The 2010 OECD Guidelines emphasized the primacy of the Comparable Uncontrolled Price (CUP) method in transfer pricing, which relies on price lists or tariffs from transactions between an entity and independent third parties. This method was favored over the Transactional Net Margin Method (TNMM), which is based on external benchmarking using comparable operators. 

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However, the concept of a hierarchy among transfer pricing methods has evolved with the adoption of the updated OECD Guidelines. The current approach prioritizes selecting the most appropriate method for the specific facts of the case. This selection considers factors such as: 

• The consistency of the chosen method; 
• The availability of reliable information; and 
• The degree of comparability between transactions involving associated enterprises and those involving independent parties. 

No single method is universally applicable, and there is no requirement to demonstrate the inapplicability of a particular method in any given case. 

The Court’s Ruling 

In Ruling No. 26432 of October 10, 2024, the Italian Court of Cassation addressed the relevance of OECD recommendations in transfer pricing, particularly concerning the hierarchy of methods for determining the arm’s length value under Article 110(7) of Presidential Decree No. 917/1986. 

The ruling reaffirmed that the OECD Guidelines do not constitute a legal source and do not establish a hierarchy among methods for determining transfer prices, unless such prioritization is explicitly prescribed by law—a decision reserved for legislators rather than the OECD. 

Case Background 

The case involved a multinational group consisting of a single production entity in Italy (characterized as a low-risk functional profile) and foreign distribution entities. The group operated in a “closed” market where prices were not determined by free competition but were instead based on pre-confirmed orders. The tax audit in question concerned the fiscal year 2008. 

Taxpayer’s Approach 

The taxpayer, interpreting the then-applicable OECD Guidelines literally, adopted the CUP method to determine intragroup transfer prices. At the time (prior to 2010), CUP was considered the preferred method under the implied hierarchy of methods. 

Tax Authority’s Approach 

The tax authority contested the use of the CUP method, arguing that the TNMM was more appropriate given the circumstances. It asserted that the TNMM offered greater reliability, particularly in this case, where market prices were not freely determined. 

Abandoning the Hierarchy of Methods 

The Court of Cassation found that in a closed market with uncontrollable prices, the TNMM was more suited to the case than the CUP method. It ruled that profit margins, rather than prices, were a more reliable basis for determining transfer prices. The tax authority’s reliance on the TNMM—through the identification of comparable operators and the exclusion of others—was deemed correct. 

The Court also clarified that the 2010 OECD Guidelines cannot establish a hierarchy of methods, as this would require a legislative provision. Instead, the OECD Guidelines serve as technical recommendations and operational methods to implement legal provisions, such as those concerning the arm’s length value under Article 110(7) of the Italian Tax Code (TUIR). 

The Court emphasized that it is the responsibility of the taxpayer and/or the tax authority to identify the method most appropriate to the specific circumstances of the case. 

Conclusions 

The Supreme Court’s position aligns with Italian transfer pricing regulations, particularly the provisions of Ministerial Decree of May 15, 2018, which outlines the application of transfer pricing rules. 

Article 4 of the decree specifies that the valuation of a controlled transaction based on the arm’s length principle should be determined using the method most appropriate to the circumstances. If both the CUP method and another transfer pricing method (e.g., RPM, CPM, PSM, or TNMM) can be applied with the same level of reliability, CUP should be preferred. 

Ultimately, while the OECD Guidelines offer valuable models, it is the responsibility of national legislations to establish any prioritization of transfer pricing methods.