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Italy’s Transfer Pricing Regulations are Updated

The Italian tax administration’s new regulations on transfer pricing documentation, issued in late November 2020 (Protocol No. 360494), rewrite the country’s 2010 rules to better align with OECD guidelines and principles.

The new regulations include:

  • New rules on the definition of small and medium-sized entities (SMEs)
  • New electronic signing requirements
  • New documentation requirements for low-value-added services
  • Rules on eligibility for the penalty protection regime

The new guidance is effective from FY 2020 onward, including transfer pricing documentation prepared in FY 2021. While any change in paperwork represents a headache for many multinationals, the alignment of Italy’s transfer pricing rules with OECD guidelines allows multinationals advantages like audit protection for select transactions, while giving the tax authority broader legal scope to initiate audits.

Subsequently, the overall increased standards for documentation may also lead to more tax audits overall by the Italian tax administration and higher costs for taxpayers to defend themselves. However, penalty protection is possible if taxpayers’ annual corporate tax return confirms the transfer pricing documentation has been prepared before the deadline. Timeliness also helps MNEs if documentation is requested by the Italian tax authorities, even if the new rules give you double the time–20 days in all–to comply.

Yet where the 2010 rules left room for multinationals to present their transfer pricing narratives in general terms, the very structure of the master file and local file required by Italy’s new rules are designed to probe functions and particularly the size of companies filing documentation. Further alignment with the OECD transfer pricing guidelines also means multinationals’ transfer pricing documentation should now offer increased disclosure, especially when it comes to financial statements and data reconciliation.

‘Small and Medium-Sized’ Enterprises Now Defined Partly by Control

The emphasis on company size in documentation comes hand-in-hand with new rules defining ‘small- and medium-sized’ enterprises in the eyes of the Italian Revenue Agency. If a business qualifies as a SME, it’s only required to update its benchmarking analysis every three years.

However, the regulations stipulate that a company cannot qualify as a SME if it either directly or indirectly controls or is controlled by a company that isn’t below the €50 million turnover threshold from the 2010 regulations. The amendment likely means small and medium-sized Italian subsidiaries of MNEs will be disqualified from benefiting from the three-year period for updating transfer pricing benchmarking analysis.

Supplementary Returns and Signatures

Among Italy’s other new requirements is that transfer pricing documentation must be electronically signed with a time stamp by a taxpayer’s legal representative or delegate, no later than the deadline to file the corporate tax return. Because the rule suggests that any amendment to the transfer pricing documentation is useless without a supplementary corporate tax return, some find the new regulation on signatures cumbersome.

A related change to Italy’s rules now allows companies maintaining proper transfer pricing documentation to file a supplementary corporate tax return if mistakes or omissions concerning transfer pricing transactions increase the corporate income tax.

If situations require amendments to align transfer pricing documentation with the arm’s length principle, the taxpayer can electronically sign the documentation again with a new timestamp, even if it passes the deadline.

If they do, the new guideance says taxpayers should file a supplementary corporate return for FY 2019 or earlier years by Dec. 31, 2020 to avoid paying penalties and interest for payment.

A “Simplified Approach” to Low Value-Added services

Current Italian law defines low value-added services as supportive in nature. They’re not considered principle activities typically performed by the multinational group. These are services that do not involve or create unique and valuable intangibles, and will not significantly increase the taxpayer’s risk position.

While typically difficult to document by nature Italy’s new guidance now allows MNEs to adopt a “simplified approach” for supporting these low- value-added services in transfer pricing documentation by qualifying a five-percent markup on services as an arm’s length renumeration. To take advantage of this shortcut, a multinational’s documentation must justify the inclusion of these transactions as low-value-added services, with agreements supporting the use of the service and criteria used to calculate the price.