It is up to the Tax Administration to prove the existence of transactions between related companies with clear discrepancies compared to transactions of the same kind on an independent market, while the taxpayer bears the burden of proving that the transactions took place for market values to be considered normal. This is the division of the burden of proof at the basis of the decision of the Milan Regional Tax Commission (CTR) rejecting the appeal lodged by the Tax Revenue Office.
The taxpayer, in the case in question, has in fact fulfilled its burden by describing and documenting in the records that the functions and organization chart of the German subsidiary were such as to give an exhaustive account of the peculiarities of the latter and of the reliability of the CUP method (Comparable Uncontrolled Price Method) used. On the contrary, however, the comparables used by the Revenue Office to prove the validity of its assessment were incorrect because they had nothing to do with the products and activities carried on by the appellant.
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“The taxpayer has in fact discharged its burden of proof.
The Agency’s construction is based on erroneous assumptions: the first aspect not clarified is the fact that the Agency’s attention was focused only on the German subsidiary; the second aspect is that of the comparables.
With regard to the first aspect, the Board of Appeal, in agreement with the trial judge, points out that the functions and organisation chart of the German subsidiary described and documented in the file are such as to give an exhaustive account of the particular nature of the German subsidiary and of the reliability of the CUP method used, both with regard to the rules of the market, guaranteed by the presence of independent German partners, and with regard to the actual performance of incisive and important functions, such as customer management, project management, tenders, and assistance services. As regards the second aspect, the use of comparables, the companies compared by the Agenzia delle Entrate do not deal with the same products or the same activities as the German affiliate: they even operate with different activity codes and in years far removed from the year 2010 in dispute.
In light of these considerations and of anything else specified by the trial judge, whose ruling is fully shared, the appeal is dismissed.”
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