In February 2016 the Regional Tax Commission rejected an appeal filed by the Revenue Agency against the first instance judgment, which had upheld an appeal brought by Italian car manufacturer, Ferrari S.p.A. against a notice of assessment issued by the Revenue Agency in which the company was accused of having applied prices lower than the ‘normal value’ in transactions with its foreign subsidiaries, in particular with the US company Ferrari NA (North America). In determining the arm’s length price of the relevant controlled transactions Ferrari had applied the CUP method. The Revenue Agency considered the TNMM to be the most appropriate method. The Regional Tax Commission observed that “for verifying the “normal value”, the Revenue Agency itself, in Circular No. 32 of 22/09/1980, had suggested the use of the CUP method instead of the less reliable TNMM method “which is not advisable due to its considerable approximation and arbitrariness’ for which reason the Office’s objection must be considered inadmissible”. On that basis the Regional Tax Commission determined that the CUP method should be applied in the case. Furthermore, the Regional Tax Commission found that the Revenue Agency had not discharged the burden of proof of tax avoidance attributed to the appellant company, for having charged prices to foreign subsidiaries that were lower than the normal value. An appeal was filed by the Revenue Agency with the Supreme Court. Judgement of the Supreme Court The Supreme Court set aside the decision of the Regional Tax Commission and upheld the Revenue Agency’s adjustments to the taxable profits of Ferrari Spa. According to the Court a transfer pricing adjustments does not require the Revenue Agency to prove the existence of tax avoidance, as stated by the Regional Tax Commission, but rather the mere existence of ‘transactions’ between related companies at a price apparently lower than the normal one. The taxpayer, by virtue of the principle of proximity of evidence, bears the burden of proving that such “transactions” took place in accordance with the arm’s length principle. Excerpts “8.5.2. In this, the contested decision ignored the fact that the development of the jurisprudence of this Court, already at the time of the issuance of the judgment rendered by the CTR, had abandoned the consideration of the nature of Article 110, paragraph 7, TUIR, as an anti-avoidance clause (see Cass. sez. 5, 18 September 2015, no. 18392; hereinafter see also Cass. sez. 5, 15 April 2016, no. 7493; Cass. sez. 5, 30 June 2016, no. 13387; Court of Cassation, section 5, 15 November 2017, no. 27018; Court of Cassation, section 5, 19 April 2018, no. 9673; most recently, while awaiting the publication of this decision, Court of Cassation, section 5, 17 May 2022, no. 15668), which leads to the further principle, affirmed by the case law of this Court, according to which “[i]n the matter of determining business income, the rules set forth in Article 110, paragraph 7, Presidential Decree no. 917 of 1986, aimed at taxing the income of a company, are not applicable to the taxable person. 917 of 1986, aimed at repressing the economic phenomenon of “transfer pricing”, i.e. the shifting of taxable income as a result of transactions between companies belonging to the same group and subject to different national laws, does not require the administration to prove the avoidance function, but only the existence of “transactions” between related companies at a price apparently lower than the normal price, while it is for the taxpayer, by virtue of the principle of proximity of proof under Article 2697 e.g. and on the subject of tax deductions, the burden of proving that such ‘transactions’ took place for market values to be considered normal within the meaning of Art. 9, paragraph 3, of the same decree, such being the prices of goods and services practiced in conditions of free competition, at the same stage of marketing, at the time and place where the goods and services were purchased or rendered and, failing that, at the nearest time and place and with reference, as far as possible, to price lists and rates in use, therefore not excluding the usability of other means of proof” (cf, more recently, Cass. sez. 5, orci. 19 May 2021, no. 13571 and already, in a conforming sense, Cass. sez. 5, 8 May 2013, no. 10742). 8.5.3. It should also be noted, in relation to the concluding passage of the grounds of the contested judgment, how the same Tax Administration had already specified in Circular No. 42/IIDD/1981 that the adequacy of a transfer pricing method must be assessed on a case-by-case basis. 8.6. In conclusion, it should be recalled how the aforementioned Court of Cassation No. 15668/2022, with specific reference to the Transactional Net Margin Method or TNMM, in referring to Section B of Part III of Chapter II of the OECD Guidelines of 2010 which regulates it, as well as, similarly, the subsequent edition of 2017, had the opportunity to affirm the principle, which must be given further continuity herein, according to which “[i]n the matter of determining business income, the rules under Article 110, paragraph 7, of Presidential Decree No. 917 of 1986, aimed at determining the transfer price of a company, are not applicable to the transfer pricing method. 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 the 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 that is based on the determination of the net margin of the transaction (so-called “TNM”), which is the basis for 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 ...

The Revenue Service had audited Severstal Distribution for FY 2008-2009 and found that the company had purchased metal products from related companies at prices above market prices. An assessment was issued where reported losses for 2009 were reduced. During the audit, Severstal Distribution indicated to the tax authorities that it had used the transactional net margin method to determine the price of its controlled transactions. However, later the company also stated that it had used the CUP method (quated steel prices from the SBB database). Severstal Distribution Ltd filed an appeal with the Administrative Regional Court. In a decision of 2019 the appeal was dismissed and the assessment of additional income upheld. An appeal was then filed by Severstal Distribution Ltd with the Administrative Court of Appeal. The issue to be examined by the Administrative Court of Appeal was whether the Revenue Service correctly determined Severstal Distribution’s income subject to corporate income tax by applying the arm’s length provisions in Section 12(2)(3) of the Law on Corporate Income Tax – i.e. whether Severstal Distribution purchased goods from related companies at above-market prices. Judgement of the Administrative Court of Appeal The Court dismissed the appeal of Severstal Distribution and upheld the decision from the Regional Court. Excerpts “Tax collection is based on the taxpayer’s cooperation with the tax administration. The tax administration can only determine the correct tax liability if it is aware of all the factual circumstances on which such liability is based. Such facts are best available and known to the taxpayer himself and it is therefore in the taxpayer’s own interest not to delay the examination of the tax liability and to provide the tax administration with the relevant information and explanations. The taxpayer’s duty to cooperate is laid down in the form of a legal obligation in paragraphs 5, 6, 10, 11 and 32.2 of the first part of Article 15 of the Law on Taxes and Duties.” “In summary, the Senate considers that there is no particular order in the choice of methods, but that the most appropriate method should be applied in each case on the basis of the circumstances of the individual case. Moreover, the choice of method is primarily the taxpayer’s responsibility, whereas the tax authorities must respect that choice as far as possible during the tax examination.” “In the light of the above, the Court was wrong to conclude that aggregated data could not be used in the application of the comparable uncontrolled price method. At the same time, as already pointed out, they must also be sufficiently comparable and meet the criteria laid down by law, bearing in mind in particular that such aggregates are not, for the most part, produced for transfer pricing purposes.” “The comparable uncontrolled price method compares a controlled transaction with a similar uncontrolled transaction to provide a direct estimate of the price that the parties could have agreed if they had used a market alternative to the controlled transaction. However, the method becomes a less reliable proxy for arm’s length transactions if all the characteristics of the uncontrolled transaction that significantly affect the prices charged between arm’s length parties are not comparable. The application of the method is limited because it is practically difficult to find an uncontrolled transaction whose differences from a related party transaction would not affect the price. Any minor inaccuracy may lead to a mispricing…” Click here for English translation Click here for other translation ...

In december 2020 the Federal Ministry of Finance in German issued a new administrative ordinance related to various transfer pricing issues. Among the issues are enhanced requirement to cooperate and submit additional documentation related to controlled transactions, but most notable may be the conditions under which estimated tax assessments can be issued. Below is an unofficial translation of the document. Click here for the original document  ...