CNH Industrial N.V. and its Italian subsidiary, FPT Industrial S.p.A., were involved in two parallel disputes relating to intercompany transfer pricing and disallowed employee costs for the 2013 and 2014 financial years. According to the tax authorities, the pricing of controlled transactions had not been documented, nor had it been proven to be at arm’s length.
However, on appeal, the Provincial Tax Commission overturned the adjustments issued by the tax authorities, ruling that many transactions were below the materiality threshold for Italian documentation requirements or were influenced by particular market circumstances. Later, the Regional Tax Commission upheld these conclusions.
The tax authorities filed an appeal with the Supreme Court.
Judgment
The Supreme Court unanimously granted the tax authorities’ appeal and overturned the lower courts’ decisions. The Court held that the Regional Commission’s decisions were insufficiently reasoned, particularly in 2013, where ‘peculiarities’ were invoked without explanation. The Court also held that simplified documentary relief under domestic law and the OECD Guidelines does not relieve taxpayers of the obligation to demonstrate arm’s-length pricing when setting intercompany prices and filing returns. The Court stressed that materiality thresholds may reduce the volume of documentation required, but cannot override the fundamental obligation to apply arm’s length prices in intra-group transactions nor shift the burden of proof for establishing deviations from the arm’s-length principle to the tax authority.
Both cases were remanded to the Regional Tax Commission for a fresh review of the transfer-pricing adjustments and the associated transfer-pricing documentation obligations.
Excerpts in English
“It is true that the Guidelines cited allow, within certain limits, leaving the determination in principle to the individual legal systems, taxpayers to be exempted from the documentary obligations laid down in the Guidelines themselves.
However, there remains the inherent obligation, established both by the OECD model convention and by domestic law (Articles 9 and 110 of the TUIR), to comply with free competition and, therefore, to ensure that the prices applied in intercompany transactions correspond to market prices, unless justified by group objectives, which are not at issue in the present case.
…
As can also be seen, even when individual legal systems have established documentary “relief” in favour of (among others) small and medium-sized enterprises (SMEs), “they should be required to provide information and documents upon specific request by the authority in the context of a tax audit or in any case to assess transfer pricing risk”.
Even in such cases, therefore, it is not sufficient for the taxpayer, in the event of an audit and verification by the Administration of a deviation from the market price, to claim exemption from the obligation to provide detailed documentation in the terms set out above. but the burden is on the taxpayer to prove that they complied with the arm’s length principle at the time the transfer price was set, as well as to confirm this result when filing their tax return. Only after the production of documents and information to this effect will the Tax Authority be responsible for analysing them and raising any issues regarding the information provided and the conclusions reached. In short, under no circumstances may the taxpayer be exempted, on the basis of requests from the tax authorities, from providing information on the pricing policies adopted in intercompany transactions, which may then allow the necessary checks to be carried out, since, as already mentioned, there is no principle of exemption from compliance with the principle of competition.”
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