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  legal advices

Legal opinion on the fiscal treatment of incentives paid, in the car industry, as ?quality bonus?.

A common practice in the car industry is for a motor vehicle manufacturer to grant its dealers sums of money as bonus upon the attainment of specific targets, or subsequent to an upgrade of structural or organizational services in order to achieve specific standards.

"Quantity" bonuses represent incentives paid by the lessor to the dealer on account of an increase in sales. They consist in a price reduction of products already delivered, granted upon reaching specific sales targets, and they qualify as "concessions or discounts" for which the lessor issues "credit notes" on behalf of the dealer.

"Quality" bonuses, on the other hand, are incentives the lessor company uses to prompt the improvement, awarding it, of the quality of structures and services used by end customers, which incentives are granted to the dealer when specific organizational standards or high rates of customer satisfaction are reached.

On "quality" bonuses, the matter at hand deals with determining whether they are to be considered as dealings involving money as per Art.2, paragraph 3, point A) of President of the Republic Decree No. 633/1972, or whether they represent the payment for a service rendered, and as such, subject to VAT tax.

To establish, therefore, whether a tax is owed or not, we firstly need to ascertain if the receiver of the sum is required to perform services in exchange for the same. In fact, paragraph 1 (last part) of Art. 3 of President of the Republic Decree No. 633/1972 states that a performance of services takes place every time there is a legal obligation to perform, to abstain from action, or to consent action, against compensation.

On this matter the Italian Revenue Agency, with resolution No. 120/E 2004, has ruled that the granting of "quality" bonuses clearly classifies as payment for a service rendered, on account of the completion, by the dealer, of specific obligations to perform (including activities dealing with marketing, car make promotions, and customer satisfaction programs) detailed as requirements in the dealership agreements. They are sums paid to the dealer in exchange for the performance of pre-established services rendered, which are, in any case, ascribable to an interest of the company which, de facto, uses such tool to carry out marketing and brand promotion strategies.

The sums paid, therefore, according to the Italian Revenue Agency, cannot be considered as transfers of money not involving a service, or, in other words, disengaged from any contractual relationship and obligation. They are to be classified, rather, as payments connected with services rendered by the dealer to the car manufacturer, and as such, included in the VAT taxable base as per Art.13, first paragraph, of President of the Republic Decree No. 633/1972.

As per the specific case of Autobergamo, in our opinion, as much as it has received specific sums as quality bonuses (after reaching higher organizational levels, or a particularly high score in the customer satisfaction program), the relationship between said sums and the services rendered might be considered as an agreement hinged on consideration.

The same is pointed out in the specific obligations detailed in the dealership agreement, which include: upgrading of showrooms, and signs, renovation of repair shops, hiring of qualified personnel, marketing and car make promotion activities, presence of a detailed customer satisfaction program, and express cancellation clause in case said organizational standards are not kept.

This last condition appears to be particularly revealing of the clear will of the parties to set up a relationship hinged on specific promises to perform, as cancellation can be applied only to agreements involving consideration, where the sacrifice of each of the parties finds a justification (synallagmatic relationship) in a valuable service which the other party undertakes to perform.

The sums paid as quality bonus constitute for A. S.p.A., a joint stock company, a compensation for greater organizational and financial costs borne in order to carry out the activities which allowed it to receive said bonus.

Ultimately, such sums, being a compensation in exchange of specific activities and services, shall need to be included in the business balance sheet as additional "earnings", differing from those received through normal sales activities, and as such invoiced to the car manufacturing company.

The same applies also when the bonus is granted in form of price reduction of vehicles upon their delivery. Such price reduction, in fact, generates a profit, even when the vehicle is not sold, qualifying as compensation for an activity differing from sales.

Of a different nature is the matter concerning the price paid by the car manufacturer when, once the dealership contract is terminated for any reason, it should buy back any unsold vehicles from the dealer?s warehouse.

It is, indeed, detailed in the dealership agreement undersigned by F. Italia S.p.A. and A. S.p.A., that the latter has a right to sell the lessor, within a month from the date of termination of the agreement, any vehicle from in its warehouse.

Art. 26 rules that the price owed for the re-purchase of vehicles shall have to be equal to the price applied at the time the vehicles were delivered, net of any discounts: "not considering any discounts or concessions made by Ford on the same, even those performed after delivery".

In light of such logic, argued by the Italian Revenues Agency, we may correctly affirm that "discounts and concessions" shall include only the sums paid as quantity bonuses, but not those paid as quality bonuses, though connected to the purchase price of vehicles qualified as compensation - or, in other words, paid as compensation for specific services performed by the dealer on behalf of the lessor - as mere estimating data.

To this should follow that the price paid by F. S.p.A. in case of vehicle downgrade shall be equal to that applied to the dealer at the moment of delivery, net of discounts practiced as "quantity" bonuses, but proportionally increased according to the contribution paid by the lessor as "quality" bonus.

We whish to highlight that, in any case, a cancellation from by the Italian Revenue Agency is enforceable only within the relationship existing between the tax payer requesting consultation and the Internal Revenue Office, and it cannot be considered relevant to the interpretation of a contract undersigned in full autonomy by the parties, where, instead, the exact interpretation of the will of the contracting parties takes particular relevance.

Such will can be inferred, other than through the literal content of the contract, also through conclusive facts and the commercial practice in use by the parties; it must also be taken into consideration that the aforementioned contractual clause was specifically approved and subscribed by the parties as per Articles 1341 and 1342 of the Civil Code.

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