Transfer pricing: penalties can be disapplied even in the absence of documentary fulfillments

Prepared by Carlo Romano, Giorgio Massa and Maurizio Foti

On June 24th, 2021 the Provincial Tax Court published the judgement no.2868 regarding a case in which the taxpayer had not set up any documentary charges relating to transfer prices pursuant to article 26 of the Legislative Decree no. 78/2010. More specifically the Tax Court decided to cancel the penalties imposed by the Italian Revenue Agency for an adjustment of intra-group prices, acknowledging how the complexity of the matter of transfer pricing can lead to  objective conditions of uncertainty regarding the extent and the scope of application of the reference legislation (i.e. article 110 paragraph 7 of the Italian Income Tax Code).

The facts analyzed by the Provincial Tax Court and the judgement at the stake

As a result of a tax audit initiated over several fiscal years, the Italian Revenue Agency notified the deeds of assessment to an Italian company (hereinafter also referred to as the “taxpayer”) belonging to a well-known multinational Group, which is a world leader in the industrial production of chocolate.

With these deeds of assessment, the Italian Revenue Agency:

  • challenged the compliance of the sale prices applied to the products by the taxpayer to transactions with its Belgian subsidiary to the arm’s length principle and
  • imposed penalties amounting to 90% of the higher tax assessed, given that the taxpayer – despite being in possession of the transfer pricing study and the relative benchmark analysis prepared by the Group in accordance with the OECD Guidelines and deemed suitable by the Revenue Agency – had not set up the transfer pricing documentation pursuant to article 26 of Legislative Decree no. 78/2010 (therefore the penalty protection regime was not applied to the Company).

The taxpayer filed an appeal before Provincial Tax Commission, First of all objecting to the illegitimacy of the deeds of assessment with specific regard to the transfer pricing issue.

This issue, however, was resolved by a Mutual Agreement Procedure (more precisely by the procedure governed by Articles 4 and 6 of the Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises no. 90/436 / EEC of 23 July 1990 – hereinafter “Arbitration Convention” – executed with ratification law of March 22nd, 1993, n. 99) with the achievement of an agreement between the competent Italian and Belgian financial authorities, which led to a reduction of the claim of the Italian Tax Police by about 85%.

Therefore, the Company – in order to implement the aforementioned MAP agreement – renounced  the judgment limitedly to the higher tax deriving from the adjustment on transfer pricing but continued the judgment limitedly to the  illegality of the penalties  imposed.

With regard to the latter, the Company – in addition to highlighting both the suitability of the transfer pricing documentation prepared by the Group and the ratio of the penalty protection reward regime – and in addition to pleading the violation of general principles such as that of good faith, transparency and collaboration – also objected to the objective conditions of uncertainty of the reference legislation on transfer pricing (i.e. article 110, para. 7, of the Consolidated Tax Law). In particular, the Company – in addition to highlighting its good faith, having behaved impeccably and with the utmost collaboration and transparency towards the Office which, thanks to the Company’s conduct and the documentation provided by the latter, was able to find all the useful information to verify the transfer pricing policy adopted by the taxpayer – pointed out that transfer pricing was obviously a complex matter and that the same, not representing an exact science, could lead to different – but equally reliable – values of free competition.

The truthfulness of such arguments was also supported by the outcome of the aforementioned Mutual Agreement Procedure which, having led to a reduction of approximately 85% of the taxable amount assessed by the Office (ergo having highlighted the erroneous nature of the assessments) clearly demonstrated how the arm’s length conditions could vary considerably. All this, therefore, could not (and cannot) but make clear the existence of objective conditions of uncertainty regarding the reference legislation thanks to which the taxpayer is entitled to obtain the full disapplication of the sanctions

Well, this thesis was confirmed by the Provincial Tax Court which recognized that the penalty protection regime – not deemed to be applicable to the case at stake by the judges –“does not exclude similar institutions of a more general nature, such as that  provided for by article 10 paragraph 3 of the Taxpayers’ Statute, according to which penalties are not, in any case, applied when the violation depends on objective conditions of uncertainty regarding the scope and sphere of application of the tax rules . In fact, according to the Court, the complexity of the transfer pricing matter and the fact that it does not constitute an exact science (since this subject matter may not lead to a single value of free competition but, rather, to a different range of potential values which are equally reliable and acceptable) determine, in its practical application, objective conditions of uncertainty on the scope and sphere of application of the reference legislation … as is clearly evident in the case at stake with the almost complete elimination of the tax claim.


This judgement represents an absolute novelty in jurisprudence since it recognizes, for the first time, that the penalties deriving from an adjustment on transfer prices – as well as on the basis of the specific reward system provided for by article 1, para. 6, of Legislative Decree no. 471/97 – can also be disapplied on the basis of principles of more general scope. Among these, there are the objective conditions of uncertainty on the scope and on the sphere of application of the tax law, especially when there are circumstances which make evident the erroneousness of the tax claim. We hope that this judgement will not remain a unicum but, on the contrary, will lead to a consolidated jurisprudential orientation.

Let’s Talk

For a deeper discussion, please contact:

Carlo Romano

PwC TLS Avvocati e Commercialisti


Giorgio Massa

PwC TLS Avvocati e Commercialisti


Maurizio Foti

PwC TLS Avvocati e Commercialisti

Senior Manager