In international taxation, consistency in intercompany transactions is vital to avoid tax liabilities. A recent ruling by the Italian Supreme Court (Case No. 3986/2026) highlights the consequences of failing to make corresponding adjustments due to amendments in the tax base of foreign affiliates.
Challenges in Ensuring Consistency in Price Adjustments
When a foreign subsidiary applies a benefit or adjustment that lowers its tax base using transfer pricing criteria, the parent company encounters a challenge. If this reduction does not result in a proportional increase in income for the counterparty, tax authorities may detect a situation of double non-taxation. This phenomenon is closely monitored, as it is perceived as an artificial profit shifting to jurisdictions with more favorable tax regimes.
The EPTA S.p.A. Case and the Arm’s Length Principle
In analyzing the case of the Italian taxpayer (EPTA S.p.A.), the tax administration (Agenzia delle Entrate- Revenue Agency) noted that its Hungarian subsidiary reduced its operating margin from 7.13% to 1.59% following a consultation with its local authority, resulting in a downward tax adjustment of over €4.7 million. Conversely, the Italian parent company did not make the corresponding upward adjustment. The Court determined that, since it is a related-party transaction, any benefit reducing the price paid by the subsidiary must be balanced in the counterparty’s tax return to comply with the usual market value.
Burden of Proof and Assessment Criteria
The current regulatory environment requires the tax authority to demonstrate that the agreed-upon prices deviate from market value. Conversely, after presenting such evidence—such as a downward adjustment in another country—the taxpayer bears the burden of proof. The company must demonstrate that its prices comply with the Arm’s Length Principle, using the OECD Guidelines as a technical guide.
Trends in International Tax Auditing
Bodies such as the OECD and high-level courts are intensifying their scrutiny of intra-group transactions against base erosion. The Italian ruling reaffirms that adjustments made in one jurisdiction must have economic substance that is defensible before both tax authorities, thereby avoiding discrepancies that trigger costly audits.
Recommendations for Multinational Companies
To mitigate tax risks arising from unilateral adjustments, it is advisable to:
- Global alignment guarantees that tax benefits or adjustments in subsidiaries are treated as corresponding in counterpart jurisdictions.
- Robust technical documentation maintains reports supporting the group’s profitability against market comparables and similar risk profiles.
- Monitoring of case law tracks rulings by the tax and supreme courts, as they set the interpretation standard for domestic administrations.
- Specialized advice relies on experts to validate the consistency of pricing policies across 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 they actually generate economic value. Companies must support their operations with documentation demonstrating compliance with the Arm’s Length Principle at every stage of the intercompany transaction.
TPC Group, a specialized Transfer Pricing firm, advises multinational groups on the strategic analysis of their intercompany operations, evaluating the overall consistency of their pricing policies and strengthening their position during increasingly sophisticated international tax audits.
Source: TPCases