Italy vs Take Two Interactive Italia s.r.l., July 2012, Supreme Court, no 11949/2012

« | »

The company Two Interactive Italia s.r.l. is wholly owned by Holding Take 2 International S.A., based in Switzerland, and is part of the US multinational Take 2 group, of which it is the sole subsidiary for Italy, for the exclusive marketing of software products (games for PC, play station, etc.). These products are imported by the taxpayer through its sister company (in turn controlled by the same parent company) Take 2 Software Europe LTD, based in Great Britain, sole supplier of the products marketed by the Italian subsidiary.

In 2004, on the last day of the fiscal year, Take Two Interactive Italia s.r.l. accounted for the invoice, issued on the same date by its English sister company Take 2 Software Europe LTD, for the amount of Euro 947,456.00. This accounting document, the reason for which was ‘Price adjustment to product sold during FY 2003/2004’, was in fact a charge to the Italian company for significant price increases previously applied in relation to certain software products purchased by the same during the above-mentioned financial year.

That being the case, the office – on the basis of what had been deduced by the inspectors in the relative report of findings – considered it to be an elusive operation, aimed at draining the profits earned by the Italian subsidiary through the abuse of the instrument constituted by ‘transfer prices’ within the multinational group in question. In the administration’s view, a number of factors depended in this regard: (a) the date of the transaction, which took place on the last day of the tax year, coinciding with the availability of the taxpayer company’s profitability statements; (b) the nature of the economic transaction, which took the form of the entry in the accounts of an invoice payable for an increase in the price already charged by the supplier company on quantitatively significant sales of software products; (c) the deviation of the price charged from the average price of acquisition of the same products by Take Two Interactive Italia s.r.l.

This led to the disallowance, for tax purposes, of the costs deriving from the aforesaid transfer price adjustments made to the economic detriment of the Italian taxpayer, with the consequent ex officio application of the normal value of the goods in question, determined – pursuant to Article 9 of Presidential Decree No. 917/1986 – as the average sale price, stripped of the contested mark-up, applied by the English supplier to its Italian sister company, during the tax year examined.

Against the notice of assessment containing, inter alia, the redetermination of the purchase costs, the taxpayer company filed an appeal, which was upheld by the CTP, with a sentence upheld by the CTR, which rejected the appeal proposed by the Revenue Agency, considering the tax claim totally unfounded.

The Revenue Agency then filed an appeal with the Supreme Court.

Judgement of the Supreme Court

The Supreme Court set aside the judgement of the CTR and decided in favor of the tax authorities.

Excerpts

“In the matter of income taxes, Article 110, paragraph 7, of Presidential Decree No. 917 of 22 December 1986, in providing that the components deriving from transactions with non-resident companies in the territory of the State, which directly or indirectly control the company or are controlled by the same company controlling the domestic company, are valued on the basis of the “normal value” of the goods sold, the services rendered and the goods received, determined pursuant to Article 9 of the same Presidential Decree, establishes an anti-avoidance clause aimed at avoiding the transfer of profits through the application of prices that are lower or higher than the value of the goods exchanged, in order to avoid taxation in Italy in favour of lower foreign taxation. It follows that, in the case of adjustments to costs, the burden of proof is on the Administration with regard to the discrepancy between the agreed consideration and the normal value of the goods or services exchanged, in accordance with the general rules set out in Article 2697 of the Italian Civil Code, and on the taxpayer with reference to the existence and relevance of the costs as well as to any element that allows the office to verify the normal value of the consideration, by virtue of the principle of closeness of evidence”.

“…the application of transfer pricing regulations does not fight the concealment of the price, which is a form of evasion, but the manoeuvres that affect an evident price, allowing the surreptitious transfer of profits from one country to another, which has a tangible effect on the applicable tax regime. Therefore, given these essential requirements it must be considered that this regulation constitutes – according to the more widespread interpretation in case law in this court – an anti-avoidance provision…”.

“…when determining company income, or rather, the problem of sharing the intra-group costs, the question of pertinence must be considered as well as the existence of the declared costs further to charging for a service or asset transfer to the subsidiary from the holding, or another company that is controlled by the same company (…). The burden for demonstrating the existence and pertinence of these negative income items, and, as in the case in question, it concerns costs derived from services or assets loaned or transferred by a foreign holding to an Italian subsidiary, each element that enables the inland revenue to verify the arm’s length value of the relative costs – further to the so-called principle of sphere of influence– can only be the responsibility of the taxpayer…”.

 

Click here for English translation

Click here for other translation

Italy-vs-Take-Two-Interactive-Italia-srl-2012

Related Guidelines