Policy, trends and developments
Describe the general government/regulatory policy for transfer pricing in your jurisdiction. To what extent is the arm’s-length principle followed?
Before the 2017 amendments, the Italian primary legislation on transfer pricing – Article 110(7) of Presidential Decree 917/1986 (the Income Tax Code) – stated that income arising from transactions carried out by Italian resident enterprises with foreign associated parties must be evaluated on the basis of the normal value of the supplied goods and services. Article 9(3) of the Income Tax Code defines ‘normal value’ as the average price or consideration paid for the same or similar goods and services, under free market conditions and at the same stage of commerce, at the time and place of supply or (nearest thereto). Where possible, the code refers to the price lists or tariffs of the goods or services supplier, taking into account usual discounts and applicable price control regulations. Although the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines are generally relied on in various guidance from the Italian tax authorities, the definition of ‘normal value’ is not fully consistent, from a legal perspective, with the OECD’s arm’s-length principle.
Article 110(7) was amended in 2017 and now makes explicit reference to the arm’s-length principle, to be interpreted in accordance with international best practice. The draft implementing Level 2 measure, recently published by the Italian Ministry of Economy and Finance, specifically references the July 2017 OECD Transfer Pricing Guidelines, as well as any subsequent amendments. Following these recent changes, the Italian transfer pricing framework is now largely aligned with international standards.
Trends and developments
Have there been any notable recent trends or developments concerning transfer pricing in your jurisdiction, including any regulatory changes or case law?
In recent years, the Italian transfer pricing framework has undergone significant changes in order to align with the OECD principles and the Base Erosion and Profit Shifting (BEPS) Action Plan.
Country-by-country reporting formalities
The regulations on country-by-country reporting formalities, as per BEPS Action 13, were enacted in 2016 and 2017, with effect from tax periods starting on or after January 1 2016.
Article 59 of the Law Decree 50/2017 significantly reshaped the Level 1 transfer pricing regulations in Article 110(7) of the Income Tax Code, which now explicitly reference the arm’s-length principle.
Downward transfer pricing corresponding adjustment
Article 59 also enacted the new Article 31-quater of Presidential Decree 600/73, broadening the circumstances in which downward transfer pricing corresponding adjustments can be made.
Public consultation on transfer pricing
The Ministry of Economy and Finance published a draft package of Level 2 transfer pricing measures for public consultation on February 21 2018. The package includes:
- a decree that provides the operational guidelines, in line with international best practices, for the application of the transfer pricing rules in Article 110(7) of the Income Tax Code, for the purposes of compliance with the arm’s-length principle stated therein; and
- the Revenue Agency Regulation, which governs the procedure for unilateral downward corresponding transfer pricing adjustments.
Along with the above draft Level 2 measures, the Ministry of Economy and Finance also published an Italian translation of the relevant parts of the July 2017 OECD Transfer Pricing Guidelines.
The public consultation ended on March 21 2018. The final versions of the above documents have yet to be released.
Domestic legislation and applicability
What primary and secondary legislation governs transfer pricing in your jurisdiction?
The primary legislation governing transfer pricing is Article 110(7) of the Income Tax Code, which states that:
- items of income derived by a resident enterprise from transactions entered into with non-resident associated enterprises must be evaluated, if an increase in taxable profits arises, on the basis of the terms and conditions that would have been agreed (in comparable circumstances) between independent counterparties acting at arm’s length;
- downward corresponding transfer pricing adjustment can be made according to Article 31-quater of Presidential Decree 600/73; and
- the minister of economy and finance may release a decree setting out guidelines for the application of Article 110(7), in line with international best practice.
Article 31-quater of Presidential Decree 600/73 sets out the circumstances that allow a downward corresponding transfer pricing adjustment, resulting in a reduction of the taxable profits of an Italian resident enterprise.
Article 1(6) of Legislative Decree 471/97 governs the optional penalty protection regime available to taxpayers with an adequate set of transfer pricing documentation (ie, master file and local file).
Articles 1(145) and 1(146) of the 2016 Stability Law (208/2015) introduced, 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 (OECD) Base Erosion and Profit Shifting Action 13 Report.
Article 31-ter of Presidential Decree 600/73, enacted in 2015, governs the international tax ruling procedure, which allows multinational enterprises to reach an agreement with the Revenue Agency on specific cross-border tax matters (including advance pricing agreements).
Article 110(7) of the Income Tax Code will be supplemented by a Ministry of Economy and Finance decree setting out operational guidelines. A draft of the decree was published by the Ministry of Economy and Finance on February 21 2018.
Article 31-quater of Presidential Decree 600/73 will also be supplemented by a Revenue Agency regulation, which will govern the procedure for securing a unilateral downward transfer pricing corresponding adjustment in Italy. A draft of the regulation was published by the Ministry of Economy and Finance on February 21 2018.
Revenue Agency Regulation 2010/137654 details the content and the format of the transfer pricing documentation that is required for the purposes of the penalty protection regime under Article 1(6) of Legislative Decree 471/97.
The implementing rules of the country-by-country reporting obligations are contained in Decree 22 February 2017 of the Ministry of Economy and Finance and Revenue Agency Regulation 275956/2017.
The tax authorities official guidelines on transfer pricing, contained in Circulars 32/9/2267/1980 and 12/1587/1981, are considered to be outdated, given the recent amendments to the transfer pricing legislative framework.
Revenue Agency Circular 58/E/2010 contains the official guidelines on the penalty protection regime in Article 1(6) of Legislative Decree 471/97 and the content of the required transfer pricing documentation as per the Revenue Agency Regulation 2010/137654.
Are there any industry-specific transfer pricing regulations?
Pursuant to Article 1(177) of the 2014 Budget Law (147/2013), companies that supply online advertising and auxiliary services are not allowed to make use of profit Level indicators applied to costs for the purposes of the transfer pricing rule in Article 110(7) of the Income Tax Code, unless an advanced pricing agreement is reached with the Revenue Agency under the international tax ruling procedure governed by Article 31-ter of Presidential Decree 600/73.
The application of the transfer pricing regulations in the pharmaceutical sector is often a complex exercise, as the prices of several pharmaceutical products are set by the government.
What transactions are subject to transfer pricing rules?
According to Article 110(7) of the Income Tax Code, the transfer pricing rules apply to any transactions between an Italian resident enterprise and non-Italian resident companies, which either directly or indirectly control the Italian enterprise or are directly or indirectly controlled by the Italian enterprise (or by the same company that controls the enterprise).
Based on Article 152(3) of the Income Tax Code, the transfer pricing rules also apply to dealings between an Italian permanent establishment and its head office.
Transactions between enterprises that are resident or established in Italy do not fall within the scope of Article 110(7) of the Income Tax Code.
How are ‘related/associated parties’ legally defined for transfer pricing purposes?
Based on the draft Transfer Pricing Decree, an Italian resident enterprise and non-Italian resident companies are deemed to be associated entities for transfer pricing purposes when:
- one of the parties directly or indirectly participates in the management, control or capital of the other; or
- the same person(s) directly or indirectly participate in the management, control or capital of both parties.
There is participation in the management, control or capital when one person or enterprise:
- directly or indirectly owns more than 50% of the capital of another enterprise; or
- has a dominant influence on the commercial or financial decisions of another enterprise.
Are any safe harbours available?
The primary and secondary legislation on transfer pricing does not provide safe harbours.
Circular 32/9/2267/1980, which provides safe harbours for royalties paid by Italian resident enterprises for intangibles, is now outdated.
Which government bodies regulate transfer pricing and what is the extent of their powers?
The primary legislation on transfer pricing is enacted by the lawmaker. Secondary legislation is made by the Ministry of Economy and Finance and the Revenue Agency, which also provides official guidelines on the matter by way of general circulars and rulings on specific cases.
Audits and investigations on tax matters (including review of companies’ compliance with transfer pricing regulations) are carried out by the Revenue Agency and the Tax Police. Tax assessments (including those containing transfer pricing adjustments) can be issued by the Revenue Agency only.
Which international transfer pricing agreements has your jurisdiction signed?
Italy has an extensive double tax treaty network comprised of more than 100 treaties. While these tax treaties are largely based on the OECD’s Model Tax Convention on Income and on Capital and include a specific provision concerning transfer pricing adjustments comparable to Article 9 of the OECD Model Tax Convention, each individual tax treaty may deviate somewhat from the model. The relevant treaty should therefore always be consulted.
Italy is also signatory to:
- the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting;
- the EU Arbitration Convention;
- the Convention on Mutual Administrative Assistance in Tax Matters; and
- the EU Tax Dispute Resolution Mechanism Directive.
To what extent does your jurisdiction follow the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines?
Pursuant to Article 110(7) of the Income Tax Code and the draft Transfer Pricing Decree, the arm’s-length principle in the Italian transfer pricing rules must be interpreted in line with international best practice. The draft transfer pricing Level 2 measure makes explicit reference to the 2017 OECD Transfer Pricing Guidelines and states that the Revenue Agency may release further regulations on the matter, taking into account, in particular, the OECD Transfer Pricing Guidelines.
Transfer pricing methods
Which transfer pricing methods are used in your jurisdiction and what are the pros and cons of each method?
Article 4(2) of the draft Transfer Pricing Decree lists the accepted transfer pricing methods, which are consistent with those provided in the July 2017 Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines:
- the comparable uncontrolled price (CUP) method;
- the resale price method;
- the cost-plus method;
- the transactional net margin method; and
- the profit split method.
Preferred methods and restrictions
Is there a hierarchy of preferred methods? Are there explicit limits or restrictions on certain methods?
Based on Article 4(1) of the draft Transfer Pricing Decree, the evaluation of controlled transactions should be made by selecting the most appropriate transfer pricing method in the specific circumstances. Consistent with the July 2017 OECD Transfer Pricing Guidelines, the draft decree states that the selection process will consider:
- the respective strengths and weaknesses of the accepted methods listed in Article 4(2);
- the appropriateness of the method considered in view of the nature and features of the controlled transaction, as determined through a functional analysis, taking into account used assets and assumed risks;
- the availability of reliable information, in particular on uncontrolled comparable transactions; and
- the degree of comparability between controlled and uncontrolled transactions, taking into account the reliability of any adjustments needed to negate the effects of any differences between them.
The draft decree softens the hierarchy of transfer pricing methods consistent with the OECD Transfer Pricing Guidelines. Based on Article 4(3), where a traditional transactional method and a transactional profit method can both be applied in light of the above criteria, the traditional transactional method is preferable. Moreover, taking into account the above criteria, where the CUP method and another transfer pricing method can both be applied, the CUP method is preferred.
According to the draft decree:
- the arm’s-length principle does not require the application of more than one transfer pricing method for a given controlled transaction;
- taxpayers can apply a method not listed in Article 4(2), provided that none of the accepted methods can be reasonably applied to valuate a controlled transaction at arm’s length and the outcome of such alternative method is consistent with that of comparable uncontrolled transactions between independent enterprises; and
- where a taxpayer has selected the transfer pricing method using the above criteria, the choice will be respected by the tax authorities and, accordingly, the assessment as to whether the controlled transactions are at arm’s length will be made by applying the chosen method.
What rules, standards and best practices should be considered when undertaking a comparability analysis?
Based on Article 3(1) of the draft Transfer Pricing Decree, an uncontrolled transaction is deemed to be comparable to a controlled transaction for transfer pricing purposes if:
- there are no significant differences in the conditions of the transactions that may affect the financial indicator to be used when applying the most appropriate method; or
- accurate comparability adjustments can be made to the conditions of the controlled transaction in order to eliminate the effects of any significant differences.
Article 3(2) of the draft decree states that, in order to assess whether two or more transactions are comparable, it is necessary to consider the relevant comparability factors, including:
- the contractual terms of the transaction;
- the functions performed by each of the parties to the transaction, considering the assets used and risks assumed;
- the characteristics of any transferred property and services provided;
- the economic circumstances of the parties and the market conditions in which they operate; and
- the business strategies pursued by the parties.
Are there any special considerations or issues specific to your jurisdiction that associated parties should bear in mind when selecting transfer pricing methods?
Transfer pricing methods should be selected in line with the criteria set out in the draft Transfer Pricing Decree (and, once released, in the final regulations) and the OECD Transfer Pricing Guidelines. In particular, the draft decree clearly endorses the OECD transfer pricing methods, selection criteria and soft hierarchy between them.
Before the amendments made by Decree 59/2017, intercompany transactions had to be evaluated based on the ‘normal value’ of the supplied goods and services, which is defined in Article 9(3) of the Income Tax Code. However, the definition is not fully consistent, at least from a legal perspective, with the OECD arm’s-length principle. Although the OECD’s guidelines were generally considered the main point of reference for Italian transfer pricing matters, there was no clear legal basis for this, which has led to the adoption of inappropriate approaches in tax audits and case law.
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.
Advance pricing agreements
Availability and eligibility
Are advance pricing agreements with the tax authorities in your jurisdiction possible? If so, what form do they typically take (eg, unilateral, bilateral or multilateral) and what enterprises and transactions can they cover?
Taxpayers that wish to seek an advance pricing agreement with the Revenue Agency must file an international tax ruling application. That application allows multinational enterprises to reach an agreement with the Revenue Agency on specific cross-border tax matters (including advance pricing agreements).
An international ruling on transfer pricing matters is essentially a unilateral advance pricing agreement. However, in their second bulletin on the international ruling procedure (March 29 2013) the tax authorities indicated that they have been negotiating bilateral or multilateral advance pricing agreements since the end of 2010.
An advance pricing agreement application can be filed by Italian resident enterprises that are subject to the transfer pricing rules in Article 110(7) of the Income Tax Code and by Italian permanent establishments. The application involves the determination of the arm’s-length price of intercompany transactions. However, the potential scope of an advance pricing agreement is flexible – it may relate to all of the business’s transfer pricing issues or be limited to specific issues.
Rules and procedures
What rules and procedures apply to advance pricing agreements?
The international tax ruling procedure, which was originally regulated by Article 8 of Legislative Decree 269/2003, is now governed by Article 31-ter of Presidential Decree 600/73 (enacted in 2015) and Revenue Agency Regulation 42295/2016.
Taxpayers may request a pre-filing meeting with the tax authorities, which can be anonymous.
Unilateral advance pricing agreement applications must be addressed to the Office for Advanced Rulings and International Disputes of the Revenue Agency in Rome or Milan (depending on the applicant’s tax domicile). Bilateral and multilateral advance pricing agreement applications must be addressed to the office in Rome and to the Directorate General International Relations of the Department of Economy and Finance. Under penalty of no acceptance, taxpayers must include the following in their applications:
- an outline of the transactions covered under the proposed advance pricing agreement;
- a detailed description of the goods and services that are supplied in the context of those transactions; and
- an explanation of the proposed transfer pricing method and reasons why that method is deemed to comply with the transfer pricing rules.
A standard advance pricing agreement procedure involves one or more meetings with the tax authorities, which may also visit the applicant’s premises.
How long does it typically take to conclude an advance pricing agreement?
Generally, advance pricing agreements should be completed within 180 days of the filing of the application. However, this term is often disregarded.
Based on the second bulletin on the international ruling procedure, published on March 29 2013, 37 international ruling agreements were concluded between 2010 and 2012 and it took, on average, less than 15 months to complete the procedure. Based on the EU Joint Transfer Pricing Forum: Statistics on APAs in the EU at the End of 2015 (October 20 2016) in 2015 the average time to negotiate bilateral or multilateral advance pricing agreements in Italy ranged between 39 months (for EU states) and 41 months (for non-EU states).
What is the typical duration of an advance pricing agreement?
Advance pricing agreements remain in force for five years (including the year in which the agreement is signed).
What fees apply to requests for advance pricing agreements?
No fees apply.
Are there any special considerations or issues specific to your jurisdiction that parties should bear in mind when seeking to conclude an advance pricing agreement (including any particular advantages and disadvantages)?
Council Directive (EU) 2015/2376 of December 8 2015 amended Directive 2011/16/EU with regard to mandatory automatic exchange of information in the field of taxation, and was transposed into law by Legislative Decree 32/2007. From January 1 2017 the Revenue Agency is therefore obliged to automatically exchange certain information on advance pricing agreements with other EU member states and inform the European Commission accordingly.
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).
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.
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.
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.
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.
What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?
General anti-abuse rule
Article 10-bis of Law 212/2000, enacted by Legislative Decree 128/2015, contains a general anti-abuse rule which empowers the Revenue Agency to counteract tax advantages that arise from abusive transactions. The general anti-abuse rule applies to all taxes, except custom duties.
An abuse of law exists when one or more transactions “lack any economic substance and, despite being formally in compliance with tax laws, are essentially aimed at obtaining undue tax advantages”. The authorities must disregard any tax advantages from these abusive schemes and calculate taxes based on the relevant circumvented rules and principles, taking into account any payments made by the taxpayer in connection with abusive transactions. Transactions lack any economic substance if they consist of facts, acts and contracts (even those that interconnect) that do not generate economic effects different from the tax advantages. The undue tax advantages consist of benefits, even if not achieved in the short term, which contradict the purpose of the tax provisions or the principles of the legal framework. However, there is no abuse where a transaction is justified by sound and non-marginal non-tax reasons (eg, managerial and organisational reasons aiming to improve the structure or the functionality of the business).
Other anti-abuse rules
Italy amended its participation exemption regime in 2016, introducing the anti-hybrid provision of the EU Parent Subsidiary Directive and making specific reference to the General Anti-abuse Rule (GAAR). Italian tax law also includes several other anti-abuse rules (eg, the controlled foreign company regime).
To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?
Italy has already implemented a significant number of measures under the Base Erosion and Profit Shifting Action Plan.
Is there a legal distinction between aggressive tax planning and tax avoidance?
The GAAR clarifies that taxpayers may choose between different optional tax regimes provided by the law or between alternative transactions leading to a different tax burden. Therefore, it is recognised that differing tax results arise depending on which choice is made. The GAAR does not challenge such choices. However, it may intervene if the course of action taken by the taxpayer in unreasonable and intended to achieve a favourable tax result as unintended by the lawmaker when it introduced the tax rules in question.
What penalties are imposed for non-compliance with anti-avoidance provisions?
Article 10bis(13) of Law 212/00 states that transactions which amount to an abuse of law under the GAAR will be subject to the ordinary administrative tax penalties (ie, the penalties contemplated for filing incorrect tax returns or for failing to make the required tax payments).
The Revenue Agency will adjust the amount of tax to the amount which would have been payable without the abusive structure and, in addition, will charge the ordinary applicable penalties.
It is specifically stated that abusive transactions challenged under the GAAR do not amount to tax crimes.