July 16, 2024
The Italian Supreme Court ruled on a transfer pricing dispute concerning Costa Crociere and its Brazilian subsidiary, Costa Cruzeiros. The case involved a €40 million transfer under an agency agreement, which the tax authorities recharacterized as a long-term loan, adding interest income to Costa Crociere’s taxable base using an adjusted LIBOR rate. Costa Crociere contested the reclassification, arguing that the adjustment was unjustified and that the interest calculation was flawed.
The Supreme Court held that tax authorities are not bound by the formal terms of an agreement when assessing transfer pricing compliance. However, it found that the lower courts had failed to consider the transaction’s economic substance, the risks assumed by each party, and Costa Crociere’s financial records. The Court emphasized that any reclassification must be based on a thorough transfer pricing analysis, comparing the transaction with independent arrangements in comparable circumstances.
Citing OECD Guidelines, the Court stressed that recharacterization is permissible only under strict conditions, following a comprehensive review of the transaction’s economic rationale and commercial substance. It criticized the lower courts for relying solely on the subsidiary’s accounting classification without fully assessing the parent company’s financial data and contractual details.
The case was remanded to the Liguria Regional Tax Commission for further review, with instructions to conduct a detailed analysis in line with these principles. The Supreme Court upheld Costa Crociere’s primary plea and ordered the lower court to reassess the matter, including the costs of the proceedings.
This ruling reinforces the strict requirements for recharacterizing related-party transactions under transfer pricing rules.
Full Link to English Translation: https://tpcases.com/italy-vs-costa-crociere-spa-july-2024-supreme-court-case-no-20228-2024/
Comments