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- 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 analyzing 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 the Italian permanent establishment of foreign companies and permanent establishment of Italian resident entities for which the branch exemption regime has been opted.
- The structure and the contents of the Italian Masterfile and Local file are rigid and are established by the Implementation Decree of the Italian Inland Revenue Director dated 23 November 2020. Circular Letter no. 15/2021 and no. 16/2022 provide some clarifications with reference to the aforementioned Implementation Decree.
- The filing of transfer pricing documentation with the Italian Tax Authority is not required. 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 for 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 (CbC).
- 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.
- 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.
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' and the 'traditional transaction methods' in general.
Alternative methods can also be used if justifiable and appropriate.
- 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 is not compulsory in Italy, but necessary if you want to benefit from the 'penalty protection regime'.
Masterfile and Local File should be prepared on a yearly basis.
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 Inland Revenue Director dated 23 November 2020, it benefits from the so-called 'penalty protection regime'.
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 the case of a tax audit. Therefore, any adjustment may result in penalties.
Masterfile and Local File must be signed electronically by the Legal Representative or a delegated substitute. The electronic signature gives certainty (through a 'time stamp') to the signing date, which must be prior to the tax return filing date for the relevant fiscal year. Failure to comply with this requirement will not allow the taxpayer to be eligible for a penalty protection regime.
Masterfile and Local File must be prepared in Italian language and should be available at the latest within 20 working days from the official request by the Tax Authority. An English version of the Masterfile 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.
- The Masterfile contains information on the multinational group activities and global allocation of income among different entities.
- The Local File supplements the Masterfile, with a focus on the local entity. The document contains specific information on the peculiarities of the local entity, as well as the transfer pricing analyses related to the transactions occurring between the latter and related parties located in different jurisdictions.
- In terms of contents, both Masterfile and Local File are in line with the recommendations provided by the OECD TPG in their last updated version of January 2022.
- As a general rule and also in light of the clarifications provided by Circular Letter no. 15/2021, should an intercompany cost be considered as not 'inherent', penalties are always applicable notwithstanding the preparation of the proper Masterfile and Local File according to the local rules.
- Charges for intercompany services usually require analysis on both the application of the arm’s length principle and on their inherency (i.e., 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. As per the above, 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 analysis may be accepted, but they need to include Italian comparable entities.
- 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 23 November 2020.
- Non-compliance with CbCR and notification requirements can draw penalties ranging from €10,000 to €50,000.
- Italian Tax Authority usually deeply analyzes 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.
- According to the clarifications provided by Circular Letter no. 16/2022, any point of the full-range should be considered at arm’s length, assuming that all the selected entities are “comparable” according to the criteria provided by the OECD Guidelines. However, basing on our experience, the median value is usually taken as a reference by the Tax Authority for the determination of the possible adjustment.
- In order to adopt the so-called 'simplified approach' with reference to 'low-value-added services' transactions, the taxpayer must prepare a specific report to be embedded in the yearly TP documentation.
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.
If certain conditions are met, the roll-back of the APA is applicable up to the last assessable fiscal year.
For the filing of a Bilateral or Multilateral APA request, a fee is required by the Italian Competent Authority. The fee varies on the basis of the amount of the Group’s consolidated revenues:
Fee of €10,000 for Groups with consolidated revenues up to €100 million
Fee of €30,000 for Groups with consolidated revenues up to €750 million
Fee of €50,000 for Groups with consolidated revenues over €750 million.
The fees here above listed are reduced to 50% in case of renewal.
- There is no charge for Unilateral APA or MAP procedure.
- There is no exemption for the application of the arm’s length principle and documentation provisions.
- An SME (as defined by the EU recommendation 2003/361/EC) is required to prepare the TP documentation on a yearly basis in order to comply with the Italian TP documentation requirements.
- If there are no significant changes in the comparability analysis, an SME may use the same benchmark analysis for the subsequent two fiscal years, conditional upon the benchmark analysis is based on publicly available data.
- Should an SME directly or indirectly be controlled by or controls an entity whose turnover exceeds the threshold of €50 million, it is required to update the benchmark analysis on a yearly basis. Thus, it cannot use the same benchmark analysis for the subsequent two years as per the point here above.
- No additional clarifications are expected.
- 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 four 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.
- 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.
- The economic fallout of COVID-19 is likely to have a widespread impact and an increase in TP, and Corporation Tax enquiries globally is expected. All MNCs should be reviewing their potential exposure to transfer pricing enquiries updating documentation accordingly.
- The report 'Guidance on transfer pricing implications of the Covid-19 pandemic' released by the OECD on 18 December 2020 should be considered as a reference of international best practice in Italy.
- 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 domestic guidelines on this matter have been published by the Italian Tax Authority.