Transfer Pricing in Italy: useful documents and tips to do everything correctly
As of 23 November 2020, the Italian tax authority has issued new guidelines for the preparation of transfer pricing documentation that fully replaces the 2010 guidelines.
What has been changed?
From the Italian perspective, a lot. Preparation of documentation for transfer pricing, however, remains optional for Italian companies. Companies can benefit from the penalty protection in case of transfer pricing adjustments by the Italian tax authority. Thus, it is advisable for companies to maintain transfer pricing documents in the event that they are requested by the tax authorities (in the event of an audit, for instance), otherwise the penalty protection will not be applicable.
Fundamental changes are required to be made to both the Masterfile and Local File in order to fully adapt and comply with the OECD regulations. This includes adding new elements deepening existing ones. For example, the Local File must still be in Italian, but the Master File may be created in English. Other changes that must be incorporated to the files are:
● A presentation of the reporting structure from the subsidiary’s perspective;
● A description of the supply chain for important products and services;
● A detailed presentation of intangible assets within the Group as well as a description of its financial structure;
● The arm’s length approach must be reconciled with the income statements;
● A separate and detailed document for “low value-adding intra-group services” is now required.
Starting from the current fiscal year (2020), the taxpayers, including Italian Permanent Establishments, who intend to benefit from the penalty protection regime must prepare their transfer pricing documentation according to the new guidelines. The provision extends the period for the submission of documentation from 10 days, from the date of request by the Italian revenue agency, to 20 days.
What about small and medium enterprises?
The possibility is confirmed for small and medium-sized enterprises—those with revenues not exceeding €50 million—not to update certain chapters concerning intra-group transactions for two tax periods. Excluded from the definition of SMEs are local entities that are directly or indirectly controlled by entities that do not themselves qualify as SMEs.
On Low Value-Added Services:
An important part of the provision concerns the documentation relating to low value-added services. This must contain a description of intra-group services, service supply contracts, valuation of operations and the related calculations. These must be provided with specific documentation other than that of the transfer pricing documentation.
Following the 2018 Decree, if a company wishes to apply the simplified approach, it must now provide details on the nature of the services, identify the beneficiaries, include expected and/or effective benefits received, describe how allocation criteria is used and specify the justifying reasons for that choice, and, lastly, a detailed explanation and documentation of the cost base and its corresponding calculations.
On the Masterfile and Local File:
Most importantly, the provision explains that the taxpayer has the right to prepare both the Masterfile and Local File with respect to only some of the transactions that are carried out by the company.
In this case, penalty protection can be granted with respect to the transactions that have been described; and, if, the information provided is considered compliant with those requirements. No description, no protection.
The masterfile and the local file must be signed by the Italian entity’s legal representative or his delegate by electronic signature with an attached timestamp by the submission date of the income tax return. All transfer pricing documentation must now be finalised within, preferably before, the deadline for the income tax return submission.
In addition, all advance pricing agreements on transfer pricing and cross-border advance rulings issued by or signed with the tax administration of the other country in which the group operates must be fully disclosed. The consolidated financial statements now need to be attached to the Masterfile.
By way of example, in order to describe the activities carried out by the group, it will now be necessary to provide: the main profit generator factors, transaction flows, intercompany service agreements, the market(s) for the product(s), a functional analysis group entities which describes their contribution to creation of value, and any business restructuring transactions that occur during the fiscal year.
In short, the documents all require a much more in-depth description and elaboration on the activities carried out by the company regardless of its country of origin. It is an attempt at a greater level of transparency and a way to fight abuse of transfer pricing practices.
Lastly, all documentation required must be submitted in electronic format.
How long are the transfer pricing documents valid?
The transfer pricing documentation is valid for one fiscal year and should be kept until the relevant statute of limitations expires. It should be noted that the documents are only valid as long as their contents are truthful.
Those are the most significant changes that have been made so far. It can be expected that new regulations will continue to be developed along these same lines in order for companies to be analyzed properly.
For more informations about this, check also our video about tax residency in Europe, or our video about tax controls in Italy.
Do you want to read more? Check also our article about import and export in Italy, and how to export to Italy.
After moving back to Italy from the United States in 2013, I realized how much an accounting and tax firm was needed to help expats living in Italy to comply with the local tax regulations.