New Italian transfer pricing documentation standard established

October 6, 2010

The Italian Revenue issued the regulations (Instructions) implementing new transfer pricing documentation requirements for multinational groups. The Instructions basically implement the EU Code of Conduct on transfer pricing by also following the OECD approach but provide for very specific requirements that multinationals should comply with in assembling their transfer pricing file.

Compliance with the Instructions will protect taxpayers from tax penalties on adjustments arising from transfer pricing audits. Current provisions provide for very high penalties ranging from 100% to 200% of any additional taxes.

The most significant implications of the new requirements are:

  • The need to assess the type of entity which exists in Italy in order to determine the type of documentation to be prepared in order to avoid penalties
  • The requirement to advise the Revenue of the existence of current transfer pricing documentation for the current tax year with the filing of the tax return
  • The requirement to advise the Revenue of the existence of transfer pricing documentation for any open tax years before 29 December 2010
  • Notwithstanding a “Masterfile approach,” the requirement to have country specific documentation prepared
  • The need to take steps to protect the taxpayer from a challenge by tax inspectors that the documentation prepared may be viewed as either incomplete or untrue, which could negate penalty protection

Notice to the Revenue, indicating that transfer pricing documentation exists for FY2010 (and subsequent FYs), must be filed each year together with the annual tax return.

For previous fiscal years subject to tax audits, a similar notice must be provided by the taxpayer within 28 December 2010. Late notices will only be deemed effective as long as filed prior to the beginning of any tax inspection.

The Instructions provide for the following steps:

  • Identify the taxpayer’s category.
    The Instructions divide taxpayers into holdings, sub-holdings and affiliate companies in relation to their role within a multinational group and provide for different documentation structures for each category (Italian permanent establishment may follow under any of those categories based on the nature of their headquarters).
    Specifically:− A holding is a resident company which is not controlled by any other resident or nonresident company controlling in its turn (also through a subholding structure) one or more nonresident companies
    − A sub-holding is a resident company which is controlled by another resident or nonresident company controlling in its turn one or more nonresident companies
    − An affiliate company is a resident company which is controlled by another resident or nonresident company and which does not control other nonresident companies
  • Identify and prepare the type of documentation required.
    Specifically:− Holdings will prepare a Masterfile and a country specific document
    − Sub-holdings will prepare a Masterfile including only their controlled companies and a country-specific document
    − Affiliate companies must prepare only a country-specific documentAs a rule, the Masterfile and the country-specific document will be written in Italian. Only sub-holdings may, under certain conditions, deliver a Masterfile in English when the Masterfile relates to the multinational group as a whole; however, the country-specific document will be in Italian. Both the Masterfile and the country-specific document must be signed on each page by the legal representative of the taxpayer and made available to tax auditors in an electronic format upon their request.
  • File the communication on the existence of transfer pricing documentation regarding previous fiscal years within 28 December 2010
  • File the communication on the existence of transfer pricing documentation regarding FY2010 (and subsequent FYs) each year together with the annual tax return
  • Deliver the transfer pricing documentation to tax inspectors upon their request within 10 days. If further information is requested, it must be delivered within 7 days except for very complex cases

The Masterfile will include information relating mainly to the multinational group as a whole and be structured as follows:

  • A general description of the multinational group (history, industry or industries where it operates, market trends, etc.)
  • Group structure
  • General group strategy
  • Operational flows
  • Intercompany transactions:
    − Transfer of goods and provision of services
    − Headquarter services
    − Cost sharing agreements
  • Functions performed, assets used and risks assumed
  • A list of intangible assets used by the companies participating in transactions
  • Group transfer pricing policy
  • Pending or signed advance price agreements and rulings, when available

The country-specific document will include information relating to the resident company and be structured as follows:

  • A general description of the company (history, market trends etc.)
  • Industry or industries where the company operates, with separate paragraphs for each industry
  • Operating structure of the company
  • Corporate strategy
  • Intercompany transactions; for each transaction a description of the transactions, a comparability analysis, the transfer pricing method selected and the relevant economic analysis (internal comparisons, external benchmarks, etc.) must be included
  • Cost sharing agreements

Furthermore, the country-specific document must include two attachments:

  • A flowchart describing operational transaction flows (including extraordinary operations)
  • A copy of each agreement supporting the intercompany transactions and a copy of any cost sharing agreements

Transfer pricing audits have become very common in Italy and are in the tier one list of objectives by tax inspectors. Compliance with the new regulations may prove very beneficial to multinationals doing business in Italy to be exempted from the draconian 100% to 200% tax penalty.

However, it has to noted that tax authorities may disregard the transfer pricing documentation provided to them, and apply tax penalties, if they consider the documentation to be incomplete (although formally compliant to the above structure), or if they consider the information included in the documentation is untrue. Definitions relating to these last provisions are not provided.

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