Burden of proof in transfer pricing: Recent case law
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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

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