Marelli Slovakia’s main business is the manufacture of automotive engine and transmission components and that its main products are throttle bodies, throttle position sensors and high-pressure fuel pumps. The parent company is Magneti Marelli S.p.A., Italy, which owns 100 % of the shares of the company, and the parent company of the entire group is Fiat S.p.A.
In an audit of corporate income taxes for FY 2012 the tax authorities compared the resale price method, the cost plus method and the net margin method, and stated the reasons why it had chosen the net margin method as the most appropriate method for assessing the arm’s length pricing of the controlled transactions relating to the intra-group sale of Marelli Slovakia’s products.
In comparing the terms and conditions agreed in the commercial relationships, it took into account the activities carried out by Marelli Slovakia in production, purchasing and sales, as well as the extent of the business risks, the contractual terms and conditions agreed, etc. The tax authorities carried out a functional and risk analysis, evaluated the functions performed by Marelli Slovakia and those performed by the parent company or other companies of the Magneti Marelli group and found that Marelli Slovakia bore risks over which it had no control or decision-making power, the control and decision-making in significant activities being largely the responsibility of the parent company, Magneti Marelli S.p.A.
According to the tax authorities Marelli Slovakia performed the functions and activities of a production plant and had the profile of a contract manufacturer, or a manufacturer with limited functions and risks, which generally produces on demand and is supposed to have all costs paid and, since it does not bear high risks, has only a small profit.
According to the tax authorities, assessing the various individual transactions separately would not provide a comprehensive view of Marelli Slovakia’s activities and their interrelationship with the main manufacturing activity.
The tax authority used the Amadeus database to search for independent comparable companies and carried out a quantitative and qualitative analysis, finding that Marelli Slovakia had achieved a profit margin of -6,01 % for the tax year under review, which was not within the established range of independent comparable profit margins of 3,62 % to 7,49 % (median 5,85 %). For that reason, the tax authorities adjusted Marelli Slovakia’s profit margin to the median value, i.e. 5,85 %, thereby increasing the tax base by EUR 2 458 414,42.
Judgment of the Administrative Court
The administrative court annulled the assessment made by the tax authorities. The case was sent back to the tax authorities for further proceedings, with instructions to correct the procedural and substantive legal issues identified by the court.
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