stated. The Tax Court had also failed to analyse Article 32-A of the Income Tax Law, which states that in export transactions with a known quotation on the international market, or with prices that are fixed by reference to the quotations of the specified markets, the market value shall be determined on the basis of such quotations. Although the Tax Court assessed the evidence in the case, it did not rule on the merits of the case by determining the appropriate method for calculating market value under the transfer pricing rules. For these reasons, the judgment of the Tax Court was declared null and void. Click here for English Translation Click here for other translation ...

Quaker Italia Srl is a non-exclusive distributor of Quaker products in Italy – lubricating oils and greases. It also carries out a minor manufacturing activity. An assessment was issued by the tax authorities in 2012 regarding the remuneration received for the distribution activities in FY 2007. The Tax authorities considered that the documentation provided by the company was contradictory and incomplete, and therefore recalculated the income using a (partially) different method (TNMM in the modified resale price version, instead of TNMM in the modified cost-plus version). This resulted in additional taxable income in the amount of Euro 1,180,447.00. A complaint was filed by Quaker with the Provincial Tax Commission. The Provincial Commission confirmed the legitimacy and effectiveness of the tax assessment. An appeal was then filed with the the Regional Tax Commission (CTR) of Lombardy. The Regional Tax Commission rejected the appeal and confirmed the first instance decision. An appeal was then filed by Quaker with the Supreme Administrative Court. Quaker contested the decision of the Regional Commission due to the absence of sufficient statement of reasons in the judgment. According to Quaker, the Regional Commission merely declared that it agreed with the arguments put forward by the Provincial Commission, without expressing its own assessment of the facts of the case and the grounds of appeal. In the appeal Quaker also claimed that the decision of the Provincial court should be considered null and void because of the irreconcilable conflict between the grounds and the operative part of the appeal. Judgement of the Supreme Administrative Court The Court upheld the grounds of appeal put forward by Quaker and remanded the case to the Regional Tax Commission for a new ruling. Excerpt “As a preliminary remark, it is worth mentioning that Quaker Italia Sri states that “the transfer pricing policy adopted by the Company, as well as its profitability in the fiscal year 2007, had to be considered at market values” (rie., p. 27), and the premise appears to be acceptable, adding, for the sake of clarity, that the expression “market values” appears to be equivalent, in the case at hand, to “normal value”, or “competition price”, expressions also used by the appellant in its argument. Now, the company decided to adopt the TNMM method of calculation in the modified Cost Plus version, and the tax authorities instead used the same TNMM method, but in the version of the modified resale price method. The stated reason for the Tax Administration’s choice is that the TNMM Cost Plus looks at company productivity, while the TNMM resale price method turns its attention to distribution activity, which Quaker Italia Sri carried out with great preponderance. The appellant opposes, however, that ‘the OECD Guidelines require auditors to follow, as far as possible, the method adopted by the company (rie., p. 32), and furthermore criticises the choice of the Tax Revenue Office to have carried out every assessment in consideration of the distribution activity, totally neglecting the production activity, which was also carried out by the company. It is also worth noting that, in its counter-affidavit, the Tax Administration reiterated the reasons why the calculation method adopted by the company led, in its opinion, to results deemed unreliable, and why it was therefore necessary to adopt a different one (counter-affidavit, p. 14). (…) 6.4. Indeed, in its decision, the CTR illustrates the objections made by the Revenue Agency to the taxpayer during the assessment, and reconstructs in extreme synthesis the course of the proceedings. It then examines with adequate breadth the main appeal brought by the Office in relation to the penalties, and the reasons why it considers it appropriate to uphold the annulment ruling made by the court of first instance. Only in the final part does the CTR then state that it adheres for the remainder to the ruling of the CTP, whose “reasoning was clearly explained both with regard to the adjustment of the costs, the subject of the contested act, and with regard to the non-application of the penalties. The appeals lodged by the parties do not in the least affect the contents and conclusions of the judgment under appeal” (CTR judgment, p. 5). 6.5. The criticisms put forward by the taxpayer appear well-founded. In fact, the judge is not precluded from proposing a reasoning per relationem, but it is nevertheless his duty to illustrate the reasons that lead him to consider correct and acceptable what was decided by another judge. This Court has already had occasion to clarify that “on the subject of tax proceedings, it is null and void, for breach of Articles 36 and 61 of Legislative Decree No. 546 of 1992, as well as of Article 118 disp. att. c.p.c., the judgment of the Regional Tax Commission which is completely devoid of any illustration of the objections raised by the appellant to the decision at first instance and of the considerations which led the commission to disregard them, and which merely gave reasons ‘per relationem’ to the judgment under appeal by mere adherence to it since, in that way, it remains impossible to identify the ‘thema decidendum’ and the reasons underlying the decision, and it cannot be held that agreement with the contested grounds was reached by examining and assessing the groundlessness of the grounds of appeal. (Applying this principle, the Court of Cassation annulled the judgment under appeal that had confirmed the first instance decision by merely referring to the content of that ruling and to the defence writings of one of the parties, in an entirely generic manner and without explaining the logical juridical path followed to reach its conclusions)”, Cass. sez. V, 5.10.2018, no. 24452 (conf. Cass. sez. VI V, 16.12.2013, no. 28113), and it did not fail to specify that “for the purposes of the sufficiency of the reasoning of the judgment, the judge cannot, when examining the facts of evidence, limit himself to stating the judgement in which his assessment consists, because this is the only “static” content of the complex motivational statement, ...

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 ...

Burkert Contromatic Italiana s.p.a. is engaged in sale and services of fluid control systems. The italian company is a subsidiary of the German Bürkert Group. Following a tax audit, the Italian tax authorities issued a notice of assessment for FY 2007 on the grounds that the cost resulting from the transactions with its parent company (incorporated under Swiss law) were higher than the arms length price of these transactions. The company challenged the tax assessment, arguing that the analysis carried out by the Office had been superficial, both because it had examined accounting documents relating to tax years other than the one under examination (2007), and because the Office, in confirming that the Transactional Net Margin Method (TNMM) was the most reliable method, in order to verify whether the margin obtained by the company corresponded to the arm’s length value, had carried out a comparability analysis (aimed at identifying the net remuneration margin obtained by independent third parties in similar transactions), identifying only three comparables.. The tax authorities replied that the analysis carried out using the Transactional Net Margin income method, had revealed an average Return On Sales (R.O.S.) equal to 13.35 %, with the consequent ascertainment of the company’s higher profitability and the recovery for taxation of intra-group costs exceeding the normal value. The Provincial Tax Commission decided in favor of Burkert Contromatic Italiana s.p.a., noting that the choice of companies made by the tax authorities was completely different from that made by the company. In particular, they pointed out that the benchmark analysis carried out by the taxpayer, and attached to the appeal, had the objective of identifying independent companies operating in the national territory engaged in activities comparable to that of the taxpayer itself, i.e. commercial companies that purchased products from third-party suppliers and resold them on the national market to third-party customers; this comparison had indicated an average profitability of 4.85% compared to that ascertained by the Office of 10.26%. It also excluded that the Office had provided clear and irrefutable evidence of the methodology applied in the assessment. An appeal was lodged by the tax authorities, which complained of failure to state reasons or insufficient reasons on decisive facts and infringement of Article 110, paragraph 7, since the grounds of the judgment did not show the reasons in law justifying the acceptance of the appeal. The Regional Tax Commission rejected the appeal of the tax authorities. It held that there was no “omitted and/or grossly inadequate motivation on decisive and controversial facts” on the part of the judges at first instance and even less a violation of the provisions of Article 110, paragraph 7, of the TUIR. The tax authorities  then filed an appeal with the Supreme Court. In the appeal the tax authorities stated that it is a clear case of motivation by reference, since the regional tax court confines itself to using vague and general formulas, stating that the judgment of the provincial tax court is “clear” and “well-founded”, without giving any reason to understand why the objections raised by the tax authorities to the judgment at first instance were unfounded and why the reasoning provided by the judge at first instance was shared. Judgement of the Supreme Court The Supreme Court decided in favor of the tax authorities. It set aside the judgment under appeal and referred the case back to the court of first instance, with a different composition. Excerpts “Referring to the judgment appealed against, the C.T.R. [Commissione tributaria regionale] limited itself to stating that the first judges, ruling on the benchmark analysis, “for the purpose of identifying the companies comparable to the appellant and the relevant interquartile range of market value”, carried out by the Office on the basis of a comparison with three companies, had concluded that the Administration had not offered irrefutable evidence of the methodology applied in the assessment. It did not, however, adequately explain either the reasons why it intended to adhere to the decision of the Provincial Tax Commission and, therefore, the reasons why the method used by the Office could not be considered reliable, or why the method used by the taxpayer company should be preferred, and it failed to examine the specific observations made by the Tax Office, which had clearly and exhaustively set out the methodology actually applied and the results of the audit. In so doing, it failed to explain whether the assessment made by the tax authorities deviated from the criteria that must guide the analysis of intra-group transactions aimed at ascertaining whether the taxpayer company complied with the arm’s length price by comparing it with similar transactions carried out by independent third party companies. The taxpayer’s defence is therefore not adequately argued and the overall reading of the judgment, which also includes the factual premise and the arguments put forward by the parties at the various stages of the proceedings, does not bear witness to an independent assessment by the appeal court because it does not allow for an understanding of the assessment made with regard to the transfer pricing analysis carried out by the Office.” Click here for English translation Click here for other translation ...