In the context of international taxation, consistency in intercompany transactions is vital to avoid contingencies. A recent ruling by the Italian Supreme Court (Case No. 3986/2026) highlights the consequences of not making correlative adjustments in the event of changes in the tax base of foreign affiliates.
Challenges in the consistency of price adjustments
When a foreign subsidiary applies a benefit or adjustment that reduces its tax base based on transfer pricing criteria, a challenge arises for the parent company. If this reduction is not reflected in a proportional increase in income for the counterparty, the tax authorities may identify a situation of double non-taxation. This phenomenon is closely monitored, as it is perceived as an artificial transfer of profits to jurisdictions with more favorable regimes.
The EPTA S.p.A. case and the principle of free competition
In analyzing the case of the Italian taxpayer (EPTA S.p.A.), the tax administration (Agenzia delle Entrate) noted that its Hungarian subsidiary reduced its operating margin from 7.13% to 1.59% after consulting with its local authority, applying a downward tax adjustment of more than €4.7 million. However, the Italian parent company did not make the corresponding upward adjustment. The Court ruled that, as this was a transaction between related parties, any benefit reducing the price paid by the subsidiary must be offset in the counterparty’s tax return in order to comply with arm’s length.
Burden of proof and valuation criteria
The current regulatory environment requires the tax administration to initially demonstrate that the agreed prices deviate from market value. However, once this evidence has been presented—such as a downward adjustment in another country—the burden of proof shifts to the taxpayer. It is the company’s responsibility to demonstrate that its prices comply with the arm’s length principle, using the OECD Guidelines as a technical compass.
Evolution of international taxation
Organizations such as the OECD and high-ranking courts are intensifying their review of intra-group transactions to combat base erosion. The Italian ruling reaffirms that adjustments made in one jurisdiction must have economic substance that is defensible to both tax administrations, avoiding discrepancies that trigger million-dollar audits.
Recommendations for multinational companies
To mitigate tax risks arising from unilateral adjustments, it is advisable to:
- Global Alignment: Verify that any tax benefit or adjustment in a subsidiary has its corresponding treatment in the counterpart.
- Solid Technical Documentation: Maintain reports that justify the group’s profitability compared to market comparables and similar risk profiles.
- Monitoring of Case Law: Observe tax and supreme court rulings, as they set the standard for interpretation by local administrations.
- Specialized Advice: Have experts validate the consistency of pricing policies in all regions where the group operates.
Conclusion
A lack of symmetry in transfer pricing adjustments can lead to protracted legal disputes and significant tax adjustments. Transparency and consistency are essential to ensure that profits are taxed where economic value is actually generated. Companies must support their operations with documentation that proves compliance with the arm’s length principle at every stage of the intercompany transaction.
TPC Group, as a company specializing in transfer pricing, advises multinational groups on the strategic analysis of their intercompany transactions, evaluating the overall consistency of their pricing policies and strengthening their position in the face of increasingly sophisticated international audits.
Source: TPCases