Italy: Preventing and resolving double taxation in transfer pricing

In recent years, the Italian tax regime has strengthened the tools available to taxpayers for effectively managing tax risks – particularly through cooperative compliance – and for preventing and resolving cases of double taxation.

Specifically, companies engaged in international activities can access the ruling procedure (Article 31-ter of Presidential Decree No. 600/1973) to enter into a pre-agreement with the Italian tax authorities regarding:

• The determination of transfer pricing (advance pricing agreements, or APAs);

• The transfer of tax residence;

• The allocation of profits or losses to a permanent establishment; or

• The payment of dividends, interest, and royalties.

APAs are increasingly being utilised in Italy, particularly by large multinational groups seeking tax certainty.

The agreement is binding for the tax year in which it is concluded and for the subsequent four tax years, unless there are changes in the relevant facts or legal circumstances that formed the basis of the agreement. The taxpayer is granted the option to apply the effects of the agreement retroactively, provided that:

• The factual and legal circumstances underlying the agreement existed in one or more tax years preceding its conclusion;

• For those tax years, the statute of limitations for assessments has not expired, and no audits, inspections, verifications, or other administrative assessment activities have been initiated, of which the taxpayer has received formal notice.

Bilateral or multilateral agreements can also be used to involve the countries of residence of foreign counterparts, ensuring consistent treatment in both jurisdictions. In such cases, the taxpayer may apply the effects of the agreement retroactively to tax periods prior to the period during which the application is submitted, provided that:

• The taxpayer requests this in the application for the advance agreement;

• The competent authorities of the foreign countries agree to extend the agreement to prior tax years;

• The same factual and legal circumstances underlying the agreement are present in those periods;

• For those periods, the statute of limitations for assessments has not expired, and no audits, inspections, verifications, or other administrative assessment activities have been initiated, of which the taxpayer has received formal notice.

For bilateral and multilateral advance agreements, the admissibility of the request is contingent on the payment of a fee based on the total turnover of the group to which the taxpayer belongs:

• €10,000 if the group’s total turnover is below €100 million;

• €30,000 if the group’s total turnover is between €100 million and €750 million;

• €50,000 if the group’s total turnover exceeds €750 million.

The fees are halved for requests to renew a bilateral or multilateral agreement. Additionally, if multiple requests are submitted for bilateral or multilateral agreements concerning the same transactions with different countries, the company must pay the fee for each bilateral request or for each foreign counterparty in the multilateral request.

Recent experience has also highlighted an increased use of tools for resolving double taxation and disputes, such as mutual agreement procedures (MAPs). Legislative Decree No. 49/2020, which transposes EU Directive 2017/1852 into Italian law, establishes a robust mechanism for resolving international tax disputes.

Compared to the framework of the earlier Convention No. 90/436/EEC, several new elements have been introduced, including an expansion of the scope, which now goes beyond transfer pricing and the allocation of profits to permanent establishments to cover other issues addressed by bilateral double taxation treaties.

A MAP application must be submitted within three years, either from the completion of the notification of the act (or other equivalent document) or from the date on which the measure that originated (or could have originated) the disputed issue was adopted.

Unlike previous instruments, the application can now also be submitted in the case of a settlement with the Italian tax authorities, allowing taxpayers to request corresponding adjustments in the foreign jurisdiction.

Finally, the Italian tax regime permits the recognition of decreases in taxable income (Article 31-quater of Presidential Decree No. 600/1973) following a final upward transfer pricing adjustment made by a country with which Italy has a tax treaty that ensures adequate information exchange.

The application can be submitted by a taxpayer resident in Italy when the transfer pricing adjustment is final and in compliance with the arm’s-length principle.

In conclusion, Italy has put in place a comprehensive framework to prevent double taxation arising from differing interpretations of transfer pricing methodologies and to resolve double taxation cases resulting from tax audits conducted both in Italy and abroad.