Skechers USA ITALIA SRL – a company operating in the sector of the marketing of footwear and accessories – challenged a notice of assessment, relating to FY 2004, by which, at the outcome of a tax audit, its business income was adjusted as a result of the ascertained inconsistency of the transfer prices relating to purchases of goods from the parent company (and sole shareholder) resident in Switzerland.
The tax authorities had contested the uneconomic nature of the taxpayer company’s operations, given the losses recognised in various financial years, attributing the uneconomic nature to the artificial manipulation of the transfer prices of the purchases of goods and recalculating, consequently, the negative income component constituted by the aforesaid costs pursuant to Article 110, paragraph 7 of the TUIR, with the consequent non-deductibility of the same to the extent exceeding the normal value of the price of the goods in question.
Skechers held that the losses did not derive from the costs of the intra-group purchases of the goods, but from the fixed start-up costs, not compensated by an adequate volume of sales, as an effect also of the competitive Italien market.
The provincial and later the regional Tax Commission rejected the taxpayer’s appeal. The judge of appeal held that Skechers had not proved that the losses stemmed from the fixed start-up costs, which – moreover – were found only in relation to the Italien company and not in relation to the distribution companies located in other European countries; it then held that it was Skechers’ burden to prove the arm’s length nature of the costs.
Skechers then filed an appeal with the Supreme Court.
Judgement of the Supreme Court
The Supreme Court set aside the decision and remanded the case to the Regional Tax Commission in a different composition.
Excerpts
“6. The following principle of law should therefore be stated:
“on the subject of the determination of business income, the transfer pricing rules set forth in Article 110, paragraph 7, Presidential Decree no. 917 of 22 December 1986. 917 of 22 December 1986 imposes on the tax authorities the burden of proving the existence of transactions between related companies at a price other than the market price, using in this regard the transfer pricing methods described in the OECD Guidelines as soft law rules; once that burden of proof has been discharged, the taxpayer bears the burden of proving that those transactions took place for market values to be considered normal, having regard to the same stage of marketing, time and place where the goods and services were acquired or rendered, having regard – in particular – to the market context in which the taxpayer was operating”.
7. The judgment under appeal, in so far as it burdened the taxpayer company with the proof of the existence and inherent nature of the fixed operating costs, did not comply with the aforesaid principles, both in so far as the burden of proof lies with the Office, and in so far as the burden of proof must relate to the appropriateness of the transfer prices of the purchases of goods, in the market conditions in which the taxpayer company was required to operate, according to one of the criteria indicated in the OECD Guidelines. Nor can the burden of proof be discharged by alleging the mere uneconomicity of management (even if ascribed to the incidence of the aforesaid purchases), since the judge of the merits must verify the use of one of the methods indicated in the aforesaid Guidelines. The merit judge’s assessment must then be carried out in relation to the context in which the taxpayer company was operating at the time of the assessment, during which there had been a high incidence on the typical management of fixed operating costs, due to the start-up phase, which would have required the realisation of higher sales volumes in order to reach the break-even point.
8. The appeal must therefore be upheld and the contested judgment set aside, with reference back to the court a quo, in a different composition, also for the settlement of the costs of the proceedings.”