Supreme Court establishes a new principle of law in the field of internal transfer pricing

The case

The Tax Authorities initiated an audit against a company, as a result of which several violations were detected. In particular, the auditors pointed out that the same taxpayer, operating in the car buying and selling sector, granted an exhibition space to another company of the group, having the same shareholding structure and the same director, for a fee of Euro 5,000 per year, considered almost free of charge. Consequently, they have decided to make a recovery for omitted invoicing pursuant to articles 9 and 110 of the Consolidated Income Tax Act. The remaining findings concerned the non-deductibility of capital losses due to incorrect accounting of assets used as capital goods rather than commodity assets, the omitted invoicing of revenues for car contracts granted for use to third parties and the non-deductibility of costs represented by the opening balance of the fiscal year.

The first instance judgment concluded with the partial acceptance of the appeal, limited to the matter of the deductibility of the costs associated with the initial existence. In the context of the appeal, the Regional Tax Committee rejected the taxpayer’s appeal and accepted the cross-appeal of the Tax Authorities.
The company therefore appealed to the Supreme Court on several grounds. As far as is relevant for the purposes of this comment, with the first ground of appeal the company censured the appeal sentence for violation of the law, claiming the violation of articles 5, paragraph 2 of Legislative Decree no. 147/2015 and 9 of the Consolidated Income Tax Act with reference to the decision of the Regional Tax Committee regarding the recovery for the concession in use of commercial spaces and equipment.

The appellant first of all contested the methods for determining the fee that the leasing company itself allegedly failed to invoice. The higher revenues, in fact, were determined by the Tax Authorities taking into account the total costs charged to the income statement, and then the revenues proportionally to the corresponding fee for the area granted for use.

Furthermore, in the opinion of the taxpayer company, the inductive analytical assessment referred to in art. 39, paragraph 1, lett. d) of Presidential Decree no. 600/73 would not be legitimate as it is based on the application of the normal price in relations between intra-group companies given that the concession of a space for displaying of another company’s car could entail advantages for the same grantor, such as attracting customers to sell their cars. Lastly, as the appellant argued, the Tax Authorities did not prove elements from which to deduce an advantage attributed by one company to the other with a view to tax avoidance or evasion.

To support the illegitimate nature of the assessment, reference was also made to the interpretative rule set forth in art. 5, paragraph 2 of Legislative Decree 14 September 2015 no. 147, according to which: “The provision referred to in article 110, paragraph 7, of the Consolidated Income Tax Act, approved by Presidential Decree 22 December 1986, no. 917, is to be interpreted in the sense that the discipline envisaged therein does not apply to transactions between companies resident or located in the territory of the State”. This rule has retroactive effect and expressly excludes the applicability of transfer pricing rules to transactions between resident companies.

The decision

The Supreme Court, with the judgment in question, rejected the appeal of the appellant company, with a consequent order to pay the costs of the proceedings.
In the opinion of the Supreme Court, the arguments put forward by the appellant company are not insurmountable. In fact - explains the Judge of the Laws - the reference to market rents was used in order to prove that the spaces were granted (almost) free of charge. Furthermore, the reference to the normal value was made not to judge the entrepreneurial choices but to demonstrate the uneconomic nature of the operation. Even the reference to the advantages for the grantor relating to a possible return of customers would represent only an abstract hypothesis, which has remained unproven.

Furthermore, according to the Supreme Court, the burden of proof of the regularity of the transaction is placed on the taxpayer and not on the Tax Authorities, with particular reference to the absence of a tax advantage obtained as a result of the shifting of a cost, equal to that which the lessee counterpart would have had to incur in relation to a similar space granted by a third lessor.

In a case such as the one under examination, the deviation from the normal value can be relevant as a circumstantial parameter of the fact that the underlying economic transaction, correlated to an uneconomic expense, constitutes an anomaly, so as to be able to justify, in the absence of contrary elements, the analytical-inductive assessment pursuant to the abovementioned art. 39. This is because it is up to the taxpayer to prove the regularity of the transactions in relation to the performance of the business activity and entrepreneurial choices.

The Supreme Court therefore established the following principle of law: “On the subject of analytical-inductive assessment pursuant to art. 39 paragraph 1 lett. d) Presidential Decree no. 600/1973, for the purposes of determining business income for omitted accounting of revenues and VAT relating to a commercial transaction carried out between companies of the same group based in Italy, for the purposes of the value to be attributed to a provision of services , the deviation from the normal value of the rent pursuant to art. 9 Consolidated Income Tax Act may be taken into account as a merely circumstantial parameter of the manifest and macroscopic uneconomic nature of the transaction carried out, beyond the normal margin of error of assessment also of the pertinence of the destination of the good or service, so as to justify the assessment with consequent evidence to the contrary against the taxpayer, without thereby violating the criterion of neutrality of the harmonized tax, nor the rule of authentic interpretation contained in art. 5, paragraph 2 of Legislative Decree no. 147/2015, which is aimed at excluding the application of art. 110 to internal transfer pricing, but not to limit the logical-legal scope of art. 9".