New Transfer Pricing Era

Revision of the transfer pricing framework The Decree of April 24, 2017 No. 50 converted by the law of June 21, 2017 amended the article 110 paragraph 7 of Presidential Decree No 917/1986 – i.e. the Corporate Income Tax Code (Tuir), milestone in the Italian law of transfer pricing. Following this change made, on 14 May was published the Decree of the Ministry of Finance that represents the realization of the first step of an overhaul of the domestic discipline. The content of Decree consists of nine articles, it is summarized below.

In Article 1 is clarified the scope in which the arm’s length principle applies, that is between intercompany transactions in foreign countries and Article 2 lists the definitions of the terms recurring in Decree.

Then, Article 3 focuses on comparability, an essential theme for the analysis and drafting of the Country File.

Subsequently, Article 4, after a brief listing of the 5 methods dictated by the OECD Guidelines, permits the adoption of alternative methods provided that the taxpayer can demonstrate that it would be impossible to adopt the other methodologies.

Article 5 specifically states that the arm’s length principle must be applied to each transaction individually, except
for operations homogeneous or complementary.

With Article 6,there is a specific definition of arm’slength range since there is no reference for determining the exact point to which any other result is considered not in line with the market.

Then, Article 7 introduces a simplified procedure for calculating the relevant remuneration based on 5% markup on direct and indirect costs for low–value–adding services.

Article 8, considering the penalty protection regime and the required contents of documentation, offers clarifications on the suitability of masterfile and country file which – in brief – must necessarily provide the tax authorities all fundamental elements essential to enable inspectors to carry out in-depth analyses of the transfer prices applied. The presence of inaccuracies in the TP documentation shall not invalidate the document in case it is basically complete and compliant with the Central Revenue guidelines. In any case, the tax office is allowed to ask for supplementary information.

Lastly, Article 9 refers to one or more acts (e.g., circular letters, official interpretations, etc.) of the Commissioner of the Revenue Agency for the issue of further provisions and operative instructions on the most relevant topics.

Downward corresponding adjustments

A few days later, on 30 May 2018, the Revenue Agency published guidelines (Provvedimento del Direttore dell’Agenzia delle Entrate n. 108954/2018) defining the procedure contained in the article 31-quarter of the Decree of the President of the Republic 600 of 1973, concerning downward corresponding adjustments.

Specifically, a recognition for Italian tax purposes of the corresponding decrease in income operating according to Article 110, paragraph 7, can be implemented locally through the presentation of a specific request to the Italian Central Revenue, provided that the adjustment raised in another State is definitive and in accordance with the arm’s length principle. Moreover, it is requested that Italy has signed a double tax treaty with that State and an adequate exchange of information is granted.

The procedure can be activated by all entities that are resident in Italy and belong to a multinational group, or operate abroad through a permanent establishment, as well as by no-residents who carry out their business in Italy through a permanent establishment. The request has to be submitted to the specific department of the Central Revenue in Rome dedicated to APAs and MPAs (so calledUfficio Accordi Preventivi eControversie Internazionali). The application requires the activation of the procedures for the resolution of international disputes and the application must be submitted within the deadlines set by the legal instrument for the resolution of international disputes indicated therein, so three years for the EU Arbitration Convention or within the deadline set by the specific double tax treaty for the MAP.

The application shall provide elements required to properly describe the litigation and in any case has to:
a. clearly indicate the subject matter, i.e. the request for the elimination of double taxation generated by an upward adjustment in the foreign country where the related entity is resident;
b. attach the documentation, suitable to prove possession of the requirements of letter c), paragraph 1 of the art. 31 quater of the D.P.R. September 29, 1973, n. 600;
c. be signed by the legal representative of the company or by another person with the powers of representation.

The procedure is finalized by a formal act of the Revenue Commissioner which disposes for the downward adjustment
in income corresponding to upward adjustment carried out in the other State. Accordingly, through the recognition for local purposes of the adjustment raised in another State, a revised taxable basis will be identified.

In the end, considering the renewed international debate around transfer pricing generated by the BEPS Project, current initiatives taken by the Italian Revenue witness a remarkable effort to enhance cooperation between the tax administration and taxpayers (i.e., multinational enterprises, in this case) in the aim reducing domestic controversy and implementing new tools to solve potential double taxation issues.

Gian Luca Nieddu, Hager & Partners, Italy.