TMC Italy SpA is a parent company which provides services and support to the commercial production activities of its affiliated companies based in foreign countries (Spain, Czech Republic, Germany, France, Israel, Brazil, United Kingdom). The costs of providing these intra-group services had been allocated between the related parties based on the number and salary of employees in FY 2008 and 2009.
The tax administration issued an assessment where the allocation was instead be based on turnover – due to data supporting better correlation.
The Court of first instance held in favour of the tax authorities. This decision was appealed by TMC to the Supreme Court.
Judgment of the Court
The Court dismissed the appeal of TMC in its entirety and decided in favour of the tax authorities.
Excerpts:
“CTR considered legitimate and correct the use of the method of allocation of the profits of the transactions adopted by the Office, as provided for by the OECD Guidelines 2010, since the allocation key chosen (turnover), although not being able to prevail in abstract terms over the other indicated by the taxpayer company (number of administrative employees), was more appropriate to the concrete case (see judgment p. 8, where it is stated that the method of allocation of the profits of the transactions used by the Office was more appropriate to the specific case). Judgment p. 8, where the inadequacy of the key indicated by the taxpayer is reported) and therefore compliant in terms of reliability of the results (OECD Guidelines, 2010, § 2.116).”
“With regard to the application of the transfer pricing rules for IRAP purposes, the Appeals Committee, after having reconstructed the succession of relevant laws (from the repeal of Law No. 244 of 2007, to the rules set forth in Article. 1, Paragraph 281 and Paragraph 282 of the 2014 Finance Act), correctly affirmed that Paragraph 281, Article 1, Law 147/2013 (2014 Stability Law), extended the application of transfer pricing also to tax periods subsequent to the one in progress as at 31 December 2007, without any break in continuity with respect to the previous rules.”
“The Court observes that art. 1, paragraph 281, I. n. 147 of 2013, is a rule of authentic interpretation, so that, as such, is intended to produce effects also for the past, allowing the application of the discipline of art. 110, paragraph 7, T.U.I.R. for tax periods from 2008 onwards.”
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The services were provided by the company in Italy to various group companies in different countries. I am unable to understand, how the allocation key ( whether number of employees, salary or revenue) affects the fee of service provider company. The impact of incorrect allocation would be on the service recipient companies.
Whether, it concerns withholding tax, if any.
Further, it is unclear, if the allocation of cost based on the time devoted by the employees to specific entity, was used by the company. If that was so, as noted in the decision, then this allocation key ( if time sheets were maintained) appears to be the most appropriate.