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Italy: Italian tax police, transfer pricing and business restructuring: still hot topics meriting inspection

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Ten years after the Circular Letter n 1/2008 was issued, on December 1 2017 the Italian tax police (Guardia di finanza) released the updated version of its operational manual for tackling tax evasion and fraud (i.e. Circular n 1/2018). This new document includes – as in the past – a section dedicated to transfer pricing (volume III, part V).

It starts with a general overview of the definition of the arm's-length principle as it has been recently modified in domestic tax law (i.e. new version of Article 110(7) of the Italian Corporate Income Tax Code) in order to implement a definition more in line with the OECD TP guidelines in light of the renewed concepts introduced following the BEPS project, in particular by Actions 8-10 and Action 13. Accordingly, the initial focus is on the pillars of the transfer pricing analysis: functional and risk analysis, method selection and economic analysis including the benchmarking exercises for the selection of comparable companies (also through the use of databases). Likewise, also in the spotlight is the assessment of law requirements imposed to benefit from the domestic penalty protection regime for those taxpayers who prepare an appropriate set of TP documents (i.e. country file and – when needed – also a master file).

Special considerations are then presented regarding intangibles and the provision of centralised services. In fact, on the one hand, echoing the work of the OECD on the so-called 'hard to value intangibles' (HTVI), the sales of this type of asset deserve an in-depth investigation due to the fact that the valuation of the purchase price could be affected by a high degree of uncertainty. On the other hand, centralised services – especially during tax inspections – still raise relevant issues in terms of costs deductibility for the recipient entities which are requested to provide supporting documentation demonstrating that the services have been effectively rendered, that they are inherent to the business activity, that they do not duplicate similar services furnished by independent providers and – ultimately – that the transfer pricing complies with the arm's-length principle. In this respect, a proper qualification of the nature of these services (i.e. low value adding versus strategic) is crucial in order to define the pricing methodology, including the simplification measures introduced by BEPS Action 10.

Subsequently, the tax police dedicated an extended section of the Circular Letter n 1/2018 to the transfer pricing aspects of business restructuring. Following the OECD TP guidelines (chapter IX), business restructuring generally refers to the cross-border reorganisation of the commercial or financial relations between associated enterprises, including the termination or substantial renegotiation of existing arrangements. Business restructurings may often involve the centralisation of intangibles, risks, or functions with the profit potential attached to them and they may typically consist of:

  • Conversion of full-fledged distributors (that is, enterprises with a relatively higher level of functions and risks) into limited-risk distributors, marketers, sales agents, or commissionaires (that is, enterprises with a relatively lower level of functions and risks) for a foreign associated enterprise that may operate as a principal;

  • Conversion of full-fledged manufacturers (that is, enterprises with a relatively higher level of functions and risks) into contract manufacturers or toll manufacturers (that is, enterprises with a relatively lower level of functions and risks) for a foreign associated enterprise that may operate as a principal;

  • Transfers of intangibles or rights in intangibles to a central entity (e.g. a so-called 'IP company') within the group; and

  • The concentration of functions in a regional or central entity, with a corresponding reduction in scope or scale of functions carried out locally; examples may include procurement, sales support, or supply chain logistics.

Circular 1/2018 states that attention has to be paid to such kinds of operations since they could be used for aggressive tax planning schemes. Particularly, underlines the Italian tax police, the assessment activity has to be focused on those business restructurings that occurred after the acquisition of the controlling interest in Italian companies by foreign entities, especially when there is an implication of a shift of profits towards low tax jurisdictions.

In this context, the verification of overall compliance with the arm's-length principle involves a detailed analysis of the functions performed. This would include risks borne and assets used by the companies taking part in the restructuring of the intercompany flows both in the phases preceding and following the reorganisation. In other words, the assessments will have to be based on the economic principles that regulate the relationships between independent companies or, if this is not possible, it will be necessary to assess which rights or obligations would have been foreseen in similar situations, if the parties had interacted in open market conditions.

Accordingly, as part of a corporate reorganisation, the entities that have suffered a depletion of assets, or which have been deprived of essential functions or which are to assume lower risks, may be entitled to compensation for the consequent reduction in expected future profits (so-called 'profit potential') as a result of the sale to other entities of the group of operating factors of substantial value (e.g. intangibles such as formulas, patents, and know-how). Consequently, in applying the arm's-length principle, it must be ascertained whether the transfer of values (rights and assets), functions and risks, or the termination or renegotiation of agreements already in place at the time of the reorganisation, would entail remuneration between independent parties, in comparable circumstances.

In light of all the above, as regards possible implications on the daily conduct of operations within multinational groups, the tax police Circular n 1/2018 undoubtedly leads to the following considerations closely related to the assessment of the tax risk profile:

  • By virtue of the nature of the projects under discussion, the focus remains, understandably, on the reorganisation of the value chain that has the effect of stripping out Italian subsidiaries' valuable assets; and

  • No reference is made to the size of the single Italian companies involved in these restructuring projects, nor to the consolidated size of the groups these companies belong to. Thus, even if the restructuring operations have greater fiscal implications as the size and complexity of the flows grow, nevertheless they can also have equal strategic importance for those medium and small businesses that want to structure themselves to face internationalisation processes or to change the way in which they operate in foreign markets where they are already active.





Gian Luca


Barbara Scampuddu ( and Gian Luca Nieddu (

Hager & Partners

Tel: +39 02 7780711


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