Italian transfer pricing implementing rules: something to monitor

Italy recently introduced a transfer pricing documentation requirement (Law Decree No. 78 dated 31 may 2010). Implementing provisions were expected and have now been introduced by an administrative circular dated 29 September 2010 (reference 2010/137654).

The administrative circular covers both material and formal aspects of transfer pricing documentation.

Interestingly, specific rules are issued for given categories of taxpayers such as sub-holdings; Italian subsidiaries of foreign multinational groups; permanent establishments of non-resident companies, etc.

The administrative circular confirms the endorsement by Italy of the EU Transfer Pricing documentation principles; the documentation is composed of a Master file (that may be drafted in English) and of a country file (in Italian). It should be noted that the Italian rules go far beyond European or even recent OECD developments.

For example, the administrative circular states that taxpayers will have to build an argument when they are not relying on a CUP or another traditional method. The documentation set should also include precise and detailed disclosures on business restructuring and management services.

The administrative circular confirms the opportunity for taxpayers to communicate transfer pricing documentation relating to prior taxable years. Taxpayers willing to use this opportunity will have to notify the Italian tax authorities that they maintain proper documentation for those prior years, not later than 90 days following the publication of the administrative circular.

Maintaining appropriate transfer pricing documentation should enable taxpayers to avoid fines and criminal actions against directors in the case of any tax adjustments.

Clarification is still expected on the availability of such an option in relation to existing tax audits. Something to closely monitor.