Global transfer pricing guide

Transfer pricing - Italy

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Introduction to transfer pricing in Italy
Transfer pricing rules
  • The Italian transfer pricing (TP) legislation is mainly contained in Article 110 paragraph 7 of the Italian Tax Code (Testo Unico Imposte e Redditi – TUIR) enacted by the Presidential Decree no. 917 of 1986. The arm’s length principle mirrors Article 9 of the OECD Model Tax Convention on Income and Capital.
  • The Ministerial Decree of 14 May 2018 implements the arm’s length principle in Italy by analysing a few provisions and by referring to the OECD Guidelines for the other subjects.
  • The TP rules apply to all cross-border operations involving Italian resident entities, including Italian permanent establishment of foreign companies.
  • The structure and the contents of the Italian Master File and Local file are rigid and are established by the Implementation Decree of the Italian Revenue Agency dated 29 September 2010, as interpreted by the Italian Tax Authority in the Circular Letter no. 58 of 15 December 2010. The provisions stated by these documents are partially different from the EU Code of Conduct and the OECD TP documentation formats. For the purpose of reflecting the OECD updated guidelines, amendments are expected in the future.
  • The filing of transfer pricing documentation with the Italian Tax Authority is not requested. If a transfer pricing documentation according to the Implementation Decree is prepared and this is notified to the Tax Authority by ticking the appropriate box in the relevant yearly tax return, the taxpayer may benefit from the so-called 'penalty protection regime'.
  • For larger groups (sales over €750m) Italy has implemented, with the Ministerial Decree of 23 February 2017, the Country-by-Country Reporting (CbCR).
  • Article 31-ter of Presidential Decree no. 600 of 1973 rules the Advanced Pricing Agreement procedure in Italy.
  • Article 31-quater of Presidential Decree no. 600 of 1973 rules the unilateral and bilateral procedures to remove double taxation.
OECD guidance
  • The Italian TP legislation follows the OECD Guidelines. The Ministerial Decree of 14 May 2018, implements the arm’s length principle in Italy by analyzing few provisions and by making a direct reference to the OECD Guidelines as updated from time to time.
Transfer pricing methods
  • The most appropriate pricing method should be selected on a transaction by transaction basis, providing the most reliable measure of an arm’s length result in each case. The current OECD methods, namely; the comparable uncontrolled price, resale price, cost plus, transactional net margin, and profit split methods are all accepted, but the method used must be in line with the functional and risk profile of the tested party.

  • There is no set hierarchy as the Italian legislation refers to the OECD Guidelines. In practice, however, a ‘natural hierarchy’ may be said to favor the comparable uncontrolled price method.

  • 'Alternative methods' can also be used if justifiable and appropriate.
Self-assessment
  • Italy has a self-assessment regime, where the onus is on the taxpayer to ensure that transfer pricing regulations are adhered to.
Transfer pricing documentation
Preparation of transfer pricing documentation
  • Transfer pricing documentation is not compulsory in Italy.

  • If the taxpayer prepares transfer pricing documentation that complies from both a formal and substantial point of view with the Implementation Decree of the Italian Revenue Agency dated 29 September 2010, it benefits from the so-called 'penalty protection regime'. The documentation must be prepared each tax year.

  • As a general principle, the TP documentation should allow the Tax Authority to 'walk through' the transfer pricing policy applied and the economic analysis. Formal errors do not prevent the taxpayer to benefit from the 'penalty protection regime'.
  • Lack of carefully prepared documentation will generally be seen as (at least) 'careless' behavior with no application of the 'penalty protection regime' in case of a tax audit. Therefore, any adjustment may result in penalties.
  • Master File and Local File must be prepared in the Italian language and should be available at the latest within 10 working days from the official request by the Tax Authority.
  • In case the Italian entity is a sub-holding, the Master File for the entire group in the English language can be used.
  • Italy has introduced, by implementing the ad-hoc Directive, the CbCR regulations which are effective for fiscal years starting on or after 1 January 2016 for groups with revenues over €750m.
Country-by-Country Reporting

According to the Implementation Decree of the Italian Revenue Agency dated 29 September 2010, the Local File documentation must include:

  • General description of the enterprise (history, recent evolution, and general overview of the relevant markets of reference)
  • Business Sectors (including specific sector analysis, one for each sector where the entity is present)
  • Enterprise’s organisation chart (including an explanation of each internal functions)
  • General business strategies pursued by the enterprise and potential changes compared to the previous tax year
  • Controlled transactions (including a FAR analysis and an economic analysis for each category of a controlled transaction)
  • Cost contribution arrangements.

According to the same Implementation Decree, Master File documentation must include:

  • a general description of the multinational group (history, recent developments, business sectors in which it operates and overview of relevant markets of reference)
  • Multinational Group Structure
  • Organisational Structure (including an organization chart, a list of group members, their legal nature, including reference to their shareholding percentages).
  • Operational Structure (including a general description of the role that each of the associated enterprises carries out with respect to the multinational group’s activities)
  • Business strategies pursued by the Multinational Group (including potential changes to the overall business strategies if compared to the previous tax year).
  • Transaction flows
  • Intra-group transactions, reported per category of the transaction (ie, sale of tangible or intangible assets, provision of services, financial services transactions). For each set of transactions, the following should be included:
    1. a description of the underlying nature of the intragroup transactions, with the option of excluding those involving transfer of goods or services between associated enterprises both resident for tax purposes in countries other than the European Union
    2. a list of the entities part of the multinational group, between those indicated in the previous chapter, amongst which the transactions involving the above-described goods and services were carried out. Similar categories of goods and services may be aggregated in accordance with the guidance provided for by the OECD Transfer Pricing Guidelines
  • Intra-Group Services (including detailed features of intra-group services carried out by one or more associated enterprises to the benefit of one or other associated enterprises and the entities part of the multinational group)
  • Cost contribution arrangements
  • Functions performed, assets used and risks assumed for each of the enterprises involved in the intercompany transactions (including the description of potential changes occurring in the functions, assets and risks if compared to the prior taxable year, with specific reference to changes triggered by business restructuring transactions)
  • Intangible assets (including a list of intangible assets owned by each associated enterprise and the identification of any royalty payment, separated per recipient or payer respectively)
  • Transfer pricing policy of the Multinational Group
  • Relationships with the tax administrations of the Member States of the European Union regarding the Advance Pricing Arrangements (APAs) and transfer pricing rulings.
Risk factors
  • Charges for intercompany services usually require analysis on both the application of the arm’s length principle and on their inherency (ie benefit test). The taxpayer is therefore required to prove that the activities have been actually undertaken by the service provider, as well as the effectiveness of the costs sustained and deducted. Should the costs for the intercompany services be deemed as not inherent, the 'penalty protection regime' does not apply.
  • High-risk business models include toll and contract manufacturing, commissionaire and agency activity.
  • Limited risk profiles are challenged in case of recurring losses and/or in case of identification of additional functions and risks that are not in line with a limited risk profile.
  • In general, the Italian Tax Authority adopts a very formal and aggressive approach with reference to economic analyses, by carefully reviewing the searching criteria and the comparable selection. Pan-European benchmark analyses may be accepted, but they need to include Italian comparable entities.
Penalties
  • Penalties range from 90% to 180% of the higher tax assessed are applicable in case of transfer pricing adjustment applied by the Italian Tax Authority
    • if the transfer pricing documentation does not exist, or
    • if the Tax Authority does not recognize it as 'the proper documentation' according to the Implementation Decree of 29 September 2010.
  • Non-compliance with CbCR and notification requirements can draw penalties ranging from €10.000 to €50.000.
Exemptions
  • There is no exemption for the application of the arm’s length principle and documentation provisions.
  • SMEs (as defined by the EU recommendation 2003/361/EC) have to prepare the Local File on a yearly basis in order to comply with the Italian TP documentation requirements, but may use the same benchmark analysis for a three-year period, conditional upon no significant changes in the FAR analysis occurring during the said period.
Related developments
New official instructions
  • Implementation Decrees and official clarifications are expected.
Digital services tax
  • The new digital service tax (DST) is a rate of 3% applied to specific types of revenue arising from digital services and applies from 1 January 2020.
  • The DST will apply to companies meeting contemporarily two revenue thresholds:
    • the amount of worldwide revenues reported by the entity standalone or at group level should equal at least Euro 750 million;
    • the amount of revenues from qualified digital services linked to Italian users should equal at least Euro 5.5 million.
  • The revenue thresholds should be met in the fiscal year preceding the one when DST comes due. It follows that in order to verify if the DST will be due for revenues obtained in FY 2020, companies should exceed the revenues thresholds in FY 2019.
  • Qualified digital services are divided into three categories:
    • Digital advertising: the placing of a digital advertisement interface targeted for users;
    • Intermediation services: the making available of multi-sided digital interfaces to users that allow them to find and interact with others and that may also facilitate the
      provision of underlying supplies of goods or services directly between users;
    • the transmission of data collected about users that have been generated from such users' activities on digital interfaces.
  • The DST applies to the gross revenues earned from the qualified digital services.
  • The DST requires additional clarifications to be issued by the Italian Tax Authority.
Italian tax authority and taxpayer behaviour
  • In several occasions, the Italian Tax Authority outlined that a collaborative behavior should be at the basis of a tax audit, especially in transfer pricing audit process.
COVID-19
  • The economic fallout of COVID-19 is likely to have a widespread impact and an increase in TP, DPT and Corporation Tax enquiries globally is expected. All MNCs should be reviewing their potential exposure to transfer pricing enquiries and DPT and updating documentation accordingly.
  • It is also likely that the Italian Tax Authority will continue to focus challenges towards companies with commissionaire/LRDs and 'cost plus' service entities, especially where they are claiming losses because of the pandemic.
  • No guidelines have been published as of now by the Italian Tax Authority.
Economic analysis and how to demonstrate an arm’s length result
  • The Italian Tax Authority usually deeply analyses the searching criteria applied in the database in order to assure their compliance with the local practice.
  • The list of comparable companies to be provided to the Tax Authority should contain some information to allow the Tax Authority to proceed with its revision, such as financial details, VAT number, BVD number, address.
  • If the tested party is an Italian entity, local comparable companies are preferred, whilst Pan-European companies can be accepted in a set of comparable that includes Italian comparable companies.
  • Tax Authority expects that the margin obtained by the tested party is included in the interquartile range of values. The median value is usually taken as a reference for the determination of the adjustment.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
  • Advanced Pricing Agreements (APAs) are written agreements between one or more taxpayers and one or more Competent Authorities to govern the appropriate transfer pricing method for a forward-looking period. The Italian Competent Authority manages both APAs and MAPs.
  • The Italian Competent Authority manages both bilateral and unilateral APAs.
  • The timing of a bilateral or multilateral APA negotiation may depend upon the practice of the other Competent Authority/Authorities involved.
  • There is no charge for APA and MAP.

For further information on transfer pricing in Italy please contact:

Paulo Besio.PNG
Paolo Besio
T +39 02 783 351
Epaolo.besio@bgt.it.gt.com

Gianni Bitetti.png
Gianni Bitetti
T
+39 02 783 351
E gianni.bitetti@bgt.it.gt.com