ITALY - TRANSFER PRICING AND THE BURDEN OF PROOF

Ruling no 258 of 2 February 2016 by division 11 of the Emilia Romagna tax court of second instance bodes well for taxpayers for what concerns disputes on transfer pricing: “It is the tax authority’s responsibility to prove the soundness of its transfer pricing changes. Should this proof not have been provided by the tax agency, the tax bill issued is invalid and must be annulled”. Firstly the court recalls that transfer pricing is aimed at avoiding transfers of earnings within groups of companies through goods sold at a lower or higher price than their market value (“fair market value”) in order to avoid taxation in Italy and instead tax them in countries with lower tax rates. Hence – so the court goes on – this scheme represents a clause against tax avoidance/evasion (and refers to some precedents of the court: rulings 11949/2012, 22023/2006 and 11226/2007), with the result that the tax authority has to prove that the factual conditions justifying a change of the fair market value applied to the goods sold exist. In the case examined by the Court the tax office had not provided the evidence required and consequently there was no reason for discarding the results from the price comparison made by the taxpayer (with the CUP method) in favour of the TNMM method suggested by the tax authority. Even more so bearing in mind that the tax authority itself had suggested in its newsletter 32 of 22 September 1980 using the CUP method for verifying the fair market value of a transaction, as it considered the TNMM method to be “not advisable as it is highly inaccurate and arbitrary”.