Takeaways from Italy’s new transfer pricing country profile

By Gian Luca Nieddu, Hager & Partners, Milan area

A new version of Italy’s transfer pricing country profile, prepared by Italian Central Revenue, was published on the OECD webpage a few days ago, reflecting the agency’s latest views on transfer pricing enforcement. It replaces the former version, dating back to February 2014.

In alignment with the Ministerial Decree issued on 14 May 2018, the profile confirms – once more – that Italy fully embraces the arm’s length principle as set in the OECD transfer pricing guidelines resulting from the final report on BEPS Actions 8-10.

Accordingly, concerning the criterion for the application of the transfer pricing methods, the most appropriate method rule is applied since July 2010.

Further, taxpayers may apply a method other than comparable uncontrolled price (CUP), resale price, cost plus, transactional net margin method (TNMM), and profit split only if it can be demonstrated that none of those methods could be applied with reliable results to determine the pricing of a controlled transaction on the basis of the arm’s length principle.

Such different method must produce a result consistent with what independent enterprises would be expected to obtain in carrying out comparable uncontrolled transactions.

It is worth noting the clear statement that there is no preference for domestic comparables over foreign comparables in benchmarking analysis, as outlined in chapter III of the OECD transfer pricing guidelines.

Even if there is no additional comment from the Italian officers, the statement is, in any case, relevant since during tax inspections auditors sometimes still tend to raise remarks on this aspect, preferring Italian comparables based on the economic conditions factor.

Further, concerning transfer pricing and intangibles, a general reference is made to the 2017 OECD transfer pricing guidelines and the new provisions set forth in BEPS Actions 8-10.

In this respect, any hint to outdated Circular Letter n. 32/1980 disappears so, practically, the document seems de facto superseded (at least on this topic), even if it has never been officially “archived” by the Revenue.

For intangibles, in fact, the  1980 Circular Letter contains sort-of safe harbours to prove the arm’s length nature of royalty rates which – since a long time – were not usable for effective transfer pricing analyses because of the complexities that usually characterize intangible properties.

In the same context, it is meaningful to recall of the Italian IP box regime introduced in 2015. The related guidelines and instructions delivered by Italian Central Revenue in 2016 make explicit the reference to transfer pricing techniques (e.g., CUP and residual profit split) to identify the additional value brought by the IP worth benefiting the specific tax deduction.

Finally, we offer two takeaways from this new version of the transfer pricing country profile.  On the one hand, it shows the great effort the Italian Tax Administration has exerted over the last few years to keep the domestic provisions up to date and more and more able to track the evolution of business structures (including the enhancements of advance pricing agreements and the mutual agreement procedure offered through tax treaties and EU Arbitration Convention).

On the other hand, the profile provides guidance for tax officers who, on a daily basis, are engaged with multinational taxpayers in assessing the arm’s length nature of the flows carried on.

In this landscape, multinationals and practitioners cannot avoid considering trends in the case law issued by provincial and regional tax courts and the Supreme Court, not only on strict transfer pricing topics but also on related matters like deductibility of service fees and permanent establishment.