With decision no. 19512 of 16 July 2024, the Italian Supreme Court rejected a claim of the Italian Tax Authorities clarifying that, for transfer pricing purposes, loss-making companies are not excluded from the benchmark analysis upon certain conditions. This is in accordance with the OECD Guidelines.
1.Case at hand.
The case at hand concerns the business run by an Italian company providing call center services to a group related company located (and tax resident) in the Netherlands.
The price was determined by recharging the costs incurred for the provision of the services, increased by a mark-up of 5% supported by local TP documentation and group benchmark analysis.
The Italian Tax Authorities (“ITA”) considered the price not at arm’s length applying a higher mark- up of 7.42%, as a result of an internal (and different) benchmarking that did not consider companies reporting an operating loss in at least two out of the three years of reference period of the analysis.
2.Why is the matter important?
This recent decision of the Italian Supreme Court is of a particular importance to the extent it concerns a very popular matter which is devoid of consolidated domestic guidance, but rather shows a long- standing conflict of interpretation between tax auditors and tax courts in Italy.
In effect:
- the position of the ITA is oriented towards the exclusion of loss-making comparables,
- on the other hand, the case law of First and Second Instance Tax Courts is supporting the contrary interpretation for a decade (see e.g., First Instance Tax Court of Milan decision no. 1108/2016, Second Instance Tax Court of Milan decision no. 1670/2015, Second Instance Tax Court of Milan decision no. 3165/2015).
The position of the case law is supported by the OECD Guidelines providing for the inclusion in the benchmark analysis of those companies that, in order to penetrate a market or to increase their share in the same market, charge a price for their product that is lower than the price charged for otherwise comparable products, or temporarily incur higher costs and hence achieve lower profit levels than other companies operating in the same market1.
Moreover, the OECD Guidelines justify the exclusion of companies that are in “particular and special” situations (e.g. start-up companies, bankrupt companies, etc.) from the set of comparables only to the extent that it is clear that such peculiar situations do not permit appropriate comparisons2.
No judgements of the Italian Supreme Court were available so far.
3.The recent (first) Supreme Court’s decision.
The Italian Supreme Court with decision no. 19512 of 16 July 2024 finally evidenced that the interpretation of the tax auditors is not compliant with the OECD Guidelines, considering that the exclusion of companies from the set of comparables cannot be run automatically only because these companies ended in a loss position.
In effect the OECD Guidelines admit the exclusion of companies in “particular and special” situations only in the event of peculiar situations supporting the elimination.
A preventive investigation of the underlying business reasons giving rise to the loss is (and it cannot be otherwise) therefore needed (e.g., is it an expression of physiological market dynamics? what are the extraordinary circumstances invalidating the benchmark analysis? etc.).
