Transfer Pricing is a discipline aimed at ensuring that companies belonging to a multi-national enterprise group (“MNE Group”) determine, for tax purposes, the transfer prices applied to their intra-group commercial and financial transactions at arm’s length, and, consequently, that a fair share of taxable profits is allocated between the different countries where the MNE Group operates.
According to Italian tax laws, Italian taxpayers can prepare and adopt a transfer pricing documentation (“TPDOC”) in order to demonstrate vis-à-vis Italian tax authorities that prices applied to their intra-group transactions comply with the OECD arm’s length principle.
In Italy, TPDOC is not mandatory. However, an Italian taxpayer who adopts TPDOC can benefit from a special penalty protection regime in case Italian Tax Authorities make adjustments to the prices applied to intragroup transactions and, thus, increase the business profits to be subject to tax in Italy.
The Italian TPDOC consists of two sets of documents, namely a Masterfile and a Countryfile (in Italian named “Documentazione Nazionale”):
• The Masterfile, on one hand, gathers information about the MNE Group, and it describes its business operations, global value chain, intangibles owned, and intra-group financial activities.
• The Countryfile, on the other hand, gathers information about the Italian resident company or the Italian permanent establishment (“hereinafter “PE”) of a foreign company, and it analyses the transactions occurring with foreign-related entities in view of supporting intra-group transfer prices applied by means of economic analyses (so-called benchmark studies). Italian TPDOC regulations were enacted in 2010 and were amended in 2020.
“An Italian taxpayer who adopts TPDOC can benefit from a special penalty protection regime .”
The following are the main novelties recently introduced. The first main novelty requires that, as of the fiscal year 2020, the Italian subsidiary, as well as the Italian PE of a foreign company, belonging to a foreign MNE Group must prepare the Master File in addition to the Countryfile, or submit the Masterfile prepared by the MNE Group.
The Masterfile must be formed according to the OECD standards, taking care, if necessary, to adapt its structure and contents to the provisions set forth by the Italian TPDOC regulations.
The aforesaid requirement may be particularly burdensome for those entities belonging to a foreign MNE Group which has not put in place any Masterfile or is unable/reluctant to provide all the necessary MNE Grouprelated information to allow the Italian subsidiary drafts its own Masterfile.
The second main novelty is the need to provide the TPDOC with electronic signature and time stamp before the date of filing the annual tax return related to the fiscal year concerned.
The aforesaid requirement is not set forth by the OECD TP Guidelines. It has a direct impact on the timing by which the TPDOC must be finalised and ready, and it has arisen some concerns by Italian taxpayers from a procedural/operating perspective.
Therefore, it is now essential that Italian entities, which intend to draw up a TPDOC fully compliant with Italian TPDOC regulations, begin duly in advance compared to the date of filing of the annual tax return related to the fiscal year concerned.
For those companies approaching the Transfer Pricing matter for the first time, it is advisable that they carefully consider this matter from the outset when they structure the MNE group and the intra-group transactions occurring between the various related entities.
Besides that, it is also very important that the aforesaid entities have a robust and well-drafted set of intra-group contracts. For those companies that, instead, have already implemented a TP policy and/or have already adopted the TPDOC, it is advisable that they periodically verify (at least on an annual basis) that the TP policy, the intra-group contracts, and the information contained in the TPDOC reflect the actual conduct of the parties involved in the intra-group transactions.
Arranging and keeping updated an appropriate intra-group TP policy as well as having a solid TPDOC is useful for Italian entities (subsidiaries/PEs) belonging to a foreign MNE Group to:
• avoid transfer pricing adjustments by Italian tax authorities on the costs incurred and/or revenues earned by the Italian entity (subsidiary/PE);
• monitor and, to the maximum extent possible, reduce the tax risk associated with intra-group transactions; and
• ensure that the Italian entity maintains its business value, also in view of a possible future acquisition by third-party investors.
Our firm has developed and keeps the necessary expertise and experience to assist MNE Groups which hold subsidiaries / PEs in Italy and wish to adopt a TPDOC in compliance with Italian regulations.
