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    Wednesday 26 June 2019

    Key ruling on transfer pricing issue in Italy

    A ruling recently issued by the Provincial Tax Court of Milan rejected the challenge raised by the tax authorities following an investigation on a transfer pricing matter. The tax officers questioned the transfer prices paid by the Italian affiliate of a foreign-related entity for the purchase of printing machines to be distributed in the Italian territory.

    Officers’ remarks were based on the application of the transactional net margin method (TNMM), where the Italian subsidiary was considered as the tested party. In order to test the nature of the transfer pricing applied, tax inspectors conducted their own benchmarking exercise searching for comparable local businesses through their domestic database. Based on the calculated range, it was proven that the taxpayer’s profitability was lower than one of the comparable Italian companies selected; therefore, an adjustment of costs of goods sold and deemed non-deductible was applied. Italian tax authorities usually re-align local companies’ margins to the median observation in the market.

    The Provincial Tax Court, which agreed with the defence arguments put by the Italian taxpayer, rejected the officers’ position and stated the following:
    • The judges recognised that the tax office didn’t perform a proper analysis and, therefore, wrongly qualified the taxpayer as a manufacturer instead of assessing the true nature of its distribution entity.
    • Consequently, the benchmarking exercise conducted by the officers was deemed inadequate since it identified only manufacturing companies that had different profitability due to specific functions performed and risks assumed; external comparables need to be ‘homogeneous’ and have a ‘high degree of similarity’ with the tested party.
    • The screening process of the comparables was also inaccurate in its examination of the characteristics of the goods distributed.
    • Moreover, the court underlined a lack of consideration of the graphic industry crisis which fiercely struck the fiscal year that was examined.

    The approach and general principles of this decision are in line with the OECD transfer pricing guidelines and confirm prior Italian jurisprudence on the matter.

    Multi-national corporations with Italian subsidiaries should take note of this ruling, particularly where their transfer pricing arrangements are challenged by the tax authorities.

    For more information, contact:

    Gian Luca Nieddu, Federico De Rosa
    Hager & Partners, Italy
    T: +39 (02) 7780711
    E: gianluca.nieddu@hager-partners.it
    E: federico.derosa@hager-partners.it
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