Independent companies make transactions between themselves, negotiate terms in their commercial and financial relations which are determined by market forces. For associated companies commercial and financial relations may not be directly influenced in the same way as by the market dynamics and therefore determine different values and price structures, regardless of the intention to obtain tax savings.

The Italian Court of Cassation, in its judgment no. 15906 of 8 June 2021, in accordance with the well-established case-law, reiterated that the rules on transfer pricing do not incorporate the characteristics of anti-circumvention provisions in the proper sense. The valuation of the price-setting activity should not be confused with the assessment of topics related to tax fraud or avoidance, even if transfer pricing policies, as has been shown in certain checks conducted by the Financial Administration, may be used for those purposes.

Where transfer prices do not reflect market logic, namely the arm’s length principle, the tax obligations of the associated undertakings and the related tax revenues of the countries concerned may be affected. The OECD Members agreed that, for tax purposes, the profits of associated undertakings may be adjusted to the extent necessary to correct such distortions and to ensure that the arm’s-length principle is complied with.

In the same judgment no. 15906/2021, the judges of legitimacy also address the problem of the division of the burden of proof between taxpayer and financial administration, identifying its scope and extent. In particular, the Supreme Court was referred to the Revenue Agency after the Regional Tax Commission had rejected the appeal filed against the unfavourable sentence pronounced by the primae curae judge.

The Italian Supreme Court, in confirming the correctness of the judgement of appeal, specified that the Financial Authority cannot be exempted from proving the existence of economic transactions, between connected enterprises, at an apparently lower price than the normal one. A general dispute, not adequately substantiated as to the inferiority of this consideration, as noted in the case in dispute and then corroborated by the Regional Tax Commission, does not allow the application of the principle of proximity of proof and therefore the reversal of the burden of proof on the taxpayer.

The judges of the Court of Cassation therefore repeat, that only as a result of this evidence provided by the Financial Administration, it is up to the taxpayer to prove that the transaction took place in accordance with normal market values.