The tax authorities had issued a tax assessment disallowing the deductibility of intra-group service costs charged to Gru Comedil s.r.l. because, in the opinion of the tax authorities, the company had not provided sufficient documentation and proof of the benefits of the alleged services received (management services). Gru Comedil, and later the tax authorities, appealed the decision, which eventually reached the Supreme Court. Judgment The court overturned the tax authorities’ assessment and ruled in favour of Gru Comedil s.r.l. Excerpts in English “According to an approach widely shared by this Court, in the matter of so-called intra-group costs, in order for the consideration paid to the parent company or to the company entrusted with the service for the benefit of another subsidiary to be deductible by the company receiving it, it is necessary that the subsidiary derives an actual utility from the remunerated service and that this utility is objectively determinable and adequately documented (Court of Cassation, n. 26/01/2023, n. 26/01/2023, n. 1795, followed by many others, including recently Supreme Court, n. 1921, 06/07/2021, n. 1919). 30/01/2023, no. 2689; Cass. 27/01/2023, no. 2599; Cass. 04/03/2020, no. 6820; Cass. 14/12/2018, no. 32422; Cass. 04/10/2017 no. 23164; Cass. 23/11/2015, no. 23027; Cass. 18/07/2014, no. 16480; Cass. 21/12/2009, no. 26851), even if those costs do not directly correspond to revenues in the strict sense (Cass. 05/12/2018, no. 31405; previously Cass. 01/08/2000, no. 10062). Moreover, the administrative practice (C.M. no. 32/9/2267 of 22 September 1980) that, beyond the flat-rate percentage of the costs charged by the parent company to the subsidiaries, subordinates the deductibility of costs deriving from contractual agreements on services to the actuality and inherent nature of the expense to the business activity carried out by the subsidiary and to the real advantage derived by the latter (Cass. 11/11/2015, no. 23027); it should be noted that the same circular expressly specifies that the control on the utility (and on the inherence) is prejudicial to the assessment of the normal value (and therefore the appropriateness of the consideration). This approach is in line with the OECD guidelines, according to which, on the subject of intra-group provision of services, it is necessary to proceed to the so-called. benefit test, i.e., to verify whether the activity in question confers on the enterprise an advantage aimed at improving its economic or commercial position (OECD Guidelines, 18 July 2010, Chapter VII), and with the rigorous approach, on the subject of OECD-derived arbitrages, of which there is ample – and not contradicted – trace in the sectional jurisprudence (Cass. 06/07/2021, no. 19001). The existence of the cost, its pertinence and usefulness, and finally its determinability are therefore different issues and all preceding its adjustment according to the normal value.” (…) “The first complaint relates to the profile of inherence, which must be understood as set out in the preamble;  On this point, it is untrue that the CTR did not assess the existence of a benefit for the company, holding instead explicitly that the management fees charged by the foreign parent company to the Italian subsidiary are deductible where they result from a written agreement containing the details of the services and specifying a congruous allocation criterion, << more if the subsidiary’s organisational structure does not appear to be suitable for the performance on its own of the services received from controllante>>, correctly pointing out that the inherent nature did not derive from a connection between costs and revenues but it was necessary to assess whether the former were functional to the business activity. The second objection, relating to the possible presence of non-deductible cost items, is inadmissible because it does not relate to the specific rationale of the decision on this point, the CTR having expressly pointed out the groundlessness of this objection since <<non is a mere reversal of costs incurred by the parent company on behalf of Gru Comedil but the cost of a management service whose quantification must be objectively determinabile>>. The third ground of appeal is unfounded, in that the CTR did not attribute any effect of reliance to the independent auditors’ report, indeed expressly stating that it did not even determine a relative presumption of the truthfulness of the records, and recalling this Court’s orientation according to which expenses and other negative components (costs) are allowed as deductions, if and to the extent that they are charged to the profit and loss account for the year in which they are incurred, which, which, especially when it is a matter of ascertaining facts that cannot be analytically proven, constitutes, as part of the financial statements, a relevant source of information and may be verified by the tax authorities in accordance with the criteria of congruity and consistency, also taking into account the auditor’s report, itself a relevant means of proof, because of the public control profiles and the auditor’s civil and criminal liability, and may only be rebutted by producing documents demonstrating the auditor’s error or breach (Cass. 12/03/2009, no. 5926; Cass. 26/02/2010, no. 4737). Above all, however, the CTR did not at all use the auditor’s report as the sole source of its own conviction, attributing overall relevance to the entire compendium of evidence produced by the company, and in particular acknowledging the examination of the cost-sharing agreement, the invoices issued by the parent company, the statements of account, the specifications of the criteria for the allocation of corporate charges the auditing firm’s annual report and also the auditing firm’s certification and the accounting records, which, according to the defence, had been produced with the indication of the name of each employee to whom the disputed services were to be referred, evidently in order to overcome the first, and indeed only, explicit ground of dispute contained in the notice of assessment. After examining these documents, the CTR, with reasons, albeit concise, that were certainly sufficient and consistent, found that they showed the nature of the services rendered, the allocation criteria, and the reality of the costs incurred by the parent company, making ...

(i) Company A is a consumer products company located in the United States. Companies B and C are wholly-owned subsidiaries of Company A and are located in Countries B and C, respectively. Company A and its subsidiaries manufacture products for sale in their respective markets. Company A hires a consultant who has expertise regarding a manufacturing process used by Company A and its subsidiary, Company B. Company C, the Country C subsidiary, uses a different manufacturing process, and accordingly will not receive any benefit from the outside consultant hired by Company A. In allocating and apportioning the cost of hiring the outside consultant (100), Company A determines that sales constitute the most appropriate allocation key. (ii) Company A and its subsidiaries have the following sales: Company A B C Total Sales 400 100 200 700 (iii) Because Company C does not obtain any benefit from the consultant, none of the costs are allocated to it. Rather, the costs of 100 are allocated and apportioned ratably to Company A and Company B as the entities that obtain a benefit from the campaign, based on the total sales of those entities (500). An appropriate allocation of the costs of the consultant is as follows: Company A B Total Allocation 400/500 100/500 Amount 80 20 100 ...

Company A pays an annual license fee of 500x to an uncontrolled taxpayer for unlimited use of a database within the corporate group. Under the terms of the license with the uncontrolled taxpayer, Company A is permitted to use the database for its own use and in rendering research services to its subsidiary, Company B. Company B obtains benefits from the database that are similar to those that it would obtain if it had independently licensed the database from the uncontrolled taxpayer. Evaluation of the arm’s length charge (under a method in which costs are relevant) to Company B for the controlled services that incorporate use of the database must take into account the full amount of the license fee of 500x paid by Company A, as reasonably allocated and apportioned to the relevant benefits, although the incremental use of the database for the benefit of Company B did not result in an increase in the license fee paid by Company A ...

The principles of this paragraph (k) are illustrated by the following examples: ...

The practices used by the taxpayer to apportion costs in connection with preparation of statements and analyses for the use of management, creditors, minority shareholders, joint venturers, clients, customers, potential investors, or other parties or agencies in interest will be considered as potential indicators of reliable allocation methods, but need not be accorded conclusive weight by the Commissioner. In determining the extent to which allocations are to be made to or from foreign members of a controlled group, practices employed by the domestic members in apportioning costs among themselves will also be considered if the relationships with the foreign members are comparable to the relationships among the domestic members of the controlled group. For example, if for purposes of reporting to public stockholders or to a governmental agency, a corporation apportions the costs attributable to its executive officers among the domestic members of a controlled group on a reasonable and consistent basis, and such officers exercise comparable control over foreign members of the controlled group, such domestic apportionment practice will be considered in determining the allocations to be made to the foreign members ...

Any reasonable method may be used to allocate and apportion costs under this section. In establishing the appropriate method of allocation and apportionment, consideration should be given to all bases and factors, including, for example, total services costs, total costs for a relevant activity, assets, sales, compensation, space utilized, and time spent. The costs incurred by supporting departments may be apportioned to other departments on the basis of reasonable overall estimates, or such costs may be reflected in the other departments’ costs by applying reasonable departmental overhead rates. Allocations and apportionments of costs must be made on the basis of the full cost, as opposed to the incremental cost ...

...

In any case where the renderer’s activity that results in a benefit (within the meaning of paragraph (l)(3) of this section) for one recipient in a controlled services transaction also generates a benefit for one or more other members of a controlled group (including the benefit, if any, to the renderer), and the amount charged under this section in the controlled services transaction is determined under a method that makes reference to costs, costs must be allocated among the portions of the activity performed for the benefit of the first mentioned recipient and such other members of the controlled group under this paragraph (k). The principles of this paragraph (k) must also be used whenever it is appropriate to allocate and apportion any class of costs (for example, overhead costs) in order to determine the total services costs of rendering the services. In no event will an allocation of costs based on a generalized or non-specific benefit be appropriate ...

...

For purposes of this section, total services costs means all costs of rendering those services for which total services costs are being determined. Total services costs include all costs in cash or in kind (including stock-based compensation) that, based on analysis of the facts and circumstances, are directly identified with, or reasonably allocated in accordance with the principles of paragraph (k)(2) of this section to, the services. In general, costs for this purpose should comprise provision for all resources expended, used, or made available to achieve the specific objective for which the service is rendered. Reference to generally accepted accounting principles or Federal income tax accounting rules may provide a useful starting point but will not necessarily be conclusive regarding inclusion of costs in total services costs. Total services costs do not include interest expense, foreign income taxes (as defined in § 1.901-2(a)), or domestic income taxes ...

A ruling was issued by the Italian Revenue Service on the following question on the VAT treatment of Transfer Pricing adjustments. 1) an internal CUP (Compared Uncontrolled Price) methodology is used, on the basis of which, net of appropriate adjustments, the price of goods charged by ALFA S.p.A. to its EU affiliates is compared with the price applied by the same company in transactions with independent third parties. The adjustments applied to the price identified by the CUP method, as clarified by the same applicant in the note forwarded at the time of submitting the supplementary documentation, consist of a discount of XX on the price of finished products that can be applied to independent third parties; this last reduction would be attributable to the higher costs borne by the subsidiaries compared to third party resellers; 2) at the end of the year, a corroborative analysis (sanity check) is carried out using the TNMM (Transactional Net Margin Method), aimed at ensuring that, without prejudice to the application of the intragroup prices identified according to the internal CUP method (net of the appropriate corrections), the margins (expressed in terms of Operating Margin or Return or Sales) of the EU affiliates are also consistent with the functional profile assumed by the same and fall within the interquartile range of the specific benchmark developed by the group. The internal CUP method described above was used to quantify the prices charged in all intra-group transfers between ALFA S.p.A. and its European subsidiaries, including those listed above, i.e. BETA Holland, BETA Hungary, BETA Prague, BETA Germany and the Austrian branch of the latter. The corroborative analysis carried out (at the end of the year) in accordance with the Group’s TP policy showed that in the year XXX the aforementioned companies achieved margins above the upper quartile of the benchmark. Consequently, in order to bring the operating margin back to levels that are consistent with their functional profile, as outlined by the specific benchmark developed by the group, it was necessary to make adjustments. Therefore, ALFA S.p.A. reports that it will “issue adjustment invoices” to the EU subsidiaries that will record an extra cost that will reduce their EBIT and therefore the relative ROS net sales revenue. In light of the above, the Company – after having highlighted that the financial transactions between the Company and the German subsidiary and the Austrian permanent establishment of the latter are subject to a procedure of Bilateral Advanced Price Agreement, for the tax periods XXX – asks for clarifications on the treatment, for the purposes of VAT, to be reserved to the “price adjustments” described above, made for the sole purpose of bringing the marginality of the above-mentioned EU subsidiaries within the range of values identified by the group’s TP policy. Tax Ruling of the Italian Revenue Agency ” … According to the Community Courts, “by allowing in certain cases to consider that the taxable amount is equal to the open market value of the transaction, Article 80(1) of the VAT Directive introduces an exception to the general rule laid down in Article 73 of the latter which, as such, must be interpreted restrictively (see. (see judgments of 21 June 2007, Ludwig, C-453/05, ECR p. I-5083, paragraph 21, and of 3 March 2011, Commission v Netherlands, C-41/09, not yet published in the ECR, paragraph 58, and the case-law cited therein)”. As a corollary to the above principle, the Court of Justice of the European Union itself has ruled that “the conditions of application laid down by Article 80(1) of the VAT Directive are exhaustive and, therefore, national legislation cannot provide, on the basis of that provision, that the taxable amount is to be equal to the open market value of the transaction in cases other than those listed in that provision, in particular where the supplier, the vendor or the purchaser is entitled to deduct VAT in full”. (In this sense judgment of 26 April 2012 in case 621/10) The Community guideline on the scope of application of Article 80 of Directive no. 112 of 2006 has been confirmed by the case law of the Supreme Court of Cassation in its judgment no. 2240 of 2018, referred to by the petitioner. Having said that, it should be noted that, as also emerges from the note forwarded by the petitioner at the time of submission of the supplementary documentation, the TP adjustments in question, although involving for the foreign subsidiaries of ALFA S.p.A. the recognition of an extra cost aimed at lowering their operating margin, are not directly related to the original sales of finished products made by the same petitioner. In other words, even if the adjustments made under the TNMM method do in fact result in the recognition of an additional cost for the foreign subsidiaries, it is not possible to establish, on the basis of the documentation provided by the applicant, that such additional cost is directly linked to the transactions (supply of goods) already carried out and, therefore, that it constitutes an upward adjustment of the VAT base of the same. Therefore, it is considered that the financial adjustments made as a result of the TP adjustments under review, which were carried out in implementation of the TP policy of the “BETA” Group, are excluded from the scope of application of VAT.” Click here for English translation Click here for other translation ...

An Italian parent company “Lender SpA” had granted interest free loans to foreign subsidiaries. Lender SpA had also paid subsidiaries for services rendered. The Italian tax authorities held that interest should be paid on the loans and that the company had not sufficiently demonstrated the conditions to justify the deductibility of costs of services. The regional Court found in favor of the tax authorities and dismissed the appeal of Lender SpA. “For these loans, which took place on the initiative of the Managing Director and in the absence of a resolution of the Shareholders’ Meeting, the Company partly used its available liquidity and partly resorted to the credit market. In this situation, contrary to what was claimed by the company xxxxx, the principle established by the aforementioned art. 110, paragraph 7 of the Consolidated Income Tax Act should have been applied and, therefore, the Italian company should have valued the financing services provided to its foreign subsidiaries at the same price it would have charged to independent companies for similar transactions carried out under similar conditions in a free market. The arm’s length principle, established by the OECD treaties, applies to intra-group services, which also include loan agreements (see OECD transfer pricing Guidelines for Multinational Enterprises and Tax Administrations of 22 July 2010, paragraphs 7.14 and 7.15 of Chapter VII). According to the above mentioned guidelines, ‘payment for intra-group services should be that which would have been made and accepted between independent enterprises, in comparable circumstances’ and, in the case of financing, as in the present case, a remuneration must be present, through the provision of an interest rate.” “the provisions of Article 110 of the Consolidated Income Tax Law apply “not only when the prices or consideration agreed upon are lower than the average prices in the economic sector of reference, but also when a zero consideration has been agreed upon for the sale of the asset (in this case, a certain amount of money). The Inland Revenue Office, already in 1980, with Circular No. 32, had clarified that intra-group transactions, including loans, are subject to transfer pricing rules.” “the provisions of Article 110 of the Consolidated Income Tax Law apply “not only when the prices or consideration agreed upon are lower than the average prices in the economic sector of reference, but also when a zero consideration has been agreed upon for the sale of the asset (in this case, a certain amount of money).” “With regard to the deduction of costs for the provision of intra-group services (concerning administrative, tax, legal, commercial, financial, etc.), this T.R.C., agreeing with the decision appealed, notes that the taxpayer has not sufficiently demonstrated the conditions to justify the deductibility of the costs invoiced by the parent company xxxxx towards the subsidiary xxxxx, merely recalling an agreement between the aforementioned companies. In addition, the assessment activity revealed that, in the year under dispute: the xxxxx company increased the number of staff assigned to carry out the services invoiced by the parent company, hiring another four administrative employees (which were added to another four hired in 2012); it incurred significant costs for professional fees (equal to 949 euros).073, 19) and for legal expenses (equal to € 174,616.32); she availed herself of a tax consultant, to whom she paid about € 150,000.00 in 2013; for the preparation of the financial statements she was assisted by the xxxxx auditing firm; for legal affairs she availed herself of xxxxx. These circumstances are suitable to demonstrate that the company carries out independent and relevant administrative activities xxxxx.” Click here for English translation Click here for other translation ...

At issue was deduction of VAT on purported costs incurred for intra-group services, which had been deemed non-deductible for tax as well as VAT purposes by the Italien Tax Authorities, as the taxpayer had not been able to prove the effectiveness and relevance of these services. The Supreme Court found that in order for intra-group cost to be deductible (and VAT deductible) taxpayer must prove that, a real service have been received which is objectively determinable and adequately documented. This burden of proof had not been lifted by the taxpayer and VAT payments on the purported services were consequently non-deductible. Click here for English translation ...

The tax authorities had issued an assessment where deductibility of service costs charged to an Italien company had been disallowed for tax purposes, as the Italien company – according to the tax authorities – had not provided sufficient proof of the alleged benefits from the purported services received (marketing, telephone, EDP and legal, accounting and tax consultancy services). Judgement of the Supreme court. The Court dismissed the appeal of Alfa Gomma. Excerpts from the Judgement “By the second ground, alleging infringement of Article 2697 of the Civil Code, the appellant criticises the judgment of appeal in so far as it finds that Alfa Gomma Sud did not discharge its burden of proof, since the documentation produced does not make it possible to carry out an adequate check as to the existence, relevance and usefulness of the costs of the services charged by the parent company Alfa Gomma SpA. It submits that, in so doing, the court of second instance wrongly burdened the taxpayer with the burden of proving facts and legal relationships relating to other entities, since it was only required to offer evidence of the contractual source of the costs charged by the parent company and of their regular invoicing to the taxpayer subsidiary.” “In fact, the OECD Guidelines on the provision of intra-group services already state in §7.25 that “the allocation [of costs] may be based on turnover” and in §7.27 they clarify that, however, “when an indirect allocation method is used, the relationship between costs and services appears unclear and therefore it may be difficult to assess the benefit obtained”. The legitimacy of the administrative practice (Ministerial Circular No. 32/9/2267 of 22 September 1980) which justifiably subordinates the deductibility of costs deriving from contractual agreements on services rendered by the parent company (cost-share agreements) to the actuality and inherent nature of the expense to the business activity exercised by the subsidiary and to the real advantage derived by the latter, without the control requirements of the parent company, peculiar to its function as shareholder, being relevant in this regard. In such a perspective, it is not sufficient to show the contract concerning the services provided by the parent company to the subsidiaries and the invoicing of the fees, since those elements necessary to determine the actual or potential benefit obtained by the subsidiary receiving the service must specifically emerge.” “…In the present case, the services concretely provided to Alfa Gomma Sud remained in the appeal at the level of a purely abstract statement..” The Court ruled in favor of the tax administration. Click here for English translation Click here for other translation ...

Gemplus India Pvt. Ltd. is a part of the Gemplus group, engaged in providing smart card solutions for the telecommunications industry, financial services industry and other e-businesses. The company entered into a intra group management services agreement for receipt of services in marketing and sales support, customer service support, finance, accounting and administration support and legal support. The tax administration found there was no clear proof that such services had actually been rendered. There was no specific benefit derived by the Indian company. Gemplus India Pvt. Ltd. had not established the benefit of these services and had already incurred expenses towards professional and consultancy services and employed qualified personnel in India for rendering similar services. The Appellate Tribunal decided the case in favour of Revenue. To satisfy the arm’s-length standard, a charge for intra group services or intangibles must at least meet the following conditions: • The need for intra group services or intangibles is established. • The intra group services or intangibles have actually been received. • The benefit from intra group services or intangibles is commensurate with the charge ...