Following a public consultation on draft regulations designed to provide operational guidance on transfer pricing in line with the international evolution that has occurred at OECD level (the BEPS project), the Italian Ministry of Economy and Finance issued the Decree of May 14 2018 on the application of the arm's-length principle based on international best practices (published in the Official Gazette number 118 of May 23 2018).
The provision arose from the coordinated work of the Finance Department, the Revenue Agency and the tax police aimed at implementing the legislation providing clarity to taxpayers on the basic principles involved and ensuring adequate training on the structures responsible for applying the relevant rules.
Likewise, within the framework of this cooperation work and implementing of the provisions of Article 31-quarter of the 1973 Decree 600 of the President of the Republic, on May 30 2018 the Revenue Agency published new guidelines (Provvedimento del Direttore dell'Agenzia delle Entrate number 108954/2018). These guidelines define the procedure for obtaining recognition vis à vis the Italian tax administration relating to downward adjustments on income following primary upward adjustments raised by a foreign tax administration, in relation to intercompany transactions, as a consequence of the application of internal rules (e.g., following a tax inspection in a foreign country).
Specifically, the recognition in Italy of a decrease in income can be implemented locally by making a specific request to the Italian Central Revenue, provided that the adjustment challenged in another state is definitive and in accordance with the arm's-length principle. Moreover, it is required that Italy has signed a double tax treaty with the state in question and an adequate exchange of information is granted.
The relevant provisions of the Italian Commissioner's decision are summarised below. They were to be applied as of their publication on the website of the Central Revenue (i.e., May 30 2018) with respect to upward adjustments raised in a foreign country in relation to which – as of the same date – no application for a mutual procedure had been filed to the competent authorities.
The procedure can be activated by all entities that are resident in Italy and belong to a multinational group, or operate abroad through a permanent establishment, and by non-residents who carry out their business in Italy through a permanent establishment.
The request has to be submitted to the specific department of the Central Revenue in Rome dedicated to advance pricing agreements (APAs) and MPAs (so-called Ufficio Accordi Preventivi e Controversie Internazionali). The request needs to be filed via certified mail (firstname.lastname@example.org), or via the postal service, or by direct delivery to the Central Revenue in Rome.
The application requires the activation of the procedures for the resolution of international disputes (mutual agreement procedures [MAPs] ex-double tax treaty in force between the two countries involved; or the convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises – Arbitration Convention, Dir 90/436/EEC), or other legal instruments governing the resolution of international disputes as incorporated into national law.
The application must be submitted within the deadlines set by the legal instrument for the resolution of international disputes indicated therein, so three years for the EU arbitration convention or within the deadline set by the specific double tax treaty for the MAP.
Content of the application
The application must provide the elements required to properly describe the litigation and must:
- Clearly indicate the subject matter, i.e., the request for the elimination of double taxation generated by an upward adjustment in the foreign country where the related entity is resident;
- Attach appropriate documentation to prove possession of the requirements described in Point c), Paragraph 1 of Article 31-quarter of DPR No 600 of September 29 1973, n. 600. That documentation would be: (i) a courtesy translation in Italian or, alternatively, in English of the tax deeds issued by the foreign tax authority from which the increasing adjustment arises; and (ii) all elements of law and fact that demonstrate that the increasing adjustment carried out in the foreign country is in accordance with the arm's length principle; and
- Be signed by the legal representative of the company or by another person with the powers of representation.
The application is declared admissible within 30 days from the date of receipt by the Central Revenue in Rome when all requirements mentioned above are met. Alternatively, if the requirements are not satisfied, the application will be rejected. In this latter case, the Italian tax administration will grant an additional 30 days to file the missing information to supplement the initial application. The preliminary activity ends with the drafting of formal minutes.
The procedure will be completed within 180 days of the receipt of the application, with the issuing of a document either recognising or rejecting the corresponding adjustment for Italian tax purposes.
The procedure is finalised with a formal act of the Director of the Agency which confirms the downward adjustment in income corresponding to the upward adjustment carried out in the other state. The Italian Central Revenue will then communicate the decision to the competent tax office of the other state.
Causes of termination of the proceedings
The procedure will be deemed terminated if the relevant documentation and/or clarifications of facts required to allow an investigation to continue are not provided within the established deadlines.
The procedure can also be terminated in the event the Italian tax administration collects information that definitively establishes that the taxpayer is liable for serious penalties relating to the object of the proceedings.
The new set of rules provided with the Decision of the Central Revenue Commissioner issued on May 30 2018 represents a new opportunity to enhance the preventive cooperation between the tax administration and taxpayers, offering the taxpayers an additional procedure to solve double taxation issues within a very brief – theoretically – timeframe. The practical recourse to this procedure will have to be carefully analysed in light of, among other things, the tax law provisions applicable in both countries involved. This would include, for example, in relation to both the possibility of an appeal before the tax court (in the country where the challenge is raised) in relation to the presence of the transfer pricing documentation for penalty protection purposes, and to compliance with the rules concerning the statute of limitation and tax audits (in Italy).