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Italy: The Italian tax authorities released the second bulletin on international tax rulings | Tax Connect Flash

1. Executive summary

The bulletin, released on March 19, 2013, summarizes, for the second time, for statistical purposes and anonymously, the outcome of the requests for the international ruling procedure made under Italian tax law. The data shows that, in the period 2005-2012:

  • 135 applications have been submitted with an average of 17 per year;
  • out of the 123 applications not rejected 56 ended up in a binding agreement with an average of 7 per year;
  • the average time needed to reach the agreement is approximately 16 months;
  • 56% of the Advance Pricing Agreements (hereinafter “APAs”) concluded with the Italian tax authorities used the TNMM as the preferred transfer pricing method.

2. Background

2.1 The International ruling procedure Article 8 of the Law decree No. 269 of September 30, 2003 – implemented with the Regulation of the Director of the Revenue Agency of July 23, 2004 – introduced, under Italian tax, the “international ruling procedure” with effect starting from February 2005 (date of the favorable opinion of the European Commission). The international ruling procedure is addressed to companies with international activity that intend to agree in advance with the Italian tax authorities:

a) the transfer pricing methodology applicable to transactions carried on with related parties in the form of unilateral APAs;

b) the application of tax treaties distributive rules to specific cases;

c) the attribution of profits to permanent establishments.

Access to the international ruling procedure is made, on a voluntary basis and free of any charge, by mean of an application sent to the International Ruling Office – International Division – Central Directorate for Tax Assessment of the Revenue Agency, which is organized into two branches based in Rome and Milan.

Within 30 days from the receipt of the application, the International Ruling Office schedules a first meeting with the taxpayer in order to define the terms and developments of the procedure. The procedure follows with several meetings during which further documentation may be required and visits to the premises where the business is actually carried on may be organized in order, for the Italian tax authorities, to obtain direct knowledge of the circumstances represented in the application.

The procedure should be completed within 180 days from the date in which the application is filed. Nevertheless, as this term is merely formal, according to the circumstances, the parties may agree to extend the procedure.

The procedure ends up, possibly but not mandatorily, with a 3 years binding agreement between the taxpayer and the Italian tax authorities which sets out the criteria and methods for calculating the normal value of the transactions to which the application refers to, or, in other cases, the criteria for application of the concerned legislation.

During the 3 years period the Revenue Agency, and more specifically the International Ruling Office, verifies that the terms of the agreement are complied with and also ascertains whether any changes have occurred to the de facto or de jure conditions which constitute the assumptions on which the clauses of the agreement are based. This activity is carried out also by means of one or more agreed visits to the premises where the enterprise carries on business.

At the end of the 3 year period of validity, and at least ninety days before it expires, the taxpayer may submit an application for renewal.

2.2 The bilateral and multilateral APAs

As an extension of scope of the previous procedure made on an unilateral basis, starting from the end of 2010 the Italian tax authorities allowed the taxpayers to file an application also for bilateral and multilateral APAs.

Access to the bilateral or multilateral APAs is still made, on a voluntary basis and free of any charge, by mean of an application sent to both the International Ruling Office – International Division – Central Directorate for Tax Assessment of the Revenue Agency, Rome office and to the Ministry of Finance – International Division.

19 bilateral APA procedures are pending as at December 31, 2012, with counterparts resident in the following States:

Table 1

Bilateral APAs per State

France

1

Germany

3

Japan

2

The Netherlands

2

United Kingdom

1

Spain

1

United States

4

Sweden

2

Switzerland

3

Total

19

2.3 Pre-filing

Before starting the international ruling procedure, it is possible to meet the tax authorities informally. Such meetings can also be made on an anonymous basis. The following table summarizes the pre-filing data concerning the period 2009-2012 dividing meetings made on an disclosure or anonymous basis:

Table 2

Pre-filing

 

2009

2010

2011

2012

Total

No. pre-filing on a disclosure basis

9

25

27

30

91

No. pre-filing on an anonymous basis

4

5

3

7

19

Total

13

30

30

37

110

% of pre-filing on a disclosure basis

69%

83%

90%

81%

 

The following table summarizes the pre-filing data concerning the period 2009-2012 per type of transaction:

Table 3

Pre-filing

 

2009

2010

2011

2012

Total

Transfer pricing –production

3

5

8

5

21

Transfer pricing –distribution

6

10

8

14

38

Transfer pricing –services

4

8

14

16

42

Dividends, interest or royalties

3

3

4

6

16

Attribution of profits to the permanent establishment

1

3

1

2

7

Cost sharing agreements

1

3

1

0

5

Business restructuring

0

0

3

2

5

Total*

18

32

39

45

134

* The number does not coincide with the one contained in Table 2 due to the fact that during the meetings more than one transaction may be examined.

3. Statistics on the application of the international ruling procedure

We summarize here-below some of the data provided by the Italian tax authorities in the second bulletin on international tax rulings.

a) Applications submitted

The data provided in Table 1 shows that 135 applications have been submitted in the period 2005-2012 with an average of 17 per year. Out of the 123 applications not rejected 56 ended up in a binding agreement between the taxpayer and the Italian tax authorities with an average of 7 per year.

Table 4

Pre-filing

 

2005

2006

2007

2008

2009

2010

2011

2012

Total

Applications submitted

18

10

6

6

12

16

29

38

135

Among which unilateral

18

10

6

6

12

13

22

27

114

Among which bilateral

 

 

 

 

 

3

7

11

21

Agreed rulings

2

2

4

5

6

7

11

19

56

Pending rulings

14

20

16

11

15

21

37

54

 

Among which unilateral

14

20

16

11

15

18

27

35

 

Among which bilateral

 

 

 

 

 

3

10

19

 

Applications rejected due to the lack of some elements

1

2

2

2

2

0

1

2

12

App rejected to the lack of agreement or because the party gave up

1

0

4

3

1

3

1

0

13

b) Timing

Table 5 shows the procedures concluded in relation to the number of months necessary to be signed.

The duration has been calculated as the difference between the date of signature of the agreement and the date of submission of the application. Calculation of this difference excludes any suspension periods due to the lack of essential elements to reach the agreement. Instead, the duration of the procedure includes periods of inactivity or delay in providing documentation or information from the taxpayer.

The average time, approximately 16 months, is calculated as a simple average of the total number of months necessary to sign the agreements.

Table 5

International ruling procedure completion time (months per procedure)

Months

No. of agreements signed

0-6

9

7-12

19

13-18

8

19-24

11

More than 24 months

9

Total

56

Completion time: average months

16

c) Methods

Table 6 shows the methods used in determining APAs. The data shows that the TNMM is applied in most cases (approximately 56%).

Table 6

Methods used for determining APAs

Description of the methods

No. Cases

Partial

Total

Comparable Uncontrolled Method (CUP)

 

4

Internal comparables

4

 

External comparables

 

 

Cost Plus Method (CPM)

 

3

Internal comparables

2

 

External comparables

1

 

Resale Price Method (RPM)

 

2

Internal comparables

 

 

External comparables

2

 

Transactional Net Margin Method (TNMM)

 

24

PLI (profit level indicator): mark-up on total cost

17

 

PLI (profit level indicator): return on sales

7

 

Profit Slip

 

10

Contribution analysis

 

 

Residual analysis

10

 

Total

 

43

d) Type of taxpayers

Table 7 shows the data relating to taxpayers, divided into classes according to the turnover. The data shows that the majority of taxpayers submitting applications (approximately 68%) have a turnover of more than 100 million Euro.

Table 7

Classes of taxpayers by turnover

Taxpayers’ turnover

Number of taxpayers*

%

Turnover < 25M Euro

10

15.38%

Turnover from 25 to 100M Euro

11

16.92%

Turnover > 100 M Euro

44

67.69%

Total

65

100%

e) Type of transactions

Table 8 shows the type of transactions. The data shows that most of the agreements (89%) concern transfer pricing.

Table 8

Type of transactions

 

2005-2009

2010

2011

2012

Total

Transfer pricing –production

11

3

2

6

22

Transfer pricing –distribution

5

3

4

7

19

Transfer pricing –services

3

1

3

4

11

Transfer pricing –royalties

1

0

0

1

5

Dividends, interest or royalties

0

0

0

1

1

Attribution of profits to the permanent establishment

2

1

0

1

4

Cost sharing agreements

1

0

1

0

2

Total*

23

8

13

20

64

* The number does not coincide with the one contained in Table 4 due to the fact that agreement can include more than one transaction.

4. Our considerations

Notwithstanding the length of the procedure, the international ruling may be a an instrument to reduce tax risks on cross-border transactions.

5. How we can help

CMS has a network of international tax specialists that can help you in submitting international tax rulings before the Italian tax authorities.

CMS has also a network of transfer specialists that can support you in discussing APAs with the Italian tax authorities and foreign counterparts.