Italy’s Top Court Looks at Economics in GE Transfer Pricing Case

The transactional net margin method, or TNMM, enjoys a well-deserved status as one of the most pragmatic of the five transfer pricing methods in the OECD guidelines. It’s flexible, forgiving of minor comparability gaps, and widely accepted across jurisdictions. Based on various surveys, it’s used in up to 90% of all cases.

The Italian Supreme Court’s decisions in the GE Medical Systems Italia cases (No. 7169/2026 and No. 7163/2026) in March serve as a reminder that agreeing on a transfer pricing method is only the first step. What matters just as much—and what courts are increasingly looking at—is the quality of the benchmark used to apply it and the economic story woven around it.

GE Medical Systems Italia was a sales and service entity within the General Electric group, distributing diagnostic medical equipment to Italian hospitals and clinics. The Italian Revenue Agency audited it for multiple tax years—2011, 2013, 2014, and 2015—and in each year challenged the company’s transfer pricing on the basis that its intercompany purchase prices from French and US affiliates were above arm’s length.

Both sides used the TNMM, but the method itself wasn’t in dispute.

The taxpayer’s profitability for 2011 had collapsed from a historically stable approximate 10% down to 3.23%. The revenue agency pointed to its own benchmark showing an average of 8.8%, presenting that gap as evidence of non-arm’s length pricing.

While the judgment didn’t disclose the full range of either benchmark, the gap between 3.23% and the revenue agency’s average of 8.8% was clearly the main trigger for the assessment.

The taxpayer pushed back on two fronts. First, it claimed the benchmark was methodologically flawed. Second, it claimed the margin compression had a legitimate explanation: the Italian healthcare sector experienced a sharp, documented contraction in public spending during that period—a systemic, sector-wide downturn that the taxpayer substantiated with the Ministry of Health’s own official healthcare expenditure report for 2011.

The court accepted both arguments. The revenue agency lost in all three instances—first instance, then on appeal, and finally at the Supreme Court.

Local vs. Regional

The court rejected the revenue agency’s exclusive reliance on Italian comparables. The authorities used the AIDA database, covering Italian companies only, while GE Medical used Amadeus and Orbis, which draw upon a broader European pool of comparables.

The lower court questioned why the Italian market was preferred over the European and French markets, as the goods resold by GE Medical originated from its French affiliate. The Supreme Court fully endorsed that reasoning.

This is an important point that often is contested in transfer pricing audits. The OECD transfer pricing guidelines don’t prescribe a fixed geographic scope for benchmarking. Instead, they require the most reliable available information and acknowledge that arm’s length prices may vary across geographic markets even for the same product or service.

The key issue is whether the chosen market genuinely reflects the economic conditions of the transaction being tested. In practice, tax authorities across jurisdictions approach this question differently.

Italy’s Revenue Agency has shown a preference for domestic comparables, and the GE Medical cases represent clear pushback by the local courts on this tendency. Since the EU is a single integrated market, many EU tax administrations typically accept pan-European comparables, and their use is standard practice in countries such as Germany, Ireland, the Netherlands, and interestingly (given its ex-EU status) the UK.

No Insurance Policy

A second lesson from these cases involved how to apply the TNMM. It’s often applied in practice in a formulaic way, meaning you should always achieve a margin within a range.

At the core of the TNMM is an economic insight that the bargaining positions of two parties in a business relationship aren’t always equal. There are arrangements where one of the parties (dubbed the “principal” in transfer pricing lingo) takes on significantly more functions and risks than the counterparty, which has fewer functions and risks (dubbed the “tested party”).

However, the economic rationale at the heart of the TNMM is often pushed to an absurd limit, where tax authorities or practitioners argue for a linear outcome for the tested party (ideally the median of the benchmark set), regardless of market circumstances. There is a name for an economic instrument that delivers exactly such outcome—an insurance policy.

To the extent that TNMM should approximate actual market outcomes, it hardly can be treated as a universal insurance policy. It would be difficult to find business arrangements among third parties where one party guarantees the counterparty’s fixed margin under any circumstances.

This essentially is what the Italian Supreme Court validated in the GE Medical cases. The argument wasn’t that TNMM was the wrong method. The argument was that the revenue agency’s benchmark had methodological defects—wrong comparables, wrong time period, wrong geographic scope. Even if the taxpayer’s margin looked low by comparison, this was explained by well-documented, sector-wide economic conditions (substantiated with the Italian government’s own report on reduced healthcare spending) rather than by artificial pricing.

This matters for the TNMM’s practical application. Margins fluctuate. Business cycles, cost pressures, and demand conditions shift from year to year. A routine distributor that operates at the lower end of its benchmark range in a year of sector-wide margin compression isn’t automatically behaving in a non-arm’s length manner, if there is a credible economic rationale for the result.

Takeaway

The main lesson from the GE cases is that transfer pricing isn’t a purely quantitative mathematical exercise. To a large degree, it’s a qualitative economic analysis, and the quality of the economics matters at least as much as the quality of the general methodology.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

David Zarecky is a transfer pricing adviser and co-founder of Reptune Tax in Amsterdam.

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