Italian Supreme Court Upholds OECD Transfer Pricing Rules


The decisions of the Italian Supreme Court nos. 10577/2024 and 10499/2024 (concerning the same case for corporate income tax and regional income tax purposes) confirm important principles regarding transfer pricing transactions between associated companies.

Firstly, the approach taken in the previous decision of the Italian Supreme Court no. 15668/2022 (available here) is confirmed with regard to the relevance of the arm’s length principle set forth by Article 9 of the OECD Model Tax Convention and included in Article 110, par. 7 of the Italian Income Tax Code.

Moreover, the principle that, in transfer pricing, the burden of proof on the Tax Authorities is limited to proving “the existence of transactions between related parties at a price apparently lower than the arm’s length price” (already confirmed in previous judgements, the most recent of which is no. 26695/2022) is consolidated, with the taxpayer bearing the burden of proving that the transactions were at arm’s length, by virtue of the so-called proof-proximity principle.

In both decisions, the Italian Supreme Court emphasises the importance of the Tax Authorities acting in accordance with the criteria set out in Italian legislation, and in line with OECD Guidelines, when dealing with transfer pricing infringements.

In the case under review, the Tax Authorities - that had argued that the cost-plus method does not require the identity of goods and services, only the comparability of functions, risks or assets – concluded that the comparability of functions was demonstrated by referring (only) to the same NACE code of the comparable companies. According to the Supreme Court’s decisions, the Tax Authorities should have carried out a clear and precise analysis of the functions, risks and assets of the comparable companies.

In addition, according to the decisions, the cost-plus method, while allowing for a lower level of product comparability, would have required in any case the verification of a certain (minimum) level of comparability (in accordance with § 2.47 of the OECD Guidelines, 2022, a principle already expressed in the decision of the Tax Court of Second Instance of Lombardia, no. 69/7/11). Such a comparability test was ruled out by the Tax Authorities, and instead confirmed by the Supreme Court, that found “unexceptional inconsistencies” in the comparability of the product and the geographical area proposed by the Tax Authorities.

The decision of the Tax Court of Second Instance in favour of the taxpayer was therefore upheld in its entirety. The judges also considered admissible the expert’s report submitted by the taxpayer, the reliability of which had been questioned by the Tax Authorities, referring to the decision of the Italian Supreme Court no. 11949/2012 (according to which the burden of proof of the arm’s length price “cannot be considered satisfied by the submission of the expert’s report, since it is a mere opinion that is not binding”).

Also, in the case under review the taxpayer had not prepared the TP documentation under the penalty protection regime (a regime that has been in force since 2010, i.e. after the tax period of the case). However, the request not to apply penalties (allowed under certain conditions) was rejected by the Tax Authorities. The Italian Supreme Court did not rule an opinion on the matter, as the condition for the application of the penalties had been removed.

Finally, the timing of the procedure is also relevant: the year under review was 2009, the second instance decisions were handed down in May 2016, and the Supreme Court decisions were issued in March 2024. The taxpayer’s motivations were finally considered fully admissible, although such a long period of time represents a limit for the taxpayer. The stricter rules on the burden of proof established by the Italian Supreme Court and now also imposed by the new procedural rules (new Article 7, par. 5-bis, of Legislative Decree no. 546/92) may not only eliminate the uncertainties related to transfer pricing disputes, but also keep the duration of judgments within reasonable limits.