TRANSFER PRICING AND UNFAVORABLE ECONOMIC CONDITIONS

With ruling no 1108/46/2016 the Milan court of first instance confirmed rejection of the objections raised by the tax authority against the transfer prices applied to intragroup transactions if the market, in which the taxpayer operates, has not been preliminarily and realistically analysed in its entirety. According to the ruling, arm’s length price for intercompany transactions must be established by considering also third companies that in the years examined have incurred losses, in order to get a real picture of the market’s economic situation. In fact, negative operating results do not necessarily point to abnormal conditions in the business life cycle. Hence, the exclusion of loss-making companies without having analysed the reasons for the loss by the tax authority when applying TNMM, does not allow proper assessment of transfer pricing based on the fundamental arm’s length principle. In fact, the OECD guidelines themselves (see chapter 3.64 – 3.65) state that loss-making companies should not necessarily be excluded, as the reasons for considering such companies comparable do not depend on financial data, but rather on the conditions they are linked to.