Italy vs UFI Filters: Supreme Court Upholds Arm’s Length Pricing

Case Information:

Court: Supreme Court of Italy
Case No: 10499/2024
Applicant: Italian Tax Authorities (Agenzia delle Entrate)
Defendant: UFI Filters SpA
Judgment Date: April 2024


Judgment Summary:

In a significant ruling, the Italian Supreme Court dismissed the appeal of the tax authorities in the case against UFI Filters SpA, upholding the decision of the Regional Tax Commission. The case centered on the transfer pricing methodology used by UFI Filters SpA for transactions with its Chinese subsidiaries in 2009. The Supreme Court’s decision emphasizes the importance of accurate comparable selection and proper application of the arm’s length principle in transfer pricing disputes.

Key Points of the Judgment:

Background:UFI Filters SpA, an Italian company, paid two related companies in China for the supply of filters in 2009 and deducted these costs from its taxable income. The Italian tax authorities conducted an audit and challenged the transfer prices based on a benchmark study of six comparable companies. They argued that the mark-ups applied by the Chinese companies (39.77% and 17.2%) under the cost-plus method were not at arm’s length, resulting in a tax assessment for additional taxable income.

Core Dispute:

The core dispute revolved around the selection of comparable companies and the application of the cost-plus method in determining arm’s length prices. UFI Filters SpA contested the tax authorities’ selection of comparable companies, arguing that they were not truly comparable due to differences in product types, geographic locations, and functional profiles.

Court Findings:

  1. Comparable Selection: The Supreme Court agreed with the Regional Tax Commission’s assessment that the tax authorities had not correctly identified the parameters for determining the “normal” price. The court found inconsistencies in the selection of the six comparable companies, noting differences in production types (e.g., cabins, tanks, gears vs. high-tech filters) and geographic locations.
  2. Functional Comparability: The court emphasized the lack of evidence demonstrating comparable “functions, risks, or investments” of the selected companies. It noted the absence of specific descriptions relating to design, production, assembly, research, purchasing, distribution, and marketing activities.
  3. Burden of Proof: The Supreme Court affirmed that the tax authorities bear the burden of proving the appropriateness of their transfer pricing adjustments, including the selection of comparable companies and the application of the chosen transfer pricing method.
  4. OECD Guidelines: The court referred to the OECD Transfer Pricing Guidelines, particularly regarding the selection criteria for traditional transaction-based methods and the application of the cost-plus method.


The Supreme Court dismissed the tax authorities’ appeal, upholding the decision of the Regional Tax Commission in favor of UFI Filters SpA. The court ordered the tax authorities to reimburse the costs of the proceedings to UFI Filters SpA.

Transfer Pricing Method Used:

The case primarily focused on the cost-plus method, which was applied by UFI Filters SpA in its transactions with the Chinese subsidiaries. The tax authorities challenged the mark-ups used under this method, but the court ultimately found their analysis and comparable selection to be flawed.

Major Issues and Areas of Contention:

  1. Comparable Selection: The primary area of contention was the selection of appropriate comparable companies. The court found significant issues with the tax authorities’ choice of comparables, highlighting differences in product types, geographic locations, and functional profiles.
  2. Functional Analysis: The lack of a comprehensive functional analysis to support the comparability of the selected companies was a major issue. The court emphasized the importance of demonstrating comparable functions, risks, and investments.
  3. Burden of Proof: The case reaffirmed that the tax authorities bear the burden of proving the appropriateness of their transfer pricing adjustments, including the selection of comparables and application of the chosen method.
  4. Application of OECD Guidelines: The court’s reference to the OECD Transfer Pricing Guidelines underscores their importance in Italian transfer pricing disputes and their interpretation by the courts.

Expected or Controversial Decision?

The decision aligns with established transfer pricing principles and OECD Guidelines, making it largely expected rather than controversial. However, it is significant in its strong emphasis on the importance of proper comparable selection and the tax authorities’ burden of proof. The decision may be seen as controversial by tax authorities, as it sets a high bar for their transfer pricing assessments and comparable selections.

Significance for Multinationals and Revenue Services:

  1. Comparable Selection: The case underscores the critical importance of careful and appropriate selection of comparable companies in transfer pricing analyses. Multinationals should ensure their comparable selections are well-documented and justified.
  2. Functional Analysis: The decision highlights the need for comprehensive functional analyses to support transfer pricing positions. Multinationals should invest in detailed functional analyses that clearly demonstrate the roles, risks, and assets of each entity involved in intercompany transactions.
  3. Documentation: The case emphasizes the importance of maintaining robust transfer pricing documentation that supports the chosen methodology and comparable selections.
  4. Burden of Proof: The reaffirmation that tax authorities bear the burden of proof in transfer pricing adjustments provides some protection for multinationals. However, it also underscores the need for companies to maintain strong supporting evidence for their transfer pricing positions.
  5. OECD Guidelines: The court’s reference to OECD Guidelines reinforces their importance in transfer pricing disputes across jurisdictions. Multinationals should ensure their transfer pricing policies align with these guidelines.
  6. Geographic Considerations: The case highlights the importance of considering geographic differences when selecting comparables, particularly in cases involving emerging markets like China.
  7. Industry Specificity: The decision underscores the need for industry-specific comparables, as the court criticized the use of companies from different industries (e.g., cabins and tanks vs. high-tech filters).

Value of Transfer Pricing Expertise:

The UFI Filters case demonstrates the immense value of transfer pricing expertise in managing complex international tax matters:

  1. Methodology Selection: Expert knowledge is crucial in selecting and applying appropriate transfer pricing methods that align with the specific facts and circumstances of each case.
  2. Comparable Analysis: Transfer pricing experts can conduct thorough comparable searches and analyses, ensuring the selection of appropriate comparables that withstand scrutiny.
  3. Functional Analysis: Experts can perform comprehensive functional analyses that accurately capture the roles, risks, and assets of each entity involved in intercompany transactions.
  4. Documentation: Transfer pricing specialists can prepare robust documentation that supports the chosen methodology and complies with local and international regulations.
  5. Dispute Resolution: In cases of audits or disputes, transfer pricing experts can provide valuable support in defending the company’s position and negotiating with tax authorities.
  6. Risk Assessment: Experts can help identify potential transfer pricing risks and develop strategies to mitigate them proactively.
  7. Global Perspective: Transfer pricing specialists often have a global perspective, allowing them to navigate complex cross-border issues and ensure consistency across jurisdictions.

Preventative Measures and Tax Risk Management:

To avoid or better manage cases like UFI Filters, companies should implement robust tax risk management processes and establish a tax steering committee. The following preventative measures can be highly effective:

  1. Implement a Tax Risk Management Process:
    • Identify and assess transfer pricing risks regularly
    • Develop and maintain a transfer pricing policy aligned with business operations and OECD guidelines
    • Conduct periodic reviews of transfer pricing positions and documentation
    • Establish clear protocols for intercompany transactions and pricing decisions
  2. Establish a Tax Steering Committee:
    • Create a cross-functional team to oversee tax matters, including transfer pricing
    • Ensure regular communication between tax, finance, and operational teams
    • Review and approve significant transfer pricing decisions and policies
    • Monitor changes in tax laws and regulations that may impact transfer pricing
  3. Invest in Technology:
    • Implement transfer pricing software to streamline documentation and analysis
    • Use data analytics to identify potential transfer pricing risks and opportunities
  4. Conduct Regular Training:
    • Provide ongoing training to relevant staff on transfer pricing principles and best practices
    • Ensure key personnel understand the importance of transfer pricing compliance
  5. Engage External Experts:
    • Regularly consult with transfer pricing specialists to review and validate internal analyses
    • Consider obtaining advance pricing agreements (APAs) for significant or complex transactions
  6. Maintain Robust Documentation:
    • Develop and maintain comprehensive transfer pricing documentation that supports the chosen methodologies and comparable selections
    • Ensure documentation is up-to-date and reflects any changes in business operations or market conditions
  7. Perform Regular Benchmarking:
    • Conduct periodic benchmarking studies to ensure transfer prices remain arm’s length
    • Update comparable selections regularly to reflect changes in the market or industry
  8. Implement a Dispute Resolution Strategy:
    • Develop a clear strategy for handling transfer pricing audits and disputes
    • Consider alternative dispute resolution mechanisms, such as mutual agreement procedures (MAPs)

By implementing these preventative measures and establishing a robust tax risk management process, companies can significantly reduce the likelihood of transfer pricing disputes and be better prepared to defend their positions if challenged. The UFI Filters case underscores the importance of proactive management of transfer pricing risks and the value of expert guidance in navigating complex international tax matters.

Closing Thoughts

The Italy vs. UFI Filters case reminds us of the complexities involved in transfer pricing and the potential consequences of inadequate documentation and analysis. By investing in transfer pricing expertise and implementing comprehensive tax risk management processes, multinational companies can better navigate the challenging landscape of international taxation and minimize the risk of costly disputes with tax authorities.

Related Articles