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Italy’s New Transfer Pricing Legislation Explained

Last November (2020), the Italian government issued new transfer pricing documentation requirements. The problem? The new regs seem to raise as many questions as they answered. Roughly a year later, on November 26, the Italian Revenue Agency issued a circular to help clarify the new expectations. Here, just a few of the highlights: To start, documentation is not required, but properly prepared documentation provides taxpayers with penalty protection, which is determined on a transaction-by-transaction basis. The Circular confirms the procedural issues of how and when to prepare the documentation. Italian entities—both parent companies and subsidiaries—must complete the master and local files before filing the corporate tax return (meaning contemporaneously, of course). Facts must be verified, meaning a legal representative must sign off on all documents—master file, local file, and any attachments — including a time stamp. (If a foreign parent company prepares the master file, a legal representative from the Italian entity must also sign off.)  Your corporate tax return must declare that you have prepared transfer pricing documentation (fortunately, that just means checking a box). Italy’s unique master file has been addressed here, too: Foreign entities can prepare the master file and Italian entities can provide Italy’s extra (required) information in an appendix. As to which information to include in the documentation, the circular notes a few items: In terms of financial transactions, the tax authority wants to see some additional information noted in the master file: the terms of the agreement, lender, beneficiary, date of stipulation, duration, amount, currency, and guarantees to name a few requirements. Italy’s also nitpicky about the local file’s details: The new regs call for noting the number of staff allocated to each company function, as well as a list of who’s in charge and the management functions in Italy and abroad. When it comes to royalties and interest expenses, taxpayers must adhere to the accrual principle. But Italy does give taxpayers a break on smaller transactions: “Marginal transactions”—those under 5% of the total value of intercompany transactions—don’t have to be fully documented. Still, be sure to analyze them because if there’s a tax adjustment and you haven’t, penalty protection won’t apply. Want to know more? Click here.