Italy: Intercompany charges, cost inherence and deductibility
In general terms, inherence can be described as the relationship between the cost and the enterprise, where the cost has a specific relevance to the determination of income; this is a result of its connection not to a specific revenue, but rather to an activity potentially able to produce income. Based on this assumption, in order to consider a cost deductible (i.e. inherent), the taxpayer is required to demonstrate clearly the connection with the activity, providing the tax authority with "sufficient" documentation.
The Italian Supreme Court recently ruled on this topic (decision no. 20113/18) regarding the deductibility of costs associated with the construction of swap bodies (casse mobili). The ruling involved Italian company ITA Co, which specialises in the manufacture of semi-trailers, containers, fittings for vehicles, ISO and special containers. The local tax authorities disregarded the deductions of costs incurred by ITA related to the construction of swap bodies, citing a lack of inherence. The adjustment filed by the tax authorities was challenged by the taxpayer, first before the local Court of First Instance, then before the Regional Tax Court (Commissione Regionale della Lombardia – sez. Distaccata di Brescia). In line with the latter's decision, the Supreme Court upheld the taxpayer's arguments and rejected those put forward by the tax authorities.
The case can be summarised as follows. ITA conducts all activities (and bears the related costs) necessary to build swap bodies. Then, it sells the finished products to a leasing company (or LCo). The LCo leases the swap bodies to a company controlled by ITA. The swap bodies are then rented by ITA, which gives them to its clients as a gratuitous loan for the period necessary to provide them with new swap bodies, which are regularly purchased and paid for. The price paid by the end client is sufficient to remunerate the initial rent under the gratuitous loan.
The Supreme Court stressed that – in line with the current jurisprudence – the judgment on the inherence of the cost refers to the corporate object of the enterprise "in the sense that it is deductible if it is functional to the single social activities or, in any case, if it brings to the enterprise a useful, objectively determinable and adequately documented".
Under this view, the inherence does not in essence integrate a link between costs and revenues, but is essentially related to the correlation between costs and company activity, even if only potentially capable of generating taxable income. Regarding intragroup relations, the inherence of the cost, within the limits of reasonableness and proportionality, is connected to the concepts of coherence and economic utility "interpreted as indexes of the existence or not of the inherence rather than essential requirements".
In conclusion, the inherence of the costs paid by a company belonging to a multinational group must be evaluated according to the criterion of coherence and the economic usefulness of the entire activity carried out by the group. Therefore, the application of these criteria must essentially bring out the advantages gained by all the companies belonging to the group and not only those gained by a single company.