Decree n. 50/2017 (which entered into force on 24 April 2017 and has to be implemented within the next 60 days) introduced important improvements to Italian transfer pricing rules, with particular reference to the decreasing adjustment of the income of a company resident in Italy resulting from a corresponding increasing adjustment of the income of a company belonging to the same group and resident in another State.
According to article 110, paragraph 7, of the Corporate Income Tax Act, Italian tax authorities can adjust the value of a transaction carried out between a company resident in Italy and company belonging to the same group and resident in another State if the price of such transaction is not in line with the one that two independent parties would have applied and if it results in an increase of the Italian taxable base.
Pursuant to the previous domestic rules, the decreasing adjustment of the income of a company resident in Italy (consequent to a corresponding increasing adjustment of the income of a company belonging to the same group and resident in another State) could be performed only as a result of an agreement concluded between the competent authorities of the two States pursuant to a mutual agreement procedure (MAP) provided for by a treaty to avoid double taxations or pursuant to the Convention No. 90/436/CE (relevant to the elimination of double taxation in connection with the adjustment of profits of associated enterprises).
Decree No. 50/2017 now states that transfer pricing adjustments may result in a decrease of the income of the company resident in Italy also in the following cases:
- as a result of tax audits carried out in the context of international cooperation activities whose outcome is shared between participant States;
- upon request of the taxpayer to the Italian Revenue Agency following a final transfer pricing adjustment carried out in compliance with the arm's length principle in another State, if a treaty to avoid double taxation that allows an adequate exchange of information is in force between such State and Italy. Such request is subject to evaluation of the Italian Revenue Agency and may result in a unilateral adjustment for the Italian taxpayer without the need to start a mutual agreement procedure. The Italian Revenue Agency will issue regulations establishing the procedure for the filing of such request.
This legislative change may allow multinational groups operating in Italy to more easily avoid double taxation. To that end, a number of technical aspects should however be taken into account, like the nature of the transfer pricing adjustment carried out abroad, the timing of such adjustment and the impact on other unilateral or bilateral remedies to double taxation.