At issue was the “royalty-free” use of intangible assets under an agreement whereby PepsiCo’s Singapore affiliate sold concentrate to Schweppes Australia, which then bottled and sold PepsiCo soft drinks for the Australian market. As no royalties were paid under the agreement, no withholding tax was paid in Australia. The Australian Taxation Office (ATO) determined that the payments for “concentrate” from Schweppes to PepsiCo had been misclassified and were in part royalty for the use of PepsiCo’s intangibles (trademarks, branding etc.), and an assessment was issued for FY2018 and FY2019 where withholding tax was determined on that basis. The assessment was issued under the Australian diverted profits tax provisions. The assessment was appealed to the Federal Court, which in November 2023 found in favour of the tax authorities. PepsiCo then appealed to the Full Federal Court. Judgment In a split decision, the Full Federal Court overturned the decision of the Federal Court and found in favour of PepsiCo. Excerpts “In summary, we conclude that the payments made by the Bottler to the Seller were for concentrate alone and did not include any component which was a royalty for the use of PepsiCo/SVC’s intellectual property. The payments were in no part made in ‘consideration for’ the use of that intellectual property and they did not therefore include a ‘royalty’ within the definition of that term in s 6(1) of the ITAA 1936. Further, the payments were received by the Seller on its own account and they cannot be said to have been paid to PepsiCo/SVC. The Commissioner’s attempts to bring PepsiCo/SVC to tax under s 128B(2B) therefore fails for two interrelated reasons: there was no ‘royalty’ as required by s 128B(2B)(b) and the payments made to the Seller by the Bottler cannot constitute ‘income derived’ by PepsiCo/SVC within the meaning of s 128(2B)(a).” “PepsiCo/SVC’s appeals in the royalty withholding tax proceedings should be allowed, the orders made by the trial judge set aside and in lieu thereof there should be orders setting aside the notices of assessment for royalty withholding tax. The Commissioner’s appeals in the Part IVA proceedings should be dismissed. PepsiCo/SVC should have their costs in both sets of appeals as taxed, assessed or otherwise agreed. The parties should bring in a minute of order giving effect to these conclusions within 14 days.” Click here for translation ...

Vincenzo Zucchi spa is an Italian company that operates in the textile sector. Following an audit an assessment was issued related to various controlled transaktions – deductions for bad debt, deductions for costs, lack of income on a loan, income from sale of goods to foreign subsidiaries, cost of goods and services purchased from subsidiaries in non EU countries, costs of employees VAT etc. The adjustment was partially upheld and partially dismissed by the Court of Appeal. An appeal and cross appeal was then filed with the Supreme Court by the tax authorities and Vincenzo Zucchi. Among the objections in the cross appeal filed by Vincenzo Zucchi was a claim stating that transfer pricing rules were not applicable in the case since the group was using global tax consolidation. Judgement of the Supreme Court The Supreme Court upheld the second plea in the main appeal (undue deduction of costs charged by the subsidiary Basitalia Leasing S.p.A.), rejecting all the other pleas in the main appeal and the cross-appeal. The judgment under appeal was set aside in relation to the upheld plea, and referred back to the CTR for reconsideration and also for the costs of these proceedings. In regards to the second plea in the appeal on deduction of costs based on an unauthenticated private contract “The tax appeal court based its decision on the point in question essentially on the use of a document that was unquestionably unregistered, therefore devoid of a certain date, and not even signed by the taxpayer company. As regards the first aspect, it is clear that Article 2704, paragraph 1, of the Italian Civil Code has been infringed, since it is documentary evidence that cannot be relied upon by the tax office precisely because of the lack of the “certainty” requirements provided for by such legislative provision (see Section 5, Sentence no. 7636 of 31 March 2006, Rv. 588675 – 01). In addition, the failure of the taxpayer company to sign the contract also makes the correlative contractual obligation uncertain and, in the final analysis, invalidates the judgment of the Lombardy Regional Tax Court in so far as it entails a misapplication of Article 109(1) of Presidential Decree 917/1985, with particular regard to the “certainty/determinability” of the negative income component in question.” In regards to the plea in the cross appeal on global tax consolidation “It is rather evident that these are autonomous legal provisions, which in their literalness do not contain direct elements of connection/coordination. This leads to the systematic hermeneutical solution that, in the case of intra-group sales of goods or services, taxation at “normal value” is not affected by the establishment of the so-called unified tax group, or, even better, that the unification of the income statement of the companies belonging to a group opting for the (global) consolidation, according to the logic of the algebraic sum of individual corporate income, is based on the prior – autonomous determination of the same according to the general rules. Moreover, investigating the rationale of the domestic rules on transfer pricing, this Court has repeatedly ruled, with a clearly prevailing orientation, that it should not be found in anti-avoidance purposes, but in those of preventing distortion of free competition and preserving the tax power of the EU member states (ex pluribus, in this sense, see Cass., 1232/2021, 16948/2019, 9673/2018, 18392/2015).” “Concluding on the decision points under examination, it is appropriate to formulate the following principle of law: “The rules on transfer pricing under Article 11O, paragraph 7, in relation to Article 9, paragraph 3, Presidential Decree 917/1986 and the “global tax consolidation” under 130, ss., Presidential Decree 917/1986 are distinct and autonomous, so that they do not interfere with each other and must be applied separately, since the effects of the option for group taxation are limited by the specific provision of Article 131 of the same TU.” Click here for English translation Click here for other translation ...

Cadence Design System Srl received a sales commission of 29% under a written agreement dated 1999 with a related party in Ireland. However, in 2003 the commission rate was changed to only 20%. The change was communicated to Cadence Design System Srl by e-mail from the Irish company dated 6/08/2002. Following an audit, the tax authorities issued an assessment where the taxable income was calculated on the basis of the commission rate originally agreed by the parties. A complaint was filed by Cadence and in 2010 the regional tax court (CTR) issued a decision where the commission rate was set to 22.38% for FY 2003 based on a transfer pricing study provided in the case. Not satisfied with the decision an appeal was filed with the Supreme Court. Judgement of the Supreme Court The Supreme Court dismissed the appeal and upheld the decision of the regional tax court. Excerpts “The ruling in question, in fact, inferred the existence of greater revenues from the clause in the (written) commission agreement between the sister companies, under which the consideration due to the taxpayer by the Irish company was set at 29% of the revenues. In compliance with the evidentiary mechanism of Article 39(1)(d), the CTR, therefore, by an assessment of merit that cannot be reviewed by the court of legitimacy, ruled out that the factual elements relied on by the appellant to demonstrate the reduction of the commission from the amount originally provided for, were capable of eliminating the probative effectiveness of the relevant contractual clause.” “The appellant complains that the CTR applied the erroneous regula iuris according to which, in the absence of contrary proof on the part of the taxpayer, the taxpayer’s claim, assisted by a presumption iuris tantum of foundation, should be upheld. It points out that the appellate court: “should have ascertained whether documentation existed, i.e. positive proof of the office’s claim and, in the absence of any proof of the Treasury’s assumption, should have allowed the taxpayer’s appeal.” (See p. 94 of the appeal). He submits that, in so doing, the appellate court failed to notice that the percentage provided for in the contract had then been modified by the parties, as attested by the e-mail of 6/08/2002, addressed by the Irish sister company to the Italian taxpayer, which indicated the new commission percentage of 20%. According to the defence, the CTR, by disregarding this element of knowledge, also infringed Article 11 of the Vienna Convention, which recognises that a contract of sale between intra-group companies, belonging to different States, does not need to be in writing, ad substantiam or ad probationem, and indeed is not subject to any formal requirement. “The CTR, on the contrary, presumed the existence of greater revenues on the basis of the negotiation clause referred to several times above, and, subsequently (with a judgement on the merits, unquestionable in the court of legitimacy), did not find that the taxpayer had provided evidence of the reduction of the percentage of 29%, denying, inter alia, that the e-mail from the Irish company, addressed to the appellant, communicating the reduction of the commission percentage from 29% to 20%, was capable of: “invalidate the very different conclusion of the written contract” (see page 5 of the contested judgment).” “In the present case, it is clear that the judgment of appeal is not criticised for a motivational defect concerning a historical fact that is controversial and decisive for the judgement, but rather, in an inadmissible manner, for the relevance that it attributed to certain concrete elements of the case (starting with the written contract that provided for a commission percentage of 29%), to the detriment of others, deemed irrelevant (for example: the e-mail of 6/08/2002), in order to recognise and affirm the validity of the tax assessment.” Click here for English translation Click here for other translation ...