At issue in the Philip Morris case was the scope of the definition of permanent establishments – whether or not activities in Italy performed by Intertaba s.p.a. constituted a permanent establishment of the Philip Morris group.
According to the tax authorities the taxpayer had tried to conceal the P.E. in Italy by disguising the fact that the Italian company was also acting in the exclusive interest of the Philip Morris group.
The Court of Appeal set aside the assessment issued by the tax authorities, and the tax authorities in turn filed an appeal with the Supreme Court.
Judgment of the Supreme Court
The supreme court set aside the decision of the court of first instance and remanded the case with the following instructions:
“…According to Art. 5(5) of the OECD Model, structures having the authority to conclude contracts in the name of the enterprise cannot be regarded as independent persons. This power, according to the Commentary (sub-article 5(5)(33)), must not be understood in the sense of direct representation, but also includes all those activities that contributed to the conclusion of contracts, even if they were concluded in the name of the enterprise.
Authoritative international doctrine has not failed to emphasise that the expedient of separating the material activity of concluding contracts from that of formally concluding them (split – up of business responsibilities on the one hand and legal authority on the other) may be considered as tax avoidance (tax circumvention), substance prevailing over form for the application of para. 5. In other words, the ascertainment of the power to conclude contracts must relate to the actual economic situation, and not to civil law, and may also relate to individual steps, such as negotiations, and not necessarily include the power to negotiate the terms of the contract.
3.9. In conclusion, it must be held that the Regional Tax Commission, in addition to failing to provide adequate reasoning on the evidence offered by the office, in particular by failing to provide a complete statement of the elements collected in the Guardia di Finanza’s audit and to carry out an analytical assessment in the light of the reasons of the parties, infringed or misapplied the rules and principles contained in the OECD. Model and incorporated in the Italy-Germany bilateral convention.
The upholding of the appeal entails setting aside the contested judgment, and remanding the case to another section of the Lombardy Regional Tax Commission.
The referring judges must therefore, after analytically examining the content of the documentation offered and the findings made in the assessment, an examination of which they must give adequate reasons, comply with the following principles of law:
(I) a capital company with its registered office in Italy may take on the role of a multiple permanent establishment of foreign companies belonging to the same group and pursuing a single strategy. In such a case, the reconstruction of the activity carried out by the domestic company, in order to ascertain whether or not it is an ancillary or preparatory activity, must be unitary and refer to the programme of the group as a whole;
(II) the activity of controlling the exact performance of a contract between a resident company and a non-resident company cannot – in principle – be regarded as auxiliary, within the meaning of Article 5(4) of the OECD Model and Article 5(3)(e) of the Convention between Italy and the Federal Republic of Germany against double taxation of 18 October 1989, ratified and made enforceable in Italy by Law No 459 of 24 November 1992
(III) the participation of representatives or appointees of a domestic structure in a phase of the conclusion of contracts between a foreign company and another resident person may be attributed to the power to conclude contracts in the name of the company, even outside a power of representation?
(IV) the entrusting to a domestic structure of the function of business operations (management) by a company not established in Italy, even if concerning a certain area of operations, entails the acquisition by that structure of the status of permanent establishment for income tax purposes;
(V) the assessment of the requirements of the permanent establishment, including that of dependence and that of participation in the conclusion of contracts, must be conducted not only at the formal level, but also – and above all – on the substantive level.
If it comes to the conclusion that Intertaba s.p.a. acted as a permanent establishment of Philip Morris GMBH, the Regional Commission must decide on the issues raised concerning the finding of omitted invoicing without payment of tax and on the other issues raised in the application, absorbed by the acceptance of the complaints concerning the (in)existence of a permanent establishment.”
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