The recent ruling No. 2853/2024 by the Italian Corte di Cassazione sets an important precedent in Transfer Pricing. The ruling confirms the legitimacy of the Transactional Net Margin Method (TNMM), but also warns that its application requires detailed technical analysis.
The Court emphasized that the selection of the method cannot be treated as a formal or purely accounting issue, but as a substantive decision that must be adequately supported and documented, especially when challenged by the tax authorities or a judge.
This decision, although issued in the Italian context, has global implications due to the widespread employment in international practice for compliance with the OECD Transfer Pricing Guidelines.
Background: The Dispute Regarding the Method Selected
The tested case by the Court involved an Italian company that conducted transactions with its subsidiary in the United Kingdom. The company applied the TNM Method to determine its profit margins, claiming that it was the most appropriate given the characteristics of the transactions and the availability of comparable data.
Conversely, the Italian tax authority (Agenzia delle Entrate) challenged the method used, arguing that the Comparable Uncontrolled Price (CUP) method would have been more appropriate. According to the authority, the TNMM did not accurately reflect market conditions or ensure the Arm’s Length Principle among the related parties.
The case escalated to the Corte di Cassazione after the lower courts determined that the chosen method dealt with practice rather than law.
Upon reviewing the case file, the Court concluded that the previous judges had not thoroughly assessed the technical relevance of the method and that the issue should be analyzed from a more structured perspective.
The Court’s Decision: The TNMM is Legitimate, but Not Automatic
In its ruling, the Corte di Cassazione determined that the TNMM is completely legitimate if employed accurately and supported by a comparability analysis.
Specifically, the Court held that:
- The method should not be automatically dismissed in favor of other alternatives, such as the CUP or Cost Plus.
- The judge must verify whether the TNMM selection is supported, considering the nature of the transaction, the functional profile of the entities involved, and the availability of reliable data.
- The method selected is a relevant legal issue, not merely a technical detail.
Thus, companies must not only document the TNMM application but also provide technical support for its appropriateness for each type of transaction.
Technical Requirements for the TNMM Application
The Italian ruling reinforces the importance of correctly applying the criteria underlying the TNMM. According to the OECD Guidelines, companies must comply with certain essential principles:
1. Selection of the tested party
The TNMM generally applies to the simplest part of the transaction, i.e., the one that does not have significant intangible assets or assume substantial commercial risks. Correctly identifying this party is essential to ensure the comparability of the results obtained with those of independent third parties.
2. Comparability analysis
The success of the TNMM depends on the quality of the comparables used. Differences in scale, functions, assets, risks, or market conditions must be adjusted reasonably. The Court noted that it is insufficient to list comparable companies; instead, it requires a detailed and documented functional analysis.
3. Profit margin and interquartile range
The net margin must fall within a reasonable interquartile range, based on the results obtained from comparable companies. Otherwise, it may be necessary to adjust or explain the deviation economically.
4. Consistency with accounting and financial statements
The data used for the analysis must be consistent with accounting records and the economic reality of the transactions. Inconsistent documentation may invalidate the study before a tax or judicial review.
Importance of a Solid Technical Basis
One of the most relevant points of the ruling is the requirement for a clear technical basis when choosing the method. Both companies and tax authorities must explain why they selected or rejected a particular Transfer Pricing method reasonably.
The Court emphasized that the lack of technical support may invalidate the administrative or judicial decision, as this method is not merely an accessory element but a crucial basis for calculating taxable income.
This approach promotes greater transparency, consistency, and technical rigor in Transfer Pricing analyses.
Implications for Multinational Companies
The ruling has an interpretative value beyond Italy. In practice, it reaffirms several principles already adopted in Latin America and Europe:
- There is no rigid hierarchy among the OECD methods, but each choice must be supported.
- The TNMM remains the most widely used method in the manufacturing, distribution, and service sectors; conversely, it requires solid functional analysis and reliable data.
- The documentation must be prepared contemporaneously, i.e., before or at the time of the transactions, not retroactively.
Companies applying the TNMM must anticipate tax challenges by ensuring consistency between their local reports, master files, and supporting documentation.
Lessons for Advisors and Tax Administrations
For tax advisors, this ruling exemplifies how to defend the method selected in an audit or litigation, demonstrating it after a thorough functional analysis process and contemplating alternatives and supporting grounds.
As for tax administrations, the decision reminds them of their obligation to evaluate the chosen method’s suitability technically, rather than simply replacing it with another without supporting evidence.
In other words, control should focus on the quality of the comparative analysis and the reasonableness of the margins, rather than on the preference for a particular method.
Conclusion: A Precedent That Reinforces Technical Consistency
The Italian Corte di Cassazione has clarified that the TNMM is legitimate, but its validity depends on rigorous technical application. This precedent reinforces the importance of documenting and supporting the method selected in each specific case, ensuring a solid defense against potential disputes.
In an increasingly demanding international environment, companies must prioritize technical quality and documentary consistency, not just formal compliance. A well-structured Transfer Pricing policy is the best tool for reducing tax risks and supporting your position before tax authorities.
Specialized Advice on Transfer Pricing Methods
At TPC Group, we have a multidisciplinary team specializing in functional analysis, benchmarking, and international tax compliance.
We support companies in Latin America, Spain, and the United States in correctly applying Transfer Pricing methods, optimizing their documentation, and strengthening tax transparency.
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Source: Lexced