Use the Lexology Navigator tool to compare the answers in this article with those from other jurisdictions. 

Review and adjustments

Review and audit

What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?

There is an ongoing debate as to the burden of proof in transfer pricing matters. Tax courts and Supreme Court decisions show diverging approaches to the issue.

Most recently, the Supreme Court has taken the view that:

  • the tax authorities must prove the existence of intercompany transactions and that the agreed prices are clearly inconsistent with the arm’s-length principle; and 
  • taxpayers wishing to challenge the tax authorities allegations must prove that they have complied with the arm’s-length requirements – for example:
  • Decision 30149 of December 15 2017 and Decision 21410 of September 15 2017, concerning goods supplied by an Italian company to foreign associated entities;
  • Decision 13387 of June 30 2016 and Decision 7493 of April 14 2016, concerning an interest-free loan granted by an Italian parent company to a foreign subsidiary; and
  • Decision 6331 of April 1 2016, concerning the interest rate on a loan granted by an Italian company to a foreign associated entity.

Elsewhere (eg, Decision 6656 of April 6 2016), the Supreme Court took a different approach, stating that the tax authorities must prove that intercompany transactions are not priced at arm’s length when making a transfer pricing adjustment.

Further, in some decisions the Supreme Court has drawn a distinction between costs and revenues, stating that the burden of proving that revenues are not at arm’s length lies with the tax authorities, while taxpayers must prove that costs deriving from intercompany transactions are set in line with arm’s-length conditions.

Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?

No specific rules govern the conduct of transfer pricing audits by the tax authorities. The ordinary rules under Decree 600/73 and Law 212/00 (the Taxpayer Bill of Rights) also apply to transfer pricing audits.

Based on Article 12(5) of Law 212/00, tax audits must be finalised in a maximum of 30 (non-consecutive) working days, which can be extended by an additional 30 days for particularly complex audits. However,  the validity of the notice of assessment served to the taxpayer should not be affected if a tax inspector infringes this rule.

Tax assessments (including those containing transfer pricing adjustments) must be notified, on penalty of nullity, within the expiration of the statute of limitations for the relevant tax year. The general statute of limitations period for income tax purposes also applies for transfer pricing assessments:

  • for tax periods up to 2015, notices of assessment must be served by December 31 of the fourth year following the year in which the tax return was filed (if the tax return was not filed, the period is extended by one year); and
  • for tax periods from 2016 onwards, notices of assessment must be served by December 31 of the fifth year following the year in which the tax return was filed (if the tax return was not filed, the period is extended by two years).

Penalties

What penalties may be imposed for non-compliance with transfer pricing rules?

When the Revenue Agency makes a transfer pricing adjustment for non-compliance with the arm’s-length principle, it will also impose the penalties for filing an incorrect tax return. These penalties are set out in Article 1 of Legislative Decree 471/97 and generally range from 90% to 180% of the additional taxes assessed by the Revenue Agency. Special rules apply where similar violations are repeated.

However, the penalty for filing an incorrect tax return is not charged if there is an adequate set of transfer pricing documentation (ie, the master file and local file) and the taxpayer can benefit from the penalty protection regime under Article 1(6) of Legislative Decree 471/97.

Adjustments

What rules and restrictions govern transfer pricing adjustments by the tax authorities?

Transfer pricing adjustments by the Revenue Agency must be based on Article 110(7) of the Income Tax Code and the forthcoming implementing decree to be released by the Ministry of Economy and Finance. On February 21 2018 a draft of the Transfer Pricing Decree was published; the final draft will be released on completion of the ongoing public consultation.

Challenge

How can parties challenge adjustment decisions by the tax authorities?

Transfer pricing adjustments can be settled through various alternative dispute resolution procedures, which imply significant reductions in the applicable penalties.

If no pre-contentious settlement with the tax authorities is achieved, taxpayers may appeal transfer pricing adjustments made by the Revenue Agency to the local tax court. Further appeals may be brought in front of the regional tax court and Supreme Court.

Mutual agreement procedures

What mutual agreement procedures are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?

Downward corresponding transfer pricing adjustments

Based on Article 31-quater of Presidential Decree 600/73 (enacted by Article 59(2) of Decree-Law 50/2017), downward corresponding transfer pricing adjustments resulting in a reduction of the taxable profits of an Italian resident enterprise are allowed:

  • on the basis of agreements concluded with the competent authorities of foreign countries, according to the mutual agreement procedures provided by the applicable double tax treaties or the EU Arbitration Convention;
  • as a result of tax audits carried out in the context of international cooperation activities, the outcome of which is agreed by the participant states; and
  • by way of a specific application filed by the taxpayer with the Revenue Agency, following a final transfer pricing adjustment in another state made in compliance with the arm's-length principle, if there is a double tax treaty between Italy and the other state which allows an adequate exchange of information.

Mutual agreement procedures

Italian taxpayers may seek mutual agreement assistance under the relevant article of an applicable double tax treaty or under the EU Arbitration Convention. The Revenue Agency published guidelines on mutual agreement procedures in Circular 21/E/2012, which outlines the differences between these different types of procedure, the various stages of the procedure and the interplay between mutual agreement procedures and the remedies available under domestic law. 

Unilateral adjustments

On February 21 2018 the Ministry of Economy and Finance published the draft Transfer Pricing Decree Revenue Agency Regulation on Unilateral Downward Corresponding Transfer Pricing Adjustments.

Based on these draft regulations, downward corresponding transfer pricing adjustments can be claimed by Italian resident enterprises to which the transfer pricing rules in Article 110(7) of the Income Tax Code apply, and by Italian permanent establishments of foreign enterprises, in order to eliminate the double taxation that arises from a final and arm’s-length compliant transfer pricing adjustment in a foreign state. This is subject to the condition that a double tax treaty has been agreed allowing adequate exchange of information.

Taxpayers wishing to secure a unilateral downward corresponding transfer pricing adjustment must file an application with the Office for Advanced Rulings and International Disputes of the Revenue Agency in Rome. On penalty of rejection, the following documents must be attached to the application:

  • copies of the documents concerning the foreign transfer pricing adjustment, together with an Italian or English translation;
  • legal and factual evidence that the foreign transfer pricing adjustment is consistent with the arm’s-length principle; and
  • a statement released by the competent foreign tax authorities confirming that their transfer pricing adjustment is final.

Click here to view the full article.