Transfer pricing – Italian Contract Manufacturer

The transaction

A Group, European market leader in the production of clothing, located in Italy with a subsidiary engaged in typical activities of on demand production (contract manufacturing). In particular, the Italian company produces garments on the basis of specifications provided by the parent and resells them to the same with direct shipping to the parent’s final client.

Activity carried out

Following a notice of assessment aimed at challenging the existence of an Italian permanent establishment (foreign company) within the manufacturing company, the Group has requested a qualitative opinion on the company’s specific risk with particular reference to the Transfer Pricing policies hitherto practiced. Following this examination, the company has decided to conduct a study to support the adequacy of the transfer pricing applied as well as to document the new transfer pricing techniques to be adopted for the future. It was then carried out a benchmark analysis aimed at identifying the proper remuneration of the transaction between the parent company which distributes worldwide and the Italian manufacturer company.

Details of the project

The study was aimed at identifying the correct remuneration of the Italian producer for his activity of producer of garments designed and commissioned by the European parent. The following activities were carried out

• On the basis of the functional analysis, it was verified the accuracy of the characterization of the  Italian company as a Contract manufacturer;
• On the basis of the functional analysis, it was then identified the Italian producer company as the less complex and thus as the more reliable tested party in the relationship with the parent;
• TNMM  was determined of as the most reliable method using Mark Up on the Total Costs (MUTC) as  the most suitable profit level indicator;
• We then performed the ‘benchmark analysis’, identifying  a sample of 34 independent Italian comparable companies which  are contract manufacturers.

The analysis was then completed with the identification of a range of market values ​​(interquartile range) within which the Group may determine the arm’s length remuneration to be applied in the examined intercompany transaction.

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