All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Burden of proof in transfer pricing: Recent case law

A few decisions taken in recent years by the Italian Courts have shed some light on the allocation of the burden of proof in transfer pricing disputes. Piergiorgio Valente, Managing Partner of Valente Associati GEB Partners explains how.

The Italian legislation on transfer pricing (article 110, paragraph 7 of the Italian Income Tax Code, or TUIR) allows the tax authorities to assess the prices charged in transactions between related companies and/or controlled companies resident in different countries, to avoid tax arbitrage practices aimed at the optimisation of the group's tax burden, by channelling income to companies residing in countries with more favourable tax regimes.

The above-mentioned provision is a law on transfer pricing evaluations directed to taxpayers, and it requires that, when preparing tax returns, they make the appropriate tax adjustments resulting from the application of the arm’s-length principle to transactions with entities belonging to the same multinational group. Based on this, the burden of proving that the prices applied do not deviate from the arm’s-length value, rests with the multinational group.

Such a conclusion cannot, however, be considered definitive, since the arm’s-length principle is a legal criterion that must be respected by whoever upholds it (be it the tax authorities or the taxpayer). This entails that the tax authorities must challenge the price stated by the taxpayer with a different price.

Further, an analysis of the existing case law regarding the burden of proof in transfer pricing disputes shows that judges frequently focus their attention on tax avoidance occurrences, namely the shifting of taxable income to other countries. According to this approach, the tax authorities should provide evidence that the tax burden in the countries of residence of the foreign affiliates, at the time when the transactions took place, was lower than the tax burden in Italy and then proceed to the calculation of the arm’s-length value.

The latest decisions of the Italian case law on the burden of proof further demonstrate the lack of a unified view on this matter.

In a case where the correct deduction of costs had to be proven, the Supreme Court stated that the burden of proof rests with the taxpayer (Decision No 10739/13). In addition, the Supreme Court Judges emphasised that the demonstration of whether the domestic tax regime is less favourable than the foreign one is irrelevant to transfer pricing regulation.

Therefore, the tax authorities are not required to prove avoidance (in that transferring profits to foreign countries resulted in tax benefits) but only have to prove the existence of transactions between related parties for anomalous market values, which are different from those that would have been set by independent parties.

Conversely, with Decision No 13/03/13, the judges of the Provincial Tax Court of Brescia stated that the burden of proving a breach of transfer pricing legislation lies with the Italian Tax Authorities, which should demonstrate that intragroup prices are lower than the arm’s-length value by means of a detailed analysis of the intercompany transactions under assessment and their respective market conditions.

Finally, the aforementioned decision underscored that transfer pricing regulation has the goal of preventing profit shifting within the multinational group through the manipulation of transfer prices intended to avoid being taxed in Italy in favour of more favourable tax regimes abroad.

Based on this line of thought, transfer pricing provisions are classified as anti-avoidance clauses aimed at countering the fraudulent pursuit of tax reductions through transactions that lack a valid economic reason.

Valente Associati GEB Partners

Viale Bianca Maria, 45

20122 Milan, Italy

Managing Partner: Piergiorgio Valente

Tel: +39 02 7626131

Fax: +39 02 76001091

Email: p.valente@gebnetwork.it

Website: www.gebpartners.it

more across site & bottom lb ros

More from across our site

The companies have criticised proposals for the gig economy, while the UK and EU VAT gaps have fallen in percentage terms, and ITR speaks to a European Commission adviser about its VAT reforms.
Corporations risk creating administrative obstacles if the pillar two rule is implemented too soon, sources say.
Important dates for the Women in Business Law Awards 2023
The Italian government published plans to levy capital gains tax on cryptocurrency transactions, while Brazil and the UK signed a new tax treaty.
Multinational companies fear the scrutiny of aggressive tax audits may be overstepping the mark on transfer pricing methodology.
Standardisation and outsourcing are two possible solutions amid increasing regulations and scrutiny on transfer pricing, say sources.
Inaugural awards announces winners
The UN’s decision to seek a leadership role in global tax policy could be a crucial turning point but won’t be the end of the OECD, say tax experts.
The UN may be set to assume a global role in tax policy that would rival the OECD, while automakers lobby the US to change its tax rules on Chinese materials.
Companies including Valentino and EveryMatrix say the early adoption of EU public CbCR rules could boost transparency of local and foreign MNEs, despite the short notice.