Worldwide transfer pricing reference guide 2014

Italy
Taxing authority and tax law
Taxing authority: Amministrazione Finanziaria (Administration of Finance and Revenue Authority, or AFRA).
Tax law and decrees: Embedded within the Presidential Decree no. 917 of 22 December 1986 (Decree 917 or Consolidated Corporate
Income Tax Code), where transfer pricing is regulated in Article 110 (7) and Article 9 (3)–(4) for Corporate Income Tax (IRES).
On 23 December 2013, the Italian Parliament passed the budget law for 2014 (2014 Stability Law, published in the Official Gazette
no. 302 of 27 December 2013), which includes clarifications on the application of the transfer pricing rules to the determination of the
Regional Tax on Productive Activities (IRAP) taxable base (which is regulated by Legislative Decree no. 446 of 15 December 1997), also
for the tax years following the one in progress at 31 December 2007.
Relevant regulations and rulings
Legislative Decree no. 78 of 31 May 2010 (Decree 78) introduced an optional transfer pricing documentation provision in the Italian tax
law. Article 26 outlines that if the taxpayer provides tax authorities with proper transfer pricing documentation during a tax assessment,
no tax penalties (currently varying from 100% to 200% of the additional taxes) will be applied on possible tax adjustments, should the tax
authority determine the intercompany transactions are not in compliance with the arm’s length standard.
On 29 September 2010, the Commissionaire of the Italian Revenue Agency released the “provvedimento” (operational instructions)
to implement the provisions endorsed in Article 1 (2–ter) of Legislative Decree no. 471, which was enacted on 18 December 1997
(Decree 471). The new documentation regime is commented on in Circular Letter 58/E, dated 15 December 2010 (Circular 58/E),
which provides interesting insights.
The documentation regime innovates the way Italy traditionally looked at transfer pricing. However, there are some grey areas still
left. Compliance with the Italian transfer pricing documentation regime is not mandatory. In this respect, taxpayers are expected to
make a strategic management decision, taking into consideration that the penalty protection is only afforded if there is complete and
appropriate transfer pricing documentation in place. If not, maximum penalties apply. The transfer pricing documentation format must
follow the one provided by the law, must be in Italian, and its contents must be detailed enough to provide officers with a substantial view
of the intercompany flows and related policies.
The instructions basically implement the EU Code of Conduct on transfer pricing and also follow the OECD approach. It also contains very
specific requirements for properly assembling the transfer pricing file. Compliance with the instructions will protect taxpayers from tax
penalties on adjustments arising from transfer pricing audits. Current provisions provide for very high penalties, ranging from 100% to
200% of any additional taxes. Among the most significant implications of the new requirements are that taxpayers must:
• Assess the Italian entity’s type to determine the proper documentation to be prepared for penalty avoidance
• Advise the tax authority as to the existence of current transfer pricing documentation for the current tax year with the filing of the
tax return
• Advise the tax authority as to the existence of transfer pricing documentation for open tax years before 29 December 2010
• Have country specific documentation prepared, regardless of whether there is a Masterfile
• Take steps to avoid a challenge by the tax authority based on incomplete or false documentation, which could negate penalty protection
The taxpayer’s notice to the tax authority, indicating that transfer pricing documentation exists for FY2010 (and subsequent fiscal years),
must be filed annually, along with the tax return. For prior fiscal years subject to tax audits, a similar notice should have been provided by
28 December 2010. Late notices will only be deemed effective as long as they are filed prior to the beginning of any tax inspection.
Strategic risk management decisions need to be made by each taxpayer, possibly in coordination with central management.
It is not clear whether and to what extent previous Circular Letter nos. 32/9/2267 of 22 September 1980 (Circular 32/9/2267) and
42/12/1587 of 12 December 1981 (Circular 42/12/1587) is still valid (at least as internal administrative guidelines).
Circular Letter no. 1 of 20 October 1998 outlines general methods for tax audits and includes transfer pricing in the framework of
regular audits of multinational enterprises.
Italian Supreme Court (Corte di Cassazione) Decision no. 22023 of 13 October 2006 notes that the burden of proof rests on the tax
authority for transfer pricing issues. According to the Supreme Court, and subsequently confirmed by the 2010 OECD Guidelines, where
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