BenQ Italy SRL is part of a multinational group headed by the Taiwanese company BenQ Corporation that sells and markets technology products, consumer electronics, computing and communications devices. BenQ Italy’s immediate parent company was a Dutch company, BenQ Europe PV.
Following an audit the tax authorities issued a notice of assessment for FY 2003 in which the taxpayer was accused of having procured goods from companies operating in countries with privileged taxation through the fictitious interposition of a Dutch company (BenQ Europe BV), the parent company of the taxpayer, whose intervention in the distribution chain was deemed uneconomic. On the basis of these assumptions, the tax authorities found that the recharge of costs made by the interposed company, were non-deductible. The tax authorities also considered that, through the interposition of BenQ BV, the prices charged by the taxpayer were aimed at transferring most of the taxable income to the manufacturing companies of the BenQ Group located in countries with privileged taxation. Thirdly, the costs recharged by the Dutch company to the taxpayer for the insurance of the solvency risk of its customers was denied.
Not agreeing with the assessment BenQ Italy filed a complaint which was rejected first by the provincial court and later by the regional court. The regional court held – in relation to purchases from non-EU countries – that there were no economic reasons for the interposition of the parent company in relation to such purchases. Secondly, the court found that the taxpayer did not allocate the income earned in Italy according to the market values of the goods purchased from the group’s distribution chain, which resulted from the variability of the unit prices and the application by the seller under Dutch law of negative mark-up prices, constituting circumstantial evidence of the transfer of the economic advantage to group companies located in other countries. Finally, it held that the insurance costs were not inherent.
BenQ then filed an appeal with the Supreme Court based on ten grounds.
In the forth ground of appeal BenQ Italy alleged that the judgment under appeal held that the rules on transfer prices had been infringed. BenQ Italy argues that the burden of proof is on the tax authorities, in order to overcome the documentary (and negotiated) element of the purchase price agreed between the seller and the other companies in the group, to provide evidence that such price constitutes a breach of the arm’s length principle. BenQ also points out that none of the methods advocated on the basis of the OECD Guidelines and the Circular of the tax authorities No 32/9/2267 of 1980 has been applied in the present case, with a consequent breach of the rules governing placement of the burden of proof.
Judgement of the Supreme Court
The Supreme Court granted the appeal on the fourth ground. The judgment of the regional court was therefore set aside and referred back to the regional court for reconsideration.
“5 – The fourth ground is well-founded.
5.1 – The judgment appealed against found, on the basis of the contested notice, that “the interposition of the parent company appears to be for the purpose of circumventing the tax rules – which is not economically justifiable – and consequently the mark-up applied to the aforementioned imports loses the requirement of inherence in that it is not necessary or causally/mente connected with the income-producing activity under Article 11O(7) of the TUIR”. While drawing inspiration from the recovery of the non-deductibility of the cost of recharge (based on the different and distorted assumption of the uneconomic nature of the interposition of the company under Dutch law), the CTR hypothesizes the existence of an element of alleged tax avoidance and evaluates in this sense the “inconsistent and unexplained marked variability of the prices charged by the parent company, as well as [. …] the application of the alleged negative margins’, in order to derive the ‘presumption’ that the BenQ Group ‘did not allocate the income earned in Italy according to market values […] but concentrated it in the producers’ countries of residence’. Therefore, despite the fact that the Office did not adopt any method of calculating normal value (by comparing, for example, the prices charged by the taxpayer with the other non-resident companies in the group with respect to transactions concluded by and with independent parties), the CTR found that the normal value pursuant to art. 110, seventh paragraph, TUIR, the excessive variability of unit prices and the application of negative mark-ups by the parent company, as a “symptom of pathological conduct”, inducing evidence of the “transfer of the actual economic advantage to companies with lower production costs”.
5.2 – The CTR arrives, therefore – after deducting the negative mark-up percentage of a 5% flat-rate margin – to consider the burden of proof met by the Office regarding the assessment of a normal value of the prices charged (generically indicated as “both in purchase and sale”), as an exception to the contractual prices charged by the taxpayer, in terms of the indicated provisions of the TUIR (art. 76, paragraphs 2 and 5 of the TUIR, corresponding to Article 110, paragraphs 2 and 7 of the TUIR pro tempore and Article 9 of the TUIR) without having made any reference to the methodologies which, according to the OECD Guidelines, allow the comparison of the margin of the resident intra-group company with that which would be achieved by the same in case of transactions with independent companies (such as, for example, the resale price method and the cost-plus method).
5.3 – It should be noted that this Court has long pointed out that the rule of assessment of the normality of the transaction price, as well as the relative burden of proof, are the responsibility of the Office (Court of Cassation, Section V, 2 March 2020, No. 5645), without the taxpayer’s avoidance purpose being relevant, since the tax authorities do not have to prove the assumption of higher domestic taxation compared to cross-border taxation. What the tax authorities must, in fact, prove – in addition to the documentary evidence resulting from the agreement of the specific intra-group transfer prices – is that the transactions – if conducted between independent parties – would have generated higher taxable income for the resident taxpayer company (Court of Cassation, Section V, 21 January 2021, no. 1232).
5.4 – It is therefore up to the tax authorities to prove the existence of economic transactions, between related companies, at a price apparently lower than the normal price (Court of Cassation, Sec. V, 16 January 2019, no. 898), resorting to the methodology indicated in Article 9 TUIR (Court of Cassation, 18 September 2015, no. 18392; Court of Cassation, Sec. V, 19 April 2018, no. 9673), as supplemented by the OECD guidelines (Court of Cassation, 18 June 2020, no. 11837). Only if the existence of a transaction price not comparable with the one that would have been applied by the taxpayer with an independent company in similar market conditions is proven, the taxpayer’s burden arises to prove that such transactions would have taken place for market values to be considered normal (Cass., Sez. V, 19 April 2018, no. 9673; Cass., Sez. V, 15 November 2017, 27018; Cass., Sez. V, 15
April 2016, no. 7493; Cass., 30 June 2016, no. 13387; Cass., Sez. V, 18 September 2015, no. 18392), thus giving the taxpayer knowledge of any commercial reasons for which such a transaction would have been concluded (Cass, Sect. V, no. 1232/2021, cited above; CJEU, 8 October 2020, Pizzarotti, C-558/19, paragraph 36), among which – in the case of EU transactions – the position taken by the company within the group may well be included (CJEU, 31 May 2018, Hornbach, C-382/16, paragraphs 57, 58).
5.5 – In the present case, the CTR did not examine, as the appellant correctly notes, whether and which methods of comparing the value of transactions with independent parties would have been taken into consideration by the Office, since neither the reference to the variability of prices (generically referring both to purchase prices and sales prices) nor the negative mark-up was sufficient, unless those values were compared with those of transactions with independent third-party economies. The plea should therefore be upheld, the CTR having to verify the methodology for determining the margin and the income earned by the taxpayer in the light of the OECD Guidelines”