By Angela Valente, Diego Conte, & Alessandro Foti, De Berti Jacchia – Milano
On November 23, the Italian tax administration issued new regulations on transfer pricing documentation. The new guidance, Act n. 360494, follows OECD principles and completely replaces Italy’s former transfer pricing regulations in Act no. 2010/137654.
Crucial issues covered by the Italian transfer pricing regulations include new rules on the definition of small and medium-sized entities, new electronic signing requirements, a new set of documentation requirements for low-value-added services, and rules on the eligibility for the penalty protection regime.
The regulations are effective from fiscal year 2020, affecting transfer pricing documentation prepared in FY 2021.
The new regulations do not affect the general structure of Italy’s transfer pricing documentation regime.
Access to penalty protection remains possible if the taxpayer timely prepares transfer pricing documentation in compliance with Italian transfer pricing rules and the annual corporate tax return shows that the documentation has been prepared. The documentation must also be timely delivered to the Italian tax administration upon their request. The new rules extend the period to comply with these requests from 10 days to 20 days.
Moreover, it seems that no crucial revisions to the transfer pricing documentation requirements have been adopted in the amendments. The transfer pricing documentation still consists of a master file and local file to be designed according to the companies’ features (e.g., size, category). Nevertheless, alignment with the OECD transfer pricing guidelines implies that the content of the transfer pricing documentation should be more detailed and grounded by further documentation, e.g., financial statements and data reconciliation.
Small and medium-sized entities
The new Italian transfer pricing regulations introduce changes that are somewhat significant for small or medium-sized entities. If a business qualifies as a small or medium-sized entity, it can update its transfer pricing benchmarking analysis every three years rather than annually.
Although the turnover conditions are unchanged (i.e. more than €50 million turnover in relevant FY), the new transfer pricing regulations stipulate that a company cannot qualify as a small or medium-sized entity if it either controls (directly or indirectly) or is controlled by a company that is not small or medium-sized.
It seems clear that this amendment will impact small and medium-sized Italian subsidiaries of MNEs, disqualifying them from benefiting from the three-year period for updating transfer pricing benchmarking analysis.
It seems clear that this amendment will impact small and medium-sized Italian subsidiaries of MNEs, disqualifying them from benefiting from the three-year period for updating transfer pricing benchmarking analysis.
Signatures
Among the other changes introduced is a new requirement that the transfer pricing documentation must be signed no later than the deadline to file the corporate tax return. The taxpayer’s legal representative or a delegate must sign via an electronic signature with a time stamp.
This is a disruptive and questionable change. It is disruptive because it suggests that any amendment to the transfer pricing documentation would be vain unless a supplementary corporate tax return is filed.
Such a rule should not apply if the taxpayer makes a good faith effort to deliver the transfer pricing documentation, especially given the new extension (up to 20 days) of the deadline to deliver to Italian tax authorities the transfer pricing documentation upon request.
A related change is that the new guidance states that companies maintaining proper transfer pricing documentation may file a supplementary corporate tax return if mistakes or omissions concerning transfer pricing transactions increase the corporate income tax.
These situations may require changes to the transfer pricing documentation to align it with the arm’s length principle. The taxpayer could electronically sign the documentation again with a new timestamp, which would likely show a date later than the deadline to file the corporate tax return.
The new guidance stipulates that, in such a case, taxpayers can avoid transfer pricing penalties and interest for late payment relating to FY ’19 and earlier if they file a supplementary corporate tax return by December 31, 2020.
Low-value-added services
The new guidance also permits taxpayers to adopt a “simplified approach” for transfer pricing documentation supporting low value-added services.
Under Italian law, low-value-added services are services that are of a supportive nature and that are not part of the main activities performed by the multinational group. The services can not involve the use of unique and valuable intangibles or be involved in their creation, and can not cause the taxpayer to bear or control a substantial risk of the supplier or give rise to such a risk in its hand.
The revised guidance states that a 5% mark-up on services-related to direct and indirect costs is an arm’s length remuneration for the provision of these services.
Moreover, it provides that taxpayers should describe these services in the transfer pricing documentation by providing detailed information justifying their inclusion as low value-added services, the agreements supporting these services, and the criteria used to price these services.
Italy’s alignment of its transfer pricing rules with the OECD guidelines is welcome. It could lead to streamlining the processing of transfer pricing documentation among MNEs and allowing the exchange of information among tax authorities.
However, the new Italian standard of transfer pricing documentation may also lead to further tax audits by the Italian tax administration and, therefore, more tax litigation by taxpayers to defend penalty protection.
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