At issue in the Philip Morris case was the scope of the definition of permanent establishments – whether or not activities in Italy performed by Intertaba s.p.a. constituted a permanent establishment of the Philip Morris group. According to the tax authorities the taxpayer had tried to conceal the P.E. in Italy by disguising the fact that the Italian company was also acting in the exclusive interest of the Philip Morris group. On the basis of a tax audit report the Revenue Department – VAT office of Milan, by means of separate adjustment notices for the years 1992 to 1995, charged AAA, and on its behalf BBB s.p.a, for having failed to invoice the amounts paid by the State Monopolies Administration for the supply-distribution in the national territory of cigarettes under the CCC brand. In addition, according to the Administration, the company had failed to self-invoice the amounts for transport and distribution of the tobacco in the national territory. The Court of Appeal set aside the assessment issued by the tax authorities, and the tax authorities in turn filed an appeal with the Supreme Court. Judgement of the Supreme Court The Supreme Court set aside the decision of the court of first instance and remanded the case with the following instructions: “…Ultimately, the activity in question – especially if it relates to the distribution of goods in a large market – does not seem to be comparable to that of a broker or a general or independent agent, which do not give rise to a permanent establishment, as expressly provided for in Article 5(6) of the OECD Model. 3.8. In conclusion, it must be held that the Regional Tax Commission not only failed to provide an adequate statement of reasons for the evidence offered by the office, in particular by failing to provide a full account of the evidence gathered in the inspection by the Guardia di Finanza and to carry out an analytical assessment in the light of the reasons of the parties, but also infringed and/or misapplied the rules and principles contained in the OECD Model and incorporated in the bilateral Italy-Germany Convention. The upholding of the appeal entails the cassation of the contested judgment, with referral to another section of the Regional Tax Commission of Lombardy. The referring judges must therefore, after analytically examining the content of the documentation offered and the findings made in the assessment, an examination of which they must give adequate reasons, comply with the following principles of law: (I) a corporation with its registered office in Italy may take on the role of a multiple permanent establishment of foreign companies belonging to the same group and pursuing a single strategy. In such a case, the reconstruction of the activity carried out by the domestic company, in order to ascertain whether or not it is an ancillary or preparatory activity, must be unitary and related to the group’s program considered as a whole; (II) an independent supply of services rendered in the national territory for consideration, when there is a direct and immediate link between the supply and the consideration, constitutes a transaction subject to VAT and to the related obligations of invoicing or self-billing, declaration and payment of the tax, regardless of whether it is part of a contract providing for other services to be rendered by the recipient and regardless of whether the latter, being a non-resident, has a fixed establishment in Italy; (III) the activity of controlling the exact performance of a contract between a resident and a non-resident person cannot in principle be regarded as an auxiliary activity within the meaning of Article 5(4) of the OECD Model Law and Article 5(3)(e) of the Convention between Italy and the Federal Republic of Germany against double taxation of 18 October 1989, which was ratified and made enforceable in Italy by Law No 459 of 24 November 1992? (IV) the entrusting to a domestic structure of the function of business operations (management) by a company not having its seat in Italy, even if it concerns a certain area of operations, entails the acquisition by that structure of the status of a permanent establishment for the purposes of VAT; (V) the assessment of the requirements of the permanent establishment or fixed establishment, including that of dependence and that of participation in the conclusion of contracts, must be conducted not only at the formal level, but also – and above all – at the substantive level. If it reaches the conclusion that BBB s.p.a. acted as a permanent establishment of AAA, the Regional Commission will have to decide on the issues raised in relation to the finding of omitted invoicing without payment of tax and on the other issues raised in the preliminary appeals, which have been absorbed by the upholding of the complaints on the non-existence of a permanent establishment.” Click here for English translation Click here for other translation ...