The Provincial Tax Commission had upheld F. S.p.A.’s appeal and set aside the assessment made by the tax authorities, both because it had failed to prove tax avoidance and because it had used the TNMM (Transactional Net Margin Method) method, which the tax authorities advised against in favour of the CUP (Comparable Uncontrolled Price) method, as used by the F. S.p.A.
Judgment of the Regional Tax Commission
The conclusion reached by the Regional Tax Commission, in line with Supreme Court decision 15642/2015, was that in terms of transfer pricing, the burden of proving the validity of the assessment lies with the administration. In the present case, such burden had ultimately not been discharged by the tax authorities.
Excerpt
“On the merits, the appellant’s grounds of the judgment appealed can be supported, being immune from logical and legal defects. As to the elusive or non-elusive nature of the “transfer pricing” rules and the most appropriate control method to be adopted for the valuation of the transferred assets at normal value pursuant to Article 110(7) of Presidential Decree No. 917 of 22/12/86, there is no reasonable ground to disagree with the findings that the trial judge placed in support of the decision. The Supreme Court of Cassation, in judgment No. 11949/2012, clarified that “the application of the rules on transfer pricing does not combat the concealment of the consideration, constituting a form of evasion, but the manoeuvres that affect the overt consideration, allowing the surreptitious transfer of profits from one State to another, so as to concretely affect the taxation regime. On account of those essential features, therefore, it must be held that those rules constitute – according to the interpretation most widely held, including in the case law of this Court – an anti-avoidance clause, in line with the EU principles on abuse of rights, aimed at preventing the transfer of profits within the group of companies by applying prices that are lower or higher than the normal value of the goods sold, in order to avoid taxation in Italy in favour of lower foreign taxation (Cass. 22023/06; Cass. 11226/07) or, in any case, in favour of situations that make it fiscally advantageous to import profits to group entities other than domestic ones’. That judgment goes on to state: ‘it is clear that the violation of an anti-avoidance clause means that the burden of proof of the recurrence of the factual premises of the avoidance falls, in principle, on the tax administration that intends to operate the consequent adjustments (see Cass. 22023/06). Indeed, as far as positive income components are concerned, the burden of proving the validity of the transfer price adjustment, i.e., the validity of the claimed tax claim, with reference to the discrepancy between the agreed consideration and the normal value of the goods or services exchanged, certainly falls on the tax authorities – in accordance with the general rules on the matter (Article 2697 of the Italian Civil Code)” (Cass. Civ. Sentence 24/07/2015 n. 15642 confirmed). The trial judge, with adequate reasoning, found that the Administration had not discharged the burden of proof of tax avoidance attributed to the appellant company, for having charged prices to its foreign affiliates that were lower than the normal value, without having taken due account of the comparison of the prices charged both to the affiliated companies and to the independent companies, which can be seen from the copious documentation produced.
Also with regard to the method for checking the normal value, the Revenue Agency itself, in Circular No. 32 of 22/09/1980, had suggested the use of the CUP method in place of the less reliable TNMM method “not very advisable due to its considerable approximation and arbitrariness”, therefore the specific and belated grievance of the Office must be considered inadmissible.
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