Transfer pricing is governed by Article 110(7) of the Presidential Decree, 22 December 1986, No 917 (Consolidated Law on Income Taxes, also referred to as Income Tax Code or ITC), which provides that the prices for intercompany cross-border transactions have to be determined on the basis of the arm’s-length principle (ie, based on the conditions and prices that would have been agreed between independent parties acting on an arm’s-length basis and in comparable circumstances) to the extent that this gives rise to an increase of the taxable income.
Special rules are provided for downward adjustments. Pursuant to Article 31-quater Presidential Decree 22 December 1973, No 600 (Presidential Decree No 600/1973), and related implementing regulations issued by the Italian Revenue Agency (IRA) on 30 May 2018, a downward adjustment is allowed under the following circumstances: "
General guidelines for the correct application of the arm’s-length principle set out by Article 110(7) ITC have been issued in the Decree of the Ministry of Economy and Finance, on 14 May 2018 (the Ministerial Decree), aligning the Italian regulations with current international best practices.
Following the 1971 tax reform, transfer pricing was regulated by a specific provision (Articles 53, last paragraph, letter (b) and 56(2) of Presidential Decree, 29 September 1973, No 597 (Decree No 597/1973)), separately for expenses and revenues.
The IRA issued comprehensive guidelines on transfer pricing for the first time in 1980 with Circular No 32/9/2267 of 22 September 1980 (1980 Circular). The 1980 Circular was largely based on the OECD report, “Transfer Pricing and Multinationals” of 1979, and has been, for a very long time, the sole source for interpreting the Italian transfer pricing rules.
At the end of 1980, the provisions contained in Articles 53 and 56 of Decree No 597/1973 were repealed and replaced by Article 75, last paragraph, of Presidential Decree, 30 December 1980, No 897. Further guidelines were issued by the IRA with Circular No 42 of 12 December 1981 (1981 Circular), dealing with the concept of control. Subsequently, Article 75 was transposed into Article 110(7) of the ITC, which provided that the price for intercompany cross-border transactions had to be determined on the basis of the “normal” value of goods and services, as defined by Article 9(3) of the ITC, which reads as follows:
“Normal value [...] means the price or consideration applied on average for goods or services of the same kind or similar, at arm’s-length conditions and at the same market level, at the time and place where goods and services are purchased or rendered or, in the absence of this, at the nearest time and place. For the determination of normal value, reference is made as far as possible to price lists or tariffs of the person rendering the goods or services or, in the absence of this, to official lists, considering usual discounts. [...]”.
Alignment with OECD Transfer Pricing Guidelines
In 2017, in order to better align the Italian transfer pricing regulations with international standards, Article 110(7) was amended by Law Decree, 24 April 2017, No 50 converted, with amendments, by Law No 96 of 21 June 2017: the reference to the “normal” value concept was replaced by the reference to the arm’s-length principle. Therefore, the new Article 110(7) ITC explicitly incorporates the arm’s-length principle set forth by both Article 9 of the OECD, Model Tax Convention on Income and on Capital, Condensed Version 2017, and the OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations of July 2017 (OECD Guidelines).
On 14 May 2018, the Ministerial Decree was published, setting out general guidance for the correct application of the arm’s-length principle in line with international best practices making explicit reference to the OECD Guidelines and to the OECD Final Report on BEPS Actions 8–10 as well.
Furthermore, pursuant to Article 8 of the Ministerial Decree, on 23 November 2020, the Director of the IRA issued Regulation ref. 2020/0360494 (2020 TP DOC Regulation), in replacement of the previous 2010 regulations, updating the transfer pricing documentation eligibility requirements to benefit from the penalty protection regime and aligning the same with the OECD Guidelines as amended following the OECD Final Report on BEPS Actions 13.
It is also worth noting that the Ministerial Decree contains a final clause under Article 9 that explicitly enables the IRA to issue further implementing measures, considering the OECD Guidelines as amended, from time to time.
Transfer pricing rules apply with respect to cross-border transactions carried out between an Italian resident enterprise and non-resident companies that are linked by a direct or indirect “control” relationship. Indeed, Article 110(7) of the ITC applies to cross-border transactions occurring between Italian and non-resident enterprises that: “directly or indirectly control the Italian enterprise, or are controlled by it, or are controlled by the same company controlling the Italian enterprise”. However, Article 110(7) of the ITC does not provide a definition of “control”.
The definition of “associated enterprises” is provided by Article 2, letter a), of the Ministerial Decree, as follows: “an enterprise resident in the Italian territory as well as non-resident companies where: (i) one of them participates directly or indirectly in the management, control or capital of the other, or (ii) the same person participates directly or indirectly in the management, control or capital of both enterprises.”
What Constitutes Control?
Article 2, letter b), of the Ministerial Decree clarifies that “participation in the management, control or capital” means (i) a participation of more than 50% in the capital, voting rights or profits of another enterprise; or (ii) the dominant influence over the management of another enterprise, based on equity or contractual bounds. In this respect, it should be noted that Article 110(7) of the ITC merely refers to the concept of “control”, which was already present in the wording of Article 110(7) before the amendments introduced by Law Decree of 24 April 2017, No 50. In this regard, the 1980 Circular had specified that the concept of “control” must be characterised as “all instances of potential or effective economic influence”. According to the 1980 Circular, the rationale of such interpretation lies in the fact that price differentials in commercial transactions often have their fundamental foothold in the power of one party to strongly influence the will of the other party, thus altering the terms of the transaction. Such power can be effective without its possessor necessarily being a majority shareholder.
On this point, the Ministerial Decree seems to follow the same approach of the 1980 Circular, confirming that the concept of “participation in the management, control or capital” includes a “dominant influence” on the management of another enterprise based on constrains other than the mere capital control, even if it introduced a reference to contractual bounds. Also, the 1981 Circular reaffirmed that the concept of control is strictly related to the actual existence of a “dominant influence”. In the light of this, apart from voting rights, some other factors had been identified, such as:
Further guidance should be provided with reference to the notion of “dominant influence”.
The transfer pricing methods to be used for the evaluation of a controlled transaction on the basis of the arm’s-length principle are provided by Article 4(2) of the Ministerial Decree, in accordance with those listed in the OECD Guidelines: (i) the comparable uncontrolled price (CUP) method, (ii) the resale price method (RPM), (iii) the cost-plus method (CPM), (iv) the transactional net margin method (TNMM) and (v) the transactional profit split method (PSM).
It is worth mentioning that, based on the 1979 OECD Guidelines, the 1980 Circular had already referred to such methods for the evaluation of a controlled transaction. The practice of the IRA shows that the guidelines provided by the 1980 Circular on transfer pricing methods have been frequently considered together with the OECD developments in this regard (namely the OECD Guidelines as updated from time to time). It is also worth noting that the Italian Ministry of Finance has translated into Italian and published the OECD Guidelines, first in 2013 and then in 2017, implicitly endorsing their adoption.
Article 4(5) of the Ministerial Decree, following the OECD Guidelines, allows taxpayers to apply an unspecified method, other than the methods listed in Article 4(2) of the same Ministerial Decree, provided that they demonstrate that (i) none of the specified methods can be applied in a reliable manner, and (ii) the different method produces a result consistent with the one which independent enterprises would obtain in carrying out comparable uncontrolled transactions.
The “most appropriate method” rule for the selection of the method is explicitly adopted by Article 4(1) of the Ministerial Decree as provided by the OECD Guidelines. Accordingly, Article 4(1) states that the most appropriate method should be selected based on:
Furthermore, in line with the OECD Guidelines, Article 4(3) also states that traditional methods (CUP, CPM or RPM) have to be preferred, where a traditional method and a transactional method (TNMM or PSM) can be applied in an equally reliable manner. Additionally, Article 4(3) provides that the CUP method is deemed to be preferable where it and any of the other above-mentioned methods can be applied in an equally reliable manner. Lastly, Article 4(4) specifies that it is not necessary to apply more than one method to assess the arm’s-length nature of a controlled transaction.
Article 6 of the Ministerial Decree deals with arm’s-length range, that is the range of figures related to a number of uncontrolled transactions each of which is equally comparable to the controlled transaction. In accordance with the OECD Guidelines, it is expressly provided that a controlled transaction is deemed to be at arm’s length if the related financial indicator falls within the above-mentioned arm’s-length range.
Furthermore, it is worth mentioning that according to Article 6(3), if the financial indicator of a controlled transaction does not fall within the arm’s-length range, the IRA and the Guardia di Finanza (tax auditors) are allowed to make an adjustment in order to bring it within the range. However, neither the Ministerial Decree nor regulations/rulings issued by the IRA provide guidelines regarding which point of the range the tax auditors can take for that adjustment. As a matter of practice, tax auditors tend to adjust to the median when the financial indicator of a controlled transaction does not fall within the interquartile range.
Lastly, in accordance with the OECD Guidelines, Article 6(3) states that, in case of a transfer pricing adjustment by the tax auditors, the taxpayer has the right to demonstrate that the controlled transaction complies with the arm’s-length principle. In that case, the tax auditors can disregard the taxpayer's arguments, providing adequate explanation.
According to Article 3 of the Ministerial Decree, in the case of differences in comparability that affect a financial indicator, comparability adjustments can be made if it is possible to reduce such differences in a reliable manner.
Italian laws do not provide for notable rules specifically relating to the transfer pricing of intangibles. The arm’s-length principle applies.
Italian laws do not provide for any special transfer pricing rules regarding hard-to-value intangibles. The arm’s-length principle and the OECD guidance on hard-to-value intangibles apply.
Cost sharing/cost contribution arrangements are generally recognised in Italy (reference to them is expressly made in the 1980 Circular), even if no special transfer pricing rules apply to such arrangements. The arm’s-length principle applies.
Italian laws provide that a taxpayer is allowed to make an affirmative transfer pricing adjustment after the filing of a tax return, and before a tax audit starts, by submitting an amended tax return and paying the higher taxes resulting from the upward adjustment, related interest and reduced penalties through the ravvedimento operoso (active repentance) programme.
In the event that a taxpayer adopts the penalty protection regime (for further details see 8.2 Taxpayer Obligations under the OECD Transfer Pricing Guidelines), that taxpayer is allowed to make an upward adjustment as per the above, also amending the transfer pricing documentation.
The Italian exchange of information framework is characterised by a wide and complex landscape of instruments available to the tax auditors, through which they can share information with, or gather information from, other jurisdictions. Very briefly, regarding transfer pricing matters, exchange of information can be based on DTTs, tax information exchange agreements (TIEA), and EU Directives executed/implemented by Italy.
Italy has a wide treaty network, largely based on the OECD Model Tax Convention on Income and Capital of 1969, generally compliant with Article 26 of the OECD Model Convention. As a general rule, under DTTs, contracting states are obliged to exchange not only necessary information, but also pieces of information that can be “foreseeably relevant”, with the only limitations being that of generalised requests for information, of a banking or financial nature, not concerning specific taxpayers (so-called fishing expeditions). The exchange of information can occur upon request, automatically or spontaneously.
Furthermore, Italy has concluded several TIEAs with states other than those with whom it has a DTT in force. Based on such agreements, exchange of information can occur only upon request; the pieces of information to be exchanged are those foreseeably relevant for the assessment and collection of taxes.
As to EU Directives, Italy has implemented, inter alia, the following.
In Italy there is an advance pricing agreement (APA) programme allowing taxpayers with international activities, inter alia, to determine in advance with the IRA the methods and criteria used to set their transfer pricing policies. Specifically, Italian taxpayers falling within the provision laid down by Article 110 (7) of the ITC can access APAs. APAs can be (i) unilateral, when they involve only the taxpayer and the IRA; or (ii) bilateral or multilateral, when they involve the taxpayer, its foreign counterparty(ies), the IRA and one or more foreign tax authorities.
The unilateral APA procedure is regulated by Article 31-ter of the Presidential Decree No 600/1973 and by its implementing regulations issued by the IRA Director on 16 March 2016 (2016 Regulations). For the bilateral and multilateral APA procedure, the governing provision is laid down by the relevant DTT and in particular by the rule corresponding to Article 25(3) of the OECD Model Convention on Income and on Capital, which provides for mutual agreement procedures (MAPs) between the tax authorities of the contracting states aimed at avoiding double taxation.
The APA procedure is concluded (i) in the case of unilateral APAs, with the execution of a binding agreement by and between the IRA and the Italian taxpayer; or (ii) in the case of a bilateral or multilateral APAs, with the execution of a binding agreement by and between the IRA and one or more foreign tax authorities, as well as of a corresponding binding agreement by and between the IRA and the Italian taxpayer mirroring the transfer pricing method and criteria agreed upon between the tax authorities.
During the effectiveness of the APA, the tax auditors are prevented from auditing the transactions covered by the APA. The office in charge of the administration of the programme has the power to assess if the taxpayer complied with the terms and conditions set out by the APA and if no changes occurred in the factual and legal circumstances founding the APA. Both unilateral and bilateral/multilateral APAs can be renewed upon request of the taxpayer.
The APA programme is administered by the IRA. Specifically, unilateral APAs are administered by the Revenue Agency - Large Taxpayer Central Directorate – Audit Sector – Advanced Agreement Office (Agenzia delle Entrate, Direzione Centrale Grandi Contribuenti, Settore Controlli, Ufficio Accordi Preventivi); while bilateral and multilateral APAs are administered by the Revenue Agency – Large Taxpayer Central Directorate – Audit Sector – Resolution and Prevention of International Tax Disputes Office (Agenzia delle Entrate, Direzione Centrale Grandi Contribuenti, Settore Controlli, Ufficio Risoluzione e Prevenzione Controversie Internazionali).
Italian laws do not provide for automatic co-ordination between the APA process and mutual agreement procedures (MAPs). Nevertheless, consistency is normally secured because the same office is in charge of both MAPs and bilateral/multilateral APAs.
There are no limits on which taxpayers and/or transactions are eligible for an APA. Indeed, an APA application can be submitted by all Italian taxpayers regardless of the size of the activity performed and of the kind of the intercompany transaction to be covered, provided that the provisions laid down by Article 110(7) of the ITC apply.
Italian laws do not provide for a deadline to file an APA application even if the date of filing can be relevant for the purposes of the application of roll-back mechanisms for bilateral and multilateral APAs.
A mandatory deadline is provided for the submission of the APA renewal application. Indeed, pursuant to Article 10 of the 2016 Regulations, taxpayers willing to renew a unilateral APA, must submit the renewal application 90 days before the end of the fiscal year in which the APA's validity expires. The same deadline should also apply to the agreement executed by and between the IRA and the taxpayer following a bilateral or multilateral APA.
APA user fees are only necessary for the submission of bilateral and multilateral APA applications starting from 1 January 2021. The admissibility of the application is subject to the payment of a fee equal to:
The above-mentioned fees are halved for the request of an APA renewal. Specific regulations shall be issued in order to provide implementing measures for the payment of the fees due for the request of a renewal.
No fees are required for unilateral APAs.
The conclusion of a unilateral APA binds the parties for five years starting from the fiscal year in which it is signed, provided that no changes occurred to the factual or legal conditions which constitute the premise on which the clauses of the agreement are based. As for bilateral or multilateral APAs, these are binding according to the agreements reached with the foreign tax authorities and starting from fiscal year in which the application was submitted. The duration of bilateral or multilateral APAs is agreed by the contracting competent authorities, and the tendency of the IRA is to propose a duration no longer than five years, aligned with the maturity of unilateral APAs.
Specifically, unilateral APAs can have retroactive effect (“rollback”) for one or more fiscal years preceding the effectiveness of the APA still open to tax assessment, if the following conditions are met: (i) the factual and legal circumstances on which the APA is based also existed in previous fiscal years; and (ii) no tax audits (access, inspections and verifications) covering previous fiscal years to be covered by the APA have been started.
As for the retroactive effect of bilateral and multilateral APAs, in addition to the above-mentioned conditions, it is also necessary to (i) submit a request for retroactive effect in the APA application, and (ii) obtain the consent of the relevant foreign tax authority(ies) to extend the effects of the APA to the previous fiscal years still open to tax assessment.
In both cases, if, from the retroactive effect of the APAs, upward adjustments are due, the taxpayer can spontaneously correct these using the ravvedimento operoso programme (as discussed in 5.1 Rules on Affirmative Transfer Pricing Adjustments) and by the submission of amended tax return. No penalties apply to the higher taxes arising from the upward adjustment.
Administrative Tax Penalties
Italy has no specific transfer pricing penalties. However, administrative tax penalties generally also apply in the case of transfer pricing claims.
In particular, a transfer pricing claim may give rise to the application of the administrative penalties provided for by the Legislative Decree 18 December 1997, No 471 (Legislative Decree No 471/1997) for (i) incorrect corporate tax return pursuant to Article 1(2); or (ii) if the transfer pricing adjustment also triggers a failure to apply withholding taxes, incorrect withholding tax agent return pursuant to Article 2(2), each of which range between 90% and 180% of the higher corporate taxes/higher withholding taxes assessed as a consequence of the upward adjustment. Repeated violations can lead to further increases in the penalties.
Defences and exemptions
With respect to administrative penalties there are a number of potentially applicable exempting cases, including – in particular – where the violation deriving from incorrect estimates gives rise to a differential not exceeding 5% of the declared amount (Article 6(1) of Legislative Decree No 471/1997). Such exempting cases are however seldom recognised by the IRA.
Documentation requirements for penalty protection
More specifically, Article 26, Decree-law, 31 May 2010, No 78, converted into law with amendments by Article 1, Law, 30 July 2010, No 122, introduced into the Italian legal system a penalty protection rule for taxpayers that comply with certain transfer pricing documentation requirements for their intra-group transactions subject to transfer pricing rules.
Specifically, it is provided pursuant to Articles 1(6) and 2(4-ter) of the Legislative Decree No 471/1997 that no penalties apply if the taxpayer delivers documentation that is appropriate to allow control over the compliance of the prices charged with the arm’s-length principle, as determined in the 2020 TP DOC Regulation. This is a replacement of the previous 2010 regulations that is substantially aligned with BEPS Action 13. In particular, penalties do not apply if the following conditions are met:
On this point, Article 8 of the Ministerial Decree reiterates that transfer pricing documentation will be appropriate to allow for penalty protection whenever that documentation provides auditors with the information necessary for an accurate analysis of the transfer prices, regardless of the choice of method or the selection of the tested party or comparables. This protection will apply even if the transfer pricing documentation contains omissions or partial inaccuracies, provided that these do not hamper the IRA’s tax audit.
Criminal Tax Penalties
Furthermore, in addition to the above-mentioned administrative tax penalties, upward transfer pricing adjustments may – under certain circumstances – compel tax officers to refer the assessment to the public prosecutors to explore possible criminal tax law implications if certain thresholds are exceeded.
In particular, Article 4 of the Legislative Decree, 10 March 2000, No 74 provides for the imprisonment, from two to four and a half years, of anyone who, with the aim of evading tax, files an incorrect tax return whereby both of the following thresholds are exceeded: (i) the non-paid tax exceeds EUR100,000, and (ii) the upward adjustments exceed 10% of the positive elements indicated in the tax return or EUR2 million.
Defences and exemptions
However, under Article 4(1-bis) of the Legislative Decree, 10 March 2000, No 74, no criminal relevance is given to
Therefore, based on the above-mentioned Article 4(1-bis), it is often argued that transfer pricing adjustments should be considered not relevant for criminal purposes if at least one of the above-mentioned conditions is met (especially in the cases where the taxpayer prepared TP Documentation).
Italian laws follow the three-tiered approach recommended by BEPS Action 13 and the OECD Guidelines (ie, master file, local file and country-by-country report).
Master File and Local File
As mentioned in 8.1 Transfer Pricing Penalties and Defences, a specific penalty protection regime has been introduced in 2010 whereby, should the tax auditors raise a transfer pricing claim, no penalties are levied if the taxpayer complies with specific documentation requirements and had timely filed a specific communication to the IRA within the corporate tax return on the availability of such documentation.
The 2020 TP DOC Regulation, which repealed the 2010 regulation, requires transfer pricing documentation that consists of a master file and a local file. Therefore, Italian taxpayers (including permanent establishments of non-Italian resident entities), wishing to benefit from the penalty protection regime, are obliged to prepare on a yearly basis both the master file and the local file.
As to the master file, the 2020 TP DOC Regulation provides that this file has to contain information regarding the group, following the structure set out in paragraph 2.2, which substantially mirrors BEPS Action 13 and the OECD Guidelines; taxpayers are allowed to draft more than one master file if the group carries out several activities that are different from each other and regulated by specific transfer pricing policies.
With regard to the local file, the 2020 TP DOC Regulation provides that this file has to contain information regarding the local entity and its intra-group transactions, and must be drafted following the structure set out in paragraph 2.3, which substantially mirrors BEPS Action 13 and the OECD Guidelines.
A simplification is provided for small and medium-sized enterprises (taxpayers with an annual turnover not exceeding EUR50 million that are not, directly or indirectly, controlled by, or in control of, entities exceeding the mentioned annual turnover): they can opt to update the benchmark analysis of the local file every three years (instead of annually), provided that (i) the comparability analysis has been performed using publicly available information sources; and (ii) the five comparability factors (characteristics of property or services, functions, assets and risks, contractual terms, economic circumstances, and business strategies) have not substantially changed.
Lastly, the 2020 TP DOC Regulation set out also the content and the structure of the documentation to be followed by the taxpayers for applying the simplified approach for intra-group low value-adding services.
In order to benefit from the penalty protection, both the master and local files must be:
As stated above, the existence of the transfer pricing documentation must be communicated to the IRA in the corporate tax return.
With Law 28 December 2015, No 208 (Finance Act 2016), Italy introduced country-by-country reporting (CbCR) obligations in accordance with Action 13 of the OECD BEPS project. On 8 March 2017 the decree of the Italian Ministry of Finance implementing the CbCR obligations (CbCR Decree) was published. The law introduced a CbCR obligation for MNE groups to deliver a comprehensive report to the IRA reflecting the activity and taxes paid in each country where the group operates (eg, revenues, profits before tax and corporate income tax paid).
Under the CbCR Decree, CbCR obligations may only apply to Italian-resident companies that belong to an MNE group whose consolidated revenues are not lower than EUR750 million (or a corresponding amount in the local foreign currency). An MNE group means a plurality (group) of enterprises, resident in different jurisdictions (or having permanent establishments in different jurisdictions), that are linked by a control or ownership relationship and are obliged to draft consolidated financial statements according to domestic accounting principles (or that would be obliged if the shares of any of the enterprises were traded on a regulated market).
The following entities are obliged to file CbCR under the CbCR Decree.
Even if there is no qualifying AEoI agreement, an Italian Subsidiary is, in any case, exempted from filing the CbCR in the following circumstances:
As discussed in 1 Rules Governing Transfer Pricing, Italian transfer pricing regulations are substantially aligned with BEPS Action 13 and OECD Guidelines. Therefore, there are no notable differences to be highlighted.
Italian transfer pricing rules consistently apply the arm’s-length principle under all circumstances.
As discussed in 1 Rules Governing Transfer Pricing, Italian transfer pricing regulations have been amended in order to better align the rules with the best international practices (ie, OECD Guidelines as amended following the BEPS project).
As a general rule, Italy applies the OECD Guidelines on risks, recognising a return to the entity actually assuming them, taking also into account through a functional analysis how related parties involved in the controlled transaction operate in relation to the assumption and management of the specific, economically significant risks, identifying in particular who performs control functions and risks mitigation functions, who bears the consequences arising from the risk outcomes and who has the financial capacity to assume the risk.
As discussed in 1 Rules Governing Transfer Pricing, Italian transfer pricing regulations have been aligned with international best practices (ie, OECD Guidelines as amended following the BEPS project). There is no reference in Italian legislation or administrative guidance to the UN Practical Manual on Transfer Pricing.
Special rules for low value-adding intercompany services are provided by Article 7 of the Ministerial Decree. This provision, mirroring the OECD Guidelines, provides for a simplified approach to assessing the consistency with the arm’s-length principle of certain qualified services. These are services which (i) are of a supportive nature, (ii) are not part of the core business activity of the group, (iii) do not require the use of unique and valuable intangibles and do not lead to the creation of the same and (iv) do not involve the assumption or control of substantial or significant risk by, or give rise to the creation of significant risk for, the service provider.
In accordance with the OECD Guidelines, the remuneration of the above-mentioned services is deemed to be arm’s length if a mark-up of 5% is applied on the direct and indirect costs borne for the performance of the same services. Therefore, if the simplified approach is applied, a specific benchmark to test the arm’s-length value is not required. However, in order to apply such a simplified approach, the taxpayer must draft specific documentation in accordance with the detailed content set out by the 2020 TP DOC Regulation.
Italian laws do not provide for specific rules governing savings arising from operating in Italy; in line with the general OECD recommendations, savings arising from operating in Italy should be taken into account in the functional analysis as they are an economic characteristic of the market.
Italian laws provide notable unique rules applicable to the determination of the transfer pricing applicable to online advertising sales and ancillary services rendered by Italian taxpayers to related foreign parties. Specifically, Article 1(177) of Law 27 December 2013, No 147, provides that in determining the pricing of online advertising sales and ancillary services, taxpayers must use profit indicators other than those applicable to costs incurred for carrying out the activity (essentially, the CPM and TNMM based on costs). The use of profit indicators based on costs is allowed only if an APA is reached with the IRA.
There are no specific rules requiring co-ordination between transfer pricing and customs valuations; it is worth mentioning that the Italian Customs and Duty Agency provided high level guidance in Circular 6 November 2015, No 16 regarding customs valuation of the transactions between related parties.
Italian laws do not provide for a specific controversy process for transfer pricing matters. Accordingly, general rules apply.
Administrative Tax Assessment
As a rule, in the case of a tax audit (which can be performed both by the IRA and the Guardia di Finanza), the tax auditors serve the taxpayer with a tax audit report (Report), that describes the outcome of the audit activity and the findings of the auditors. The Report is not enforceable against the taxpayers and does not contain any request of payment of higher taxes and/or penalties.
To raise an enforceable claim against the taxpayer, the IRA issues a tax assessment notice (the Guardia di Finanza are not entitled to issue tax assessments). Note that, in certain cases, a tax assessment notice could be issued also in the absence of previous audit activity.
Before the tax assessment notice is served, the taxpayer has the following options:
Based on the Report and taking into account the discussion with, and the observations of, the taxpayer, the competent Office may withdraw/amend the claims or issue the formal tax assessment notice.
Once the formal tax assessment notice is served to the taxpayer, the latter has the following options.
The taxpayer is entitled, before filing the appeal, to pay ⅓ of the penalties indicated in the tax assessment notice, if any, thus reducing the risk of negative litigation. However, if the taxpayer prevails in Court, the penalties paid will not be reimbursed.
Tax Litigation Procedure
The First Instance Tax Court schedules a hearing; the taxpayer is entitled to file additional documentation and briefs before the Court within certain time limits.
Pending the appeal, the taxpayer is still in a position to negotiate a settlement with the competent IRA Office, which must be concluded within the date scheduled for the first hearing before the First Instance Tax Court. If the negotiation is successful, the penalties, if any, are reduced to 40% of the minimum applicable.
The decision issued by the First Instance Tax Court may be appealed both by the IRA Office and by the taxpayer before the competent Second Instance Tax Court. Pending the second instance procedure, the taxpayer may further negotiate a settlement (if the negotiation is successful, the penalties, if any, are reduced to 50% of the minimum applicable). The decision issued by the Second Instance Tax Court may be appealed by both parties before the Supreme Court but only for reasons based on violation of legal provisions (ie, generally, factual circumstances and amounts cannot be challenged). It is possible that the Supreme Court, rather than issuing a final judgment, will refer the case back to a different chamber of the Tax Court that issued the decision (generally the Second Instance Tax Court), so that the litigation process could continue.
Provisional Collection Pending Litigation
The tax assessment notice containing a transfer pricing claim is enforceable (ie, the taxpayer has to pay on a provisional basis, as a rule, ⅓ of the higher taxes assessed and interest pending tax litigation within the Appeal Deadline, as possibly extended in case of filing of the settlement application).
Under motivated and exceptional circumstances, the IRA can decide on provisional collection for the full amount of the assessment.
If the taxpayer does not pay within the above-mentioned deadline, the IRA will instruct the collection agent to start the collection procedure (the collection procedure cannot generally be started in the 30 days following the filing of the appeal). After this 30-day period, a “grace” period of 180 days is in any case granted under law to all taxpayers. The suspension is not granted in the case of precautionary measures (eg, seizure of assets) and when the IRA Office claims that the collection is at risk.
After the First Instance Tax Court decision, to the extent unfavourable for the taxpayer, the collection agent can collect up to ⅔ of the higher taxes and penalties as determined by the decision, plus interest. After the Second Instance Tax Court decision, to the extent unfavourable for the taxpayer, the Collection Agent may request 100% of the taxes and penalties as determined by the decision, plus interest.
The taxpayer can also ask for a suspension of the collection according to the following procedures.
Italy has a well-developed legal system that puts taxpayers in the position to prevent domestic transfer pricing disputes, through unilateral or bilateral/multilateral APAs, and to resolve them out of court through competent authorities procedures (MAPs and arbitration procedures), that can ensure elimination of double taxation, or settlement procedures that allow taxpayers to significantly reduce penalties (where taxpayers did not have proper transfer pricing documentation).
As a result, in many cases, transfer pricing claims are solved out of court. Especially, in recent years there has been a trend to start competent authority procedures instead of court proceedings, particularly where there are no penalties. This is the reason why the number of court rulings on transfer pricing matters is quite limited in comparison with the overall number of transfer pricing challenges.
In the last decade one of the most notable transfer pricing topics discussed before Italian courts has concerned the procedural ramifications of Article 110(7) of the ITC and, in particular, whether the initial burden of proof lies on the taxpayer, which will have to demonstrate that its transfer pricing policy is in line with the arm’s-length principle, or on the IRA, which will have to demonstrate effective non-compliance with the arm’s-length principle and the low level of taxation in the state of residence of the related party involved in the controlled transaction. According to the several Supreme Court decisions, the burden of proof in transfer pricing primarily lies on the IRA (see, eg, the Decisions of the Supreme Court, 13 October 2006, No 22023 and 16 May 2007, No 11226). In such decisions, the Supreme Court has stated that the taxpayer is not required to prove the accuracy of transfer prices applied, unless the tax authorities have themselves first provided proof of effective non-compliance with the arm’s-length principle and the low level of taxation in the state of the related counterpart. Hence, it is up to the IRA to demonstrate that the conditions applied in the controlled transactions are not at arm’s length.
However, in the last five years, the Supreme Court has overturned this position. Indeed, the Supreme Court has stated that, in transfer pricing disputes, the burden of proof initially lies on the taxpayer, which will have to demonstrate that its transfer pricing is in line with the arm’s-length principle while it secondarily shifts to the IRA, which does not have to demonstrate the low level of taxation in the related counterparty state, but still has to demonstrate the reasons why the taxpayer's reasonings is not valid (see, eg, Supreme Court decisions No 6656 of 6 April 2016; No 20805 of 6 September 2017; No 5645 of 2 March 2020; No 5646 of 3 March 2020; No 11837 of 18 June 2020; No 21828 of 9 October 2020; No 22695 of 19 October 2020; No 230 of 12 January 2021 and 1232 of 21 January 2021).
Outbound payments (eg, royalties) relating to uncontrolled transactions are not restricted by Italian laws and/or by IRA practices.
Outbound payments (eg, royalties) relating to controlled transactions are not restricted by Italian laws and/or by IRA practices.
Italian laws do not have rules regarding the effects of other countries’ legal restrictions.
Except for the publication of statistics in compliance with international standards, the IRA does not publish any information regarding APAs or transfer pricing audit outcomes.
Use of secret comparables is not explicitly prohibited by Italian law. However, as stated, the OECD Guidelines are consistently applied by the IRA. Therefore, it may be reasonably held that the use of secret comparables would be permitted only if the IRA were to disclose such data to the taxpayer so as to allow the exercise of a proper right of defence.
For the time being there have been no specific amendments or adjustment to the transfer pricing rules and guidance in Italy in connection with the COVID-19 pandemic.
At the outbreak of the pandemic, the Italian government enacted several measures to face the COVID-19 health emergency and to support families, workers and businesses. Mainly, the government extended the deadlines for certain tax payments and tax compliance obligations; in certain cases, payment obligations were fully relieved.
Aside from employment-related subsidies, the government also introduced specific incentives for equity enhancement and investments and certain tax credits aimed at supporting, inter alia, tenants of business properties, investment in R&D and capital assets as well as the implementation of COVID-19 safety measures in workplaces.
The tax auditors' activities were suspended for a period of 84 days in 2020 due to the restrictive measures imposed by the government to deal with the health emergency. Although the suspension of the audit activities was limited to a certain period of time, de facto the tax audits suffered a significant downsizing.
New Tax Dispute Resolution Mechanisms in Italy Following the Implementation of the EU Directive 2017/1852
With Legislative Decree No 49 of 10 June 2020 (DR Decree) Italy implemented Council Directive 2017/1852 of 10 October 2017 to introduce a new tax dispute resolution mechanism applicable within the European Union (DR Directive); on 16 December 2020, the Revenue Agency Director issued implementing regulations (DR Regulations).
The DR Decree is substantially aligned with the DR Directive, which establishes an efficient, binding and mandatory mechanism for dispute resolution that can lead to double taxation between EU member states, resulting from the interpretation and application of agreements and conventions that provide for the elimination of double taxation of income and, where applicable, capital.
Apart from the new mechanism introduced by the DR Decree, the settlement of international tax disputes can be done in Italy, subject to the relevant conditions, through mutual agreement procedures (MAPs) governed by bilateral tax treaties (DTTs) and the Convention 90/436/EEC on the elimination of double taxation in connection with the adjustments of profits of associated enterprises resident in an EU member state (Arbitration Convention). However, remedies under DTTs and the Arbitration Convention present some critical issues. Under most DTTs signed by Italy, competent authorities must endeavour to resolve double tax issues, but there is neither an obligation for the authorities to reach a result nor a mandatory arbitration clause. This is one of the main limitations of MAPs governed by DTTs.
Regarding the Arbitration Convention, although it provides for mandatory arbitration, the main critical issues derive from the fact that its scope is limited to transfer pricing matters and to the attribution of profit to permanent establishments, from its quite long duration and from the fact that recourse to arbitration only takes place in limited cases. Hence, the DR Directive aims at improving existing mechanisms and making them more effective, efficient and reliable in implementation.
The procedures governed by the DR Directive essentially reproduce the layout of the Arbitration Convention, but extend the scope of application and contain further remedies aimed at overcoming the critical issues encountered in the application of the said Convention, with particular regard to access, duration and effective conclusion of the procedure. The procedure contemplates a MAP combined with a (possible) arbitration phase, with a clearly defined deadline and an obligation for member states to reach an agreement.
The DR Directive is also in line with international guidelines on the matter, specifically with Action 14 of the OECD/G20 BEPS project, aimed at improving the effectiveness of international tax dispute resolution mechanisms.
The following paragraphs provide an overview of the provisions set forth by the DR Decree, focusing on the major innovative features of the new procedure.
Scope and entry into force
The DR Decree applies to MAPs and other tax dispute resolution procedures between the Italian competent authorities (ie, the Revenue Agency) and the competent authorities of other member states (CAs), resulting from the interpretation and from the application of the DTTs of which Italy is a party and of the Arbitration Convention.
The dispute resolution procedures can be applied not only with respect to transfer pricing matters and to the attribution of profits to permanent establishments (as under the Arbitration Convention), but also with respect to other double taxation issues that may stem from the application of DTTs: the tax residency of individuals and companies, assessment of the existence of a (hidden) permanent establishment, flows of dividends, interest and royalties, etc.
Disputes arising from the application of EU directives, such as the EU Parent Subsidiary Directive or the EU Interest and Royalties Directive, are excluded. Procedures between CAs to resolve general issues relating to the interpretation and application of DTTs are also excluded.
The new provisions apply to complaints for the opening of a MAP submitted from 1 July 2019 regarding tax disputes concerning tax years starting from 1 January 2018 and subsequent tax years.
Mutual agreement procedure
Access to the MAP
The complaint for the opening of the MAP can be submitted by any affected person, even an individual (taxpayer) that is a resident for tax purposes of Italy or of another member state. The application can be filed if the taxpayer suffered (or claims to have suffered) double taxation, following a measure taken by the tax authorities of a member state, which leads to (i) an additional tax charge, (ii) an increase in tax liabilities, or (iii) the cancellation or reduction of losses that could be used to offset taxable profits.
The taxpayer can submit the complaint regardless of whether it has recourse to the remedies available under the national laws of any of the member states concerned.
The complaint must be submitted simultaneously to the Revenue Agency and to the foreign CAs within three years starting from (i) the date of the first notice of the assessment or other equivalent deed, or (ii) the date of the measure that gave rise to, or could give rise to, the dispute.
The DR Decree is intended to include all cases from which the taxpayer may derive double taxation. Therefore, the complaint can be submitted, in addition to the more frequent case of a notice of assessment, in the event that a reimbursement claim was rejected by the Revenue Agency and following a tax audit report with proposed tax claims. In the latter case, the three-year period to submit the complaint starts from the subsequent notification of the tax assessment containing the findings that determine the double taxation; the three-year period for the submission of the complaint following a denial of a reimbursement claim should start from the date of the notice of the refusal.
A simplification is provided for Italian-resident small and medium-sized enterprises and individuals, in order to reduce their administrative burden when using the dispute resolution procedure. Indeed, in accordance with the DR Directive, the DR Decree provides that the above taxpayers need only submit their complaint to the Revenue Agency, which in turn will forward it to the other CAs concerned within two months from receipt.
The complaint is presented in one of the official languages of the member states concerned or in another language if this is accepted by the member states. The complaint submitted to the Revenue Agency should be in Italian or accompanied by an official translation into Italian, while the supporting documentation is admitted in Italian, or alternatively, in English, without prejudice to the right of the Revenue Agency to request an official translation into Italian, where deemed appropriate. The complaint must report detailed information as set out by the DR Decree. Moreover, the DR Regulations offer taxpayers a facsimile complaint to be used in submitting the case. Nevertheless, the taxpayer can be requested to supplement the complaint with additional information and documentation.
Relationship with domestic remedies, including settlements
One of the most innovative elements introduced by the DR Decree is that it changes the previous Italian position regarding access to a MAP in the event that a taxpayer has already settled a claim with the Revenue Agency. Indeed, the DR Decree extends the possibility to obtain the elimination of double taxation to cases in which the taxpayer (i) has not challenged the tax assessment (so called acquiescenza) and paid the taxes assessed with reduced penalties; or (ii) settled the dispute through a settlement procedure (so called accertamento con adesione), by paying the taxes agreed upon with the Revenue Agency and reduced penalties.
By contrast, the opening of a MAP is still precluded if there is a decision of an Italian Tax Court that has become res iudicata or a Court decision following a post-judicial settlement of the case (conciliazione giudiziale). This is because Italian laws do not allow the Revenue Agency to derogate from the decision of a Court.
As stated, the taxpayer can submit the complaint regardless of the recourse to national remedies. Therefore, the taxpayer can decide to pursue both international and domestic remedies. In this case, however, in order not to jeopardise the MAP or arbitration procedure, for instance if a Tax Court decision were to be issued, the taxpayer can obtain from the competent Tax Court a suspension of the domestic litigation process which leads also to the suspension of tax collection. Indeed, a final decision by an Italian Tax Court or a settlement in Court on the question in dispute could determine the termination of the procedure. In such cases, the Revenue Agency can only inform the other CAs concerned about the termination of the procedure, leaving to them the decision of whether to accept the conclusion reached by the Tax Court in Italy.
Relationship with MAPs under DTTs and the Arbitration Convention
If the taxpayer’s complaint refers to both the DR Decree, a DTT and/or the Arbitration Convention, the Revenue Agency is entitled to carry on only with the DR Decree procedure. However, in the event the taxpayer withdraws the complaint submitted based on the provisions of the DR Decree or the procedure is terminated for one of the reasons provided for by the DR Decree, the taxpayer is entitled to submit a new MAP request on the same question based solely on a DTT and/or the Arbitration Convention, if the relevant requirements are met.
On the other side, where a MAP under a DTT is concluded without a mutual agreement and the arbitration procedure is not feasible, the taxpayer can submit a MAP complaint to the CAs to resolve the dispute pursuant to the DR Decree procedure, provided that the applicable requirements are met.
The unilateral phase
After the submission of the case to the CAs, it is possible that, within six months from the receipt of the complaint (or from the receipt of the additional information, where requested), the Revenue Agency decides to resolve the case on a unilateral basis and therefore to eliminate the double taxation without involving the other CAs concerned. For this purpose, the Revenue Agency could (i) withdraw the claim that it has raised and that gave rise to the double taxation under dispute, through so-called self-protection (autotutela); or (ii) recognise a tax refund in accordance with the internal regulations, where the dispute arises from the claim of a member state. In this case, the Revenue Agency must inform the other CAs concerned about the conclusion of the procedure.
Acceptance of the MAP complaint
The Revenue Agency adopts a decision as to whether the complaint is accepted or not within six months from the receipt of the same (or, from the receipt of additional documentation and information, where requested), then promptly informs the taxpayer and the other CAs concerned about the decision taken. In the absence of a decision of the Revenue Agency within the above-mentioned time limit, the complaint is deemed to be accepted.
Once the complaint is accepted by all CAs concerned, they endeavour to resolve the dispute by mutual agreement within two years (which can be extended by up to one year, upon a written and grounded request of one of the CAs concerned), starting from the last notification of the decision by one of the CAs concerned of the acceptance of the complaint.
It is worth noting that if an internal litigation is pending on the question in dispute under the MAP, the above-mentioned time limits (six months for the acceptance or refusal of the complaint as well as the two/three years to reach the mutual agreement) start running from the date of the suspension of the domestic litigation.
The MAP can be concluded with a mutual agreement reached by the CAs resolving the dispute; in such a case, the Revenue Agency informs the taxpayer about the decision taken within thirty days from the date of the agreement. On the contrary, if the CAs fail to reach a mutual agreement within the two-year period (or three-year period), the Revenue Agency informs the taxpayer of the reasons why an agreement has not been reached.
Refusal of the MAP complaint
The Revenue Agency can reject the complaint within the above-mentioned time limit, where:
The Revenue Agency informs the taxpayer about the reasons for the complaint rejection.
If the complaint is rejected by all the CAs concerned, the taxpayer is entitled to appeal against the decision before the competent Italian Tax Court. If, instead, the complaint is rejected by at least one, but not all, of the CAs concerned, the taxpayer is entitled to request them to set-up an advisory commission. The latter issues its decision regarding the acceptance of the complaint within six months from the date of its establishment. If the advisory commission issues a favourable decision, the MAP starts upon the request of one of the CAs concerned. In the absence of such a request, the advisory commission also provides an opinion on how to resolve the question in dispute.
Where the CAs fail to reach a mutual agreement within the above-mentioned time limit, the taxpayer can request the Revenue Agency and the other CAs concerned to set-up the advisory commission to access the arbitration procedure. Small and medium-sized enterprises and individuals need only file the request to the Revenue Agency, which in turn informs the other CAs concerned. The taxpayer’s request must be in writing and filed not later than 50 days from the date of receipt of the notification of the failure to reach a mutual agreement (or of the favourable decision by the relevant Court regarding the refusal of the complaint, as the case may be).
The advisory commission must be set up not later than 120 days from the receipt of such a request. In the event that the CAs do not set up the advisory commission, the taxpayer can submit an appeal before the Regional Tax Court of Lazio, requesting the setting-up of the advisory commission.
It is worth mentioning that the Revenue Agency rejects access to the procedure when criminal charges have been levied and can reject the procedure when the question in dispute does not entail double taxation.
The CAs can agree to set-up an alternative dispute resolution commission (even in the form of a permanent committee) instead of an advisory commission to deliver an opinion on how to resolve the question in dispute. An alternative dispute resolution commission may apply any dispute resolution processes or techniques to solve the dispute in a binding manner, including so-called “last best offer” arbitration, which is based on one of the proposals offered by each of the CAs concerned. In contrast, the advisory commission applies the independent opinion process, in which it independently reaches a solution based on its own opinion of the facts and legal sources applicable to the question in dispute.
Both the advisory commission and the alternative dispute resolution commission issue their opinion within six months (or nine months) from their establishment. In the subsequent six months, the CAs concerned must agree on how to resolve the question in dispute, also deviating from the commissions’ opinions. In the absence of an agreement, the CAs are bound by the commissions’ opinions. The final decision must be notified to the taxpayer within thirty days (in the absence of such notification, the taxpayer can submit an appeal before the domestic Tax Courts to obtain such final decision).
It is worth noting that, unlike MAPs operating under DTTs and under the Arbitration Convention, the taxpayer may, at its request and with the consent of the CAs concerned, or upon request of the commissions, appear or be represented before the commissions.
Implementation of the final decision
The decision taken by the CAs, either through mutual agreement or the arbitration procedure, is implemented, irrespective of any domestic time limits – provided that the taxpayer accepts it and renounces other remedies, and/or abandons any pending litigation – within sixty days from the notice of the decision.
The Revenue Agency implements the decision through the refund of the undue taxes or through the collection of the higher taxes due, considering the amounts already collected pending the procedure. In the event that the final decision leads to the recovery of higher taxes in Italy, penalties apply unless the penalty protection regime is recognised in the tax assessment or penalties have not been already settled – and interest is computed starting from the date of the decision.
The taxpayer can request the refund of any penalties already paid only if the claim under dispute is completely withdrawn.
If the Revenue Agency does not implement the decision, the taxpayer can force it to do so by submitting an appeal before the competent Tax Court.
Finally, unlike MAPs operating under DTTs and the Arbitration Convention, the costs of the procedure are also regulated. As a rule, they are equally allocated between the CAs. However, they are charged to the taxpayer if it withdraws the MAP complaint, or if the advisory commission confirms the refusal of the complaint.