The first elements of transfer pricing (TP) regulations in Italian legislation can be found in 1936, but the formal introduction into the Italian legislation took place with the 2004 tax reform that led to the amendment of the Income Tax Code. This resulted in the rise of TP’s importance for the Italian Revenue Agency, which led to an increased number of TP audits in the country.
Currently, the transfer pricing rules in Italy are governed by the Income Tax Code–Article 110 para.7 and the 2018 Ministerial Decree. The Italian TP rules largely follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (The OECD TP guidelines).
Arm’s Length Principle
Italian transfer pricing regulations, under Article 110(7) of the Income Tax Code, follow the arm’s length principle, which reflects Article 9 of the OECD Model Treaty. It stipulates that transfer pricing rules shall apply to any transaction among related subjects whenever their effects contribute to the determination of the income to which tax is applied, with respect to the sale and purchase of tangible and intangible goods, services, operating income, capital gains, or losses. The law prescribes that the transactions between related companies, whether owned, controlled, or under common control, are valued at market conditions as if the transactions had been between independent parties. This would avoid any distortions in the shifting of profits with the view to obtaining unwarranted tax advantages. This is the principle on which the Italian Revenue Agency operates in regulating and controlling the transfer pricing operations.
Related Party Definition
Article 110, para. 7 of the Income Tax Code, as amended in June 2017, governs the transactions between Italian companies and non-residents under control of or under control by the same entity. The Decree of May 14, 2018, expands the definition of “associated enterprises” arguing for the definition of entities in which a controlling interest or participation in the management, control, or capital of the other is possessed directly or indirectly. It also states that control or participation refers to having more than 50% of the capital, voting rights, profit, or the dominant control of management, through equity or contractual means.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Italy are:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method
- Profit Split Method
Italy does not apply a preference on the method; however, it’s the legislation advises to follow the principle of the most appropriate method. The selection of the method, however, is to be guided by several factors, such as the nature of the transaction, reliable data, and fair comparison with independent deals. The method’s strengths and weaknesses should also be considered to ensure accuracy in pricing.
Comparability Analysis
An important part of the transfer pricing compliance is the comparability analysis. Below is a summary of the main points regarding comparability analysis in Italy:
According to Article 3 of the 2018 Decree, a transaction is considered comparable if there are no major differences affecting the financial indicator used for pricing or if adjustments can be made to account for such differences. The key factors for comparability include the contract terms, functions performed, characteristics of goods or services, market conditions, and business strategies of the involved parties. These elements help ensure that transactions between related entities align with market conditions, following the arm’s length principle.
In Italy, tax authorities generally prefer internal comparables over external comparables when assessing transfer pricing. This is because internal data is more accessible, while external comparables often require information that is not available to tax authorities. Internal comparables are also considered closer to the transaction under review, making them more reliable. The Italian tax authorities typically rely on company-provided documentation and rarely use external sources or secret comparables in their assessments.
Documentation Requirements
Documentation requirements for transfer prices in Italy are based on the three-wheeler method of OECD. That means multinationals have to report the following to the Italian tax authorities:
- Master file;
- National Documentation; and
- Country-by-Country (CbC) report.
In Italy, transfer pricing documentation is not required but is certainly mandatory as a means to access the “penalty protection regime”. As required by the 23 November 2020 Implementation Decree of the Italian Revenue Agency, taxpayers are obliged to hold an annual Masterfile and National File. Effective documentation must allow the Tax Authority to understand with clarity the transfer pricing policy and the economic analysis performed. The documentation must be in Italian and provided within 20 working days upon request by the Tax Authority, although an English Masterfile may also be used.
The Master File gives an overview of a multinational group’s structure and operations to ensure transfer pricing compliance. It includes details on the group’s legal structure, key business activities, and main markets. It also covers intangibles, explaining ownership, strategy, and pricing policies for intellectual property and R&D. Financial transactions are documented, including group financing, centralized financial functions, and transfer pricing policies. The file must also include consolidated financial statements and any major agreements, such as Advance Pricing Agreements (APAs).
National Documentation focuses on Italian companies or permanent establishments and their intercompany transactions. It provides a company overview, outlining its market position, management structure, and operations. The key section details intragroup transactions, categorized by type (goods, services, intangibles). Transactions under 5% of total intercompany dealings are considered marginal but still require disclosure for penalty protection.
Country-by-Country Reporting
In Italy, Country-by-Country reporting was introduced in 2015, in line with OECD BEPS Action 13. It applies to groups multinational with annual sales exceeding €750 million. According to the rules, whereby the Italian parent company, or sometimes also an Italian subsidiary, shall provide the report if the foreign parent’s country does not provide appropriate agreements with Italy.
The report contains figures for revenues, profits, taxes, employees, assets, and group activities by jurisdiction. It has to be filed annually beginning from fiscal years starting on or after January 1, 2016, and before any calendar year-end by 12 calendar months after the end of the fiscal year. Lack of compliance or errors can lead to a fine of €10,000 to €50,000.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Italy uses both APA and MAP to manage and resolve international tax disputes, in compliance with OECD guidelines and EU directives.
APAs are agreements made between the taxpayer and the tax authorities, in advance, to avoid tax disputes regarding transfer pricing methodology. The authority regulating the agreements is the Italian Revenue Agency which determines how Italy’s tax law will be applied to a specific situation or transaction that has not yet occurred from a tax perspective.
The Italian law provides three types of APAs: Unilateral, Bilateral, and Multilateral
Essentially, an Advanced Pricing Agreement (APA) is an arrangement between a taxpayer and either one or more tax administrations as to how transfer pricing will be conducted in respect of future transactions. In Italy, the tax administration deals with unilateral APAs (where only the Italian tax authority is involved), bilateral or multilateral APAs (followed by tax administrations of other countries), and Mutual Agreement Procedures (MAPs).
The negotiation timeline for a bilateral or multilateral APA may depend on the practices of the other authorities which are involved. If certain conditions are met, an APA can be applied retroactively to the last assessable fiscal year.
For filing a Bilateral or Multilateral APA request, a fee based on the group’s consolidated revenues: €10,000 for groups with revenues up to €100 million, €30,000 for groups up to €750 million, and €50,000 for groups exceeding €750 million. These fees are halved for renewals. There are no charges for Unilateral APAs or MAP procedures.
Approach to Transfer Pricing Audits
In Italy, the tax system works on a “self-assessment” basis, with companies required to submit an annual report electronically by the final day of the 11th month following the related fiscal year. The taxable period coincides with the company’s financial year as defined in the article of association but may be shorter or longer than 12 months.
Transfer pricing is not subject to specific audit procedures but is often reviewed during general tax audits. These audits are planned annually and focus on high-risk areas highlighted in the tax authorities’ guidelines. Intragroup transactions identified during an audit typically lead to scrutiny of transfer pricing, as this area often involves cross-border transactions and large enterprises, which are closely monitored. Businesses are generally less prepared for transfer pricing audits, making this a key focus for tax authorities due to the significant amounts involved.
Penalties
Penalties in Italy range from 90% to 180% of the higher tax rate determined by the Italian Revenue Agency, in case of a transfer pricing adjustment and case of a lack of or a perceived non-compliance of transfer pricing documentation with the law.
Taxpayers in Italy can settle tax assessments with the authorities to reduce penalties. If an agreement is reached, the penalty goes down to 30% from the usual 90%. For a settlement to be considered, the taxpayer has to make a payment of the amount agreed upon within 60 days of receipt of the assessment.
The criminal punishment is applied in cases where the amount of evaded tax exceeds €100,000 or if the undeclared revenues exceed 10% of the declared revenues or more than €2 million.
Taxation at a Glance
Administratively, Italy is comprised of 20 regions among which the five regions Aosta Valley, Friuli-Venezia Giulia, Sardinia, Sicily, and Trentino-Alto Adige/Südtirol have enjoyed special autonomic status with wider legislative and administrative powers. The country has signed double tax agreements with several countries. The official name of the Italian tax authority is the Italian Revenue Agency.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 24% |
VAT | 22% |
Withholding tax on dividends to non-residents | 26% |
Withholding tax on interest to non-residents | 26% |
Withholding tax on royalties to non-residents | 30% |
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