New rules for Italian TP documentation: Groups may need to revise approach
Gian Luca Nieddu and Barbara Scampuddu of Hager & Partners assess the changes for businesses to consider, as Italy’s transfer pricing documentation guidance evolves to better reflect the OECD’s guidelines.
The Italian Commissioner decision no. 360494 dated November 23 2020 has replaced prior guidance on corporate transfer pricing (TP) obligations set forth by the September 29 2010 decision.
These new regulations are aligned with the 2017 OECD Transfer Pricing Guidelines (OECD TPG) and the Decree of the Ministry of Economy and Finance dated May 14 2018, and are effective starting from the fiscal year in which the new decision is released (i.e. 2020).
Several pre-existing rules on duties that corporations were supposed to fulfil for penalty protection purposes (e.g. non-application of administrative penalties, ranging between 90% and 180% of higher taxes due, in case of TP add-back) have subsequently been confirmed.
For example, minor inter-company flows may still be excluded from the analysis and not described in detail in the documentation, so will not benefit from the penalty protection if challenged. Moreover minor inaccuracies in the documentation still do not prevent penalty protection from being applied.
However, multinational groups should now carefully evaluate the impact that new regulations will have on operating flows and processes and accurately set up or revise responsibilities, tasks and workflows between local company management, the headquarters and their advisors.
In particular, a first element to consider is the increased documentation effort which will be required starting from 2020. Italian companies belonging to multinational groups, Italian permanent establishments of foreign legal entities, and permanent establishments abroad of Italian companies must prepare both a local file and a masterfile.
From a practical standpoint, despite the fact that the masterfile may now be drafted also in English and will be relatively aligned to OECD standard structure (therefore allowing compliance simplifications), information and details to be disclosed are remarkable.
This is particularly true for some transactions involving strategic assets such as intellectual property and financial agreements, which must be analysed in detail. In this case, confidentiality issues will also have to be carefully considered.
New provisions also provide for specific disclosure on low value adding services, as identified in Chapter VII of the OECD TPG. Nevertheless, it is unclear whether this information has to be mandatorily included in a separate report (in addition to the masterfile and local file) or if it can be included in the country file. The information to be provided in this regard will imply careful revision of also benefit-test related aspects.
Based on the above, groups will have to accurately plan all the steps to timely gather the necessary information and carry out the required analyses.
All this, of course, takes an unavoidably high degree of coordination among the companies of the group. This is further complicated as consolidated financial statements shall be attached and additional disclosure will have to be given on TP advance pricing agreements (APAs) and cross-border rulings involving the authorities of the countries where the group companies are located.
Furthermore, the key element groups will have to manage when dealing with their newly reformed TP obligations is timing. In fact, prior to the new decision, taxpayers could prepare the TP documentation, declare its possession by checking the dedicated box in the income tax return, and hand it in to the tax authorities upon formal request within 10 calendar days.
As a result of the changes, the new provisions oblige the company’s legal representative to digitally sign the documentation before the tax return is filed (i.e. by no later than November 30, for those companies with the fiscal year ending on December 31) and to put a time stamp (marca temporale) on it. Under the new provisions, the taxpayer is given 20 days to deliver copies of the masterfile and the country file upon formal request of the tax administration, which includes a mere questionnaire and is not limited only to a tax inspection by the premises.
Accordingly, all aspects related to timing (filing of the tax return and submission of the TP documentation) will be even more crucial than today. In fact, checking the box to declare the possession of the TP documentation remains a mandatory element to be granted the penalty protection in case of tax inspection. In this respect, lacking specific indication in the last Commissioner Decision, it seems that integrative tax returns will still be possible for those taxpayers that we finalise the TP documentation after the filing of the (first) tax return. However, considering the big impact that this possibility has for taxpayers in the management of the TP potential risk exposure, a clarification from the Revenue would be than welcome.
Gian Luca Nieddu
T: +39 02 7780711
T: +39 02 7780711