Enoplastic SpA is engaged in production of closures for vine, spirits, oil and vinegars. Following an audit an assessment was issued by the tax authorities regarding transfer pricing. An appeal was filed by Enoplastic and the Regional Court later set aside the assessment stating that the tax authorities had not proved the existence of a tax advantage nor that the pricing determined by Enoplastic had not been at arm’s length. An appeal was then filed by the tax authorities claiming that the burden of proof was on Enoplastic due to the principle of proximity of evidence and that transfer pricing adjustments was not premised on proof of an intention to obtain tax savings. Judgement of the Supreme Court The Supreme Court upheld the decision to set aside the tax assessment. However, the basis on which the decision of Regional Court had been issued was incorrect. According to the Supreme Court transfer pricing adjustments should not be confused with tax fraud or avoidance, even if transfer pricing may be used for such purposes. Thus, transfer pricing adjustments is not premised on the tax authorities proving that a tax advantage has been archived by the incorrect pricing. The tax authorities must prove the existence of economic transactions between controlled parties at a price that appears to deviate from the normal price. Only where such evidence has been provided by the tax authorities will the burden of proof shift to the taxpayer who will then have to prove that the transaction has been priced in accordance with the arm’s length principle. Judgement of the Court The Supreme Administrative Court Click here for English translation Click here for other translation ...

This case is about deduction of certain “cost” related to sale of property and intragroup financing between an Italian company and a related group company in Luxembourg. Judgment of the Supreme Court The Court ruled partly in favour of the tax authorities and partly in favour of the PDM D srl. I regards to the deduction of the “guarantee” granted in relation to the sale of real estate the Court states: “In the present case, in the absence of proof of the above requirements in the reference financial year (2005/2006), and since the costs in question have not yet been actually incurred, but are future costs that may be incurred in subsequent financial years, following a comparison between the amount actually received from the leases and the fixed amount guaranteed by the seller company and therefore depending on the actual development of the lease relationship, the tax recovery is legitimate. ” In regards to the arm’s length nature of the interest rate the Court states: “This Court has therefore affirmed that ‘the burden of proof on the Office – in the matter of transfer pricing – is limited to demonstrating the existence of transactions between related companies and the clear deviation between the agreed consideration and the market value (abnormal value), since this burden does not extend to the proof of the elusive function of the transaction’, and that, on the other hand, ‘in the face of the evidence offered by the Administration, it is up to the taxpayer to demonstrate – by virtue of the principle of proximity of the evidence, inferable from Article 2697 of the Civil Code. – It is for the taxpayer to demonstrate – by virtue of the principle of closeness of evidence, as inferable from Article 2697 of the Civil Code – not only the existence and relevance of the deducted costs, but also any other element that allows the Office to consider that the transaction took place at market value.” “In the present case, the C.T.R. made a precise assessment, applying the concept of “economic normality of the transaction”, considering justifiable the agreement, in favour of the Luxembourg parent company, of an interest rate of 2%, taking into account the specific concrete characteristics (the fact that it was an intra-group loan but with a short term and of an amount exceeding one million euros, as well as the lower average riskiness of the borrowing company, a company under Luxembourg law, financed by a company from the South, in particular), which made the financing in any event not comparable to other financing provided by the same company or by the banking system. The statements contained in the judgment are therefore consistent with the rules governing the remuneration of intra-group financing and with the rules on transfer pricing, with reference to the appropriateness of the interest rate and its correspondence to the “normal market value”.” Click here for English translation Click here for other translation ...

SGL CARBON SPA paid interest on loans received from the German parent of the SGL Group. The tax authorities considered, that the interest rate applied to the intra-group loan was significantly higher than the average interest rate applied in the German market. SGL disagreed and brought the case before the Italien Courts. The Court of first instance ruled in favor of SGL but this decision was set aside by the second instance court. SGL then filed an appeal to the Supreme Court. Judgement of the Supreme Court The Supreme Court dismissed SGL’s appeal. “In view of the above, it is – therefore – quite clear that in the application of the method of “price comparison” preference should be given to the so-called internal comparison, based on the price lists and tariffs of the entity that has supplied the goods or services in the relationship between such entity and an independent company, given that it is to the above-mentioned documentary elements of comparison that the Administration must first of all refer, “as far as possible”, and taking into account any “customary discounts”. Secondly, the Administration will have to refer to the price lists and price lists of the chambers of commerce, or to professional tariffs, when examining comparable transactions between independent companies (so-called external comparison) belonging to the same market, i.e. that of the supplier of the goods or services. Finally, and in a completely subsidiary and supplementary way, the Office may have recourse – pursuant to the first part of paragraph 3 of the aforementioned Article 9 – to the “average price” and in “conditions of free competition” for similar goods or services, “in the time and place where the goods or services were acquired or provided, and, failing that, in the nearest time and place”.” All this being said, it is – consequently – quite clear that, in the concrete case, the Financial Administration has correctly applied the above criteria On the basis of such data, therefore, the Office has ascertained that the average interest rate practised on the German financial-credit market, i.e. in the State of residence of the lender, “is lower than that adopted for the financing operation in question”. This leads to the conclusion – entirely correct, as explained above – of the fiscal non-deductibility, from the corporate income relevant for IRES purposes, of the costs represented by said interest, clearly increased in order to increase the profits of the German parent company, reducing those of the Italian subsidiary in order to avoid national taxation, in clear violation of Article 110, paragraph 7 of the CIT decree.” Click here for English translation Click here for other translation ...