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Documentation and reporting
Rules and procedures
What rules and procedures govern the preparation and filing of transfer pricing documentation (including submission deadlines or timeframes)?
Master file and local file
Article 1(6) of Legislative Decree 471/97, enacted by Decree 78/2010, governs an optional penalty protection regime for taxpayers that have adequate transfer pricing documentation in place (ie, master file and local file), as detailed in the Revenue Agency Regulation 2010/137654.
Articles 1(145) and 1(146) of Law 208/2015 introduced in Italy, for tax periods commencing on or after January 1 2016, the country-by-country reporting obligations, in compliance with the Organisation for Economic Cooperation and Development Base Erosion and Profit Shifting (BEPS) Action 13 Report. The implementing rules are contained in the Ministry of Economy and Finance decree of February 22 2017 (which also transposed into national legislation Council Directive 2016/881/EU of May 25 2016 amending Directive 2011/16/EU regarding mandatory automatic exchange of information in the field of taxation) and in the Revenue Agency Regulation 275956/2017.
Annual tax return disclosure
Italian resident enterprises that execute transactions falling under Article 110(7) of the Income Tax Code must disclose specific information in their annual tax return.
Other transfer pricing documentation
Except for country-by-country reports (which are mandatory only in certain circumstances) and the required disclosure in annual tax returns in respect of intercompany transactions, taxpayers are not obliged to file transfer pricing documentation or figures with the tax authorities on a regular basis. Further, multinational enterprises are not subject to special documentation requirements. Nonetheless, having appropriate transfer pricing documentation in place is strongly advised.
What content requirements apply to transfer pricing documentation? Are master-file/local-file and country-by-country reporting required?
Master file and local file
Article 1(6) of Legislative Decree 471/97, enacted by Decree 78/2010, governs an optional penalty protection regime for taxpayers that have an adequate set of transfer pricing documentation in place. In essence, Article 1(6) states that, where a transfer pricing adjustment is made under Article 110(7) of the Income Tax Code, no penalty can be imposed on the taxpayer if, during the audit, the latter provides tax inspectors with appropriate documentation to allow them to assess the arm’s-length nature of the transactions. The template and the content of such transfer pricing documentation are detailed in Revenue Agency Regulation 137654/2010 and are largely consistent with the requirements under the EU Code of Conduct on Transfer Pricing Documentation. Guidelines were provided by the Revenue Agency in Circular 58/E/2010. The availability of the non-mandatory transfer pricing documentation must be disclosed to the Revenue Agency in the taxpayer’s annual tax return.
For the purposes of the optional penalty protection regime in Article 1(6) of Legislative Decree 471/97, the transfer pricing documentation includes a master file (with global information about the enterprise’s multinational group) and a local file (with detailed information on all relevant material intercompany transactions of the particular Italian resident enterprise). Copies of the contracts governing the intercompany transactions must also be attached. These documents are generally updated annually. However, small and medium-sized enterprises (with an annual turnover of less than €50 million) may be allowed to update the local file concerning the selection of the transfer pricing method every three years.
The penalty protection regime applies only where:
- the taxpayer checked the box in its annual tax return stating that the documentation is available for that specific year;
- the template and content of the required transfer pricing documentation complies with the detailed rules set out in Revenue Agency Regulation 137654/2010;
- the documentation is complete, true and accurate; and
- the documentation is delivered to the tax authorities within 10 days of their request (or seven days for supplementary documentation requests, unless an extension is granted by the tax auditors).
Annual tax return disclosure
In an annual tax return, Italian resident enterprises that execute transactions falling under Article 110(7) of the Income Tax Code are required to:
- check the appropriate box if they possess the master file and local file and wish to benefit from the penalty protection regime in Article 1(6) of Legislative Decree 471/97; and
- disclose the aggregate amount of revenue and expenses to which the transfer pricing regulations apply.
The country-by-country reports must be filed within 12 months from the end of the tax period. However, Revenue Agency Regulation 288555/2017 postponed the deadline by 60 days for reports concerning tax periods that started on or after January 1 2016 and ended before December 31 2016.
The country-by-country reporting obligations must be satisfied by the multinational group’s Italian resident ultimate parent company if:
- that entity must submit group consolidated financial statements; and
- the consolidated group revenue was at least €750 million in the previous year.
Country-by-country reporting is extended to an Italian resident subsidiary of a multinational group in the following circumstances (exemptions may apply):
- The ultimate foreign parent company is not obliged to file country-by-country reports in its state of residence.
- The state of residence of the foreign ultimate parent company has a legal instrument allowing for the automatic exchange of information with Italy, but has not entered into a competent authority arrangement to provide for the automatic exchange of country-by-country reports.
- There has been a systemic failure by the tax residence of the ultimate parent entity of the multinational enterprise group to provide the country-by-country reports in its possession and the Revenue Agency has notified the Italian tax resident subsidiary. A systemic failure occurs when there is a competent authority arrangement in place, but the foreign jurisdiction has suspended automatic exchange for reasons other than those provided in the terms of the competent authority arrangement, or otherwise persistently fails to automatically exchange country-by-country reports.
- One or more of the conditions set out above apply, more than one subsidiary of the same multinational group is resident for tax purposes within the European Union and the group designates an Italian subsidiary to file the country-by-country report.
Country-by-country reports take the form of charts and the required information is generally consistent with that requested under EU Directive 2016/881 and Base Erosion and Profit Shifting (BEPS) Action 13 Report.
Based on Article 7 of the Ministry of Economy and Finance decree of February 22 2017, the Italian tax authorities may use the country-by-country report information to assess any transfer pricing or other BEPS risk and, where appropriate, for statistical analyses. Transfer pricing adjustments cannot be grounded on the information acquired through country-by-country reports, but such information can be the basis for further analysis in the context of advance pricing agreement negotiations or in tax audits, which may then result in a transfer pricing adjustment.
What are the penalties for non-compliance with documentation and reporting requirements?
The master file and local file are not mandatory transfer pricing requirements. Failure to prepare those documents is therefore not penalised, but would prevent the availability of the penalty protection regime under Article 1(6) of Legislative Decree 471/97 (ie, in the event of a transfer pricing adjustment, the Revenue Agency would charge the ordinary applicable penalties).
Non-compliance with the country-by-country reporting obligations is punishable by a penalty between €10,000 to €50,000.
Non-compliance with the required disclosure of transfer pricing information in the annual tax return is punishable by a penalty between €250 to €2,000.
What best practices should be considered when compiling and maintaining transfer pricing documentation (eg, in terms of risk assessment and audits)?
Although there is no mandatory requirement to prepare and keep the master file and local file, it is common practice to have these documents in place as, if properly drafted, they allow a party to rely on the penalty protection regime; if absent, there is a higher risk of audit and of incurring liabilities.
Italian resident multinational enterprises that do not wish to rely on the penalty protection regime under Article 1(6) of Legislative Decree 471/97 should prepare and keep available comprehensive transfer pricing documentation as evidence of their compliance with the arm’s-length principle in the event of an audit.
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