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1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
Legal bases for the elimination of double taxation in Italy are:
European Arbitration Convention;
mutual agreement procedures provided for by tax treaties
Unilateral remedies are hardly applicable when the assessment is notified to the Italian entity of the group. In this case the only unilateral remedy is to convince the Italian tax administration or the Italian tax court that transfer prices were right and the assessment is wrong.
On the contrary, if the assessment is notified to the foreign entity of the group, its Italian counterpart may invoke a unilateral remedy asking to the Italian tax administration to refund taxes paid in excess in Italy as a consequence of revenues higher than appropriate or costs lower than appropriate due to intra-group transfer pricing policies. In this case, the foreign assessment may be shown to the Italian authorities to support the refund claim.
2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
Arbitration clauses have been introduced in 14 treaties out of the 92 signed by Italy. Reference is made to the treaties signed by Italy with the following countries:
Please note that, with the sole exception of the Italy-San Marin treaty, the said arbitration clauses require that the two countries and the taxpayer express their consensus in order to start the arbitration procedure. In other words, they do not provide a mandatory arbitration.
Moreover, in 5 of these 13 tax treaties the arbitration procedure is also subject to an agreement between the two countries about the operational aspects of the procedure (formation of the arbitration commission, criteria for the designation of the relevant members, allocation of the relevant costs, selection of the language of the procedure, etc.). Reference is made to the treaties signed by Italy with the following countries:
For the sake of clarity, we report hereunder the arbitration clause included in the treaties signed by Italy with Canada and the US.
Article 24, paragraph 5, of the Italy-Canada treaty signed on 3 June 2002:
“If any difficulty or doubt arising as to the interpretation or application of the Convention cannot be resolved by the competent authorities pursuant to the preceding paragraphs of this Article, the case may be submitted for arbitration if both competent authorities and the taxpayer agree and the taxpayer agrees in writing to be bound by the decision of the arbitration board. The decision of the arbitration board in a particular case shall be binding on both States with respect to that case. The procedure shall be established in an exchange of notes between the Contracting States”.
Article 25, paragraph 5, of the Italy-US treaty signed on 25 August 1999:
“If an agreement cannot be reached by the competent authorities pursuant to the previous paragraphs of this Article, the case may, if both competent authorities and the taxpayer agree, be submitted for arbitration, provided that the taxpayer agrees in writing to be bound by the decision of the arbitration board. The competent authorities may release to the arbitration board such information as is necessary for carrying out the arbitration procedure. The award of the arbitration board shall be binding on the taxpayer and on both States with regard to that case. The procedures shall be finalized by the Contracting States by means of notes to be exchanged through diplomatic channels after consultation between the competent authorities. The provisions of this paragraph shall not have effect until the date specified in the exchange of diplomatic notes”.
The sole exception to the above mentioned approach is represented by the arbitration clause included in the Italy-San Marin treaty signed on 21 March 2002. Indeed, based on Article 25, paragraphs 5, 6 and 7, of such treaty, if the two countries do not reach an agreement on the elimination of double taxation within two years, an arbitration commission is set up subject to the previous (i) acceptance by the taxpayer of any outcome of the arbitration procedure and (ii) waiver of any domestic litigation eventually in place. The arbitration commission has to release its opinion within six months and the two countries have to agree on the remedies to avoid the double taxation, even not in compliance with the said opinion, within the following six months. Otherwise, the opinion becomes binding.
3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
In our experience at least three years are necessary to eliminate double taxation under the European Arbitration Convention or the mutual agreement procedure set forth by a tax treaty.
4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
The starting point to initiate in Italy a procedure to eliminate double taxation resulting from a transfer pricing reassessment is the notification of the reassessment. However, in many cases the assessment procedure starts with an inspection at the taxpayer’s premises that is concluded by the notification to the taxpayer of the inspection report; such document may not be appealed since it only represents the position of the inspectors and is subject to further evaluation by the competent Revenue Agency office in order to eventually issue a reassessment; in these cases, the procedure to eliminate (prevent) double taxation may be initiated after the notification of the inspection report without waiting for the notification of the reassessment.
The time limit depends on the specific procedure. Usually Italian treaties provide a two years term. However, certain treaties provide different terms. For example, the Italy-France treaty provides a six months term while the Italy-UK treaty provide a three years term.
Notwithstanding the above, before initiating a procedure it is in general advisable to discuss the case with the Italian tax administration in order to see whether it is possible to convince the latter that the reassessment is fully or partly wrong.
5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation
The terms “international procedure to eliminate double taxation” mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty. (your State? the other State concerned? both States?)
The position of the Italian tax administration is that, in general, the procedure should be initiated in Italy by the Italian entity that has received the notification of the reassessment and that, if the additional taxable base reassessed in Italy has already been taxed abroad, the procedure can also be initiated abroad by the foreign entity.
6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
In order to initiate an international procedure in Italy the taxpayer has to file a written claim to the Ministry of Finance. In the claim it should describe the parties involved, their relationship, the position of the tax administration and reason to contest such position. It should also file a number of documents that are substantially in line with those requested by the EU Code of Conduct of 22 December 2009.
7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
Typically the Italian tax administration refuses to participate to an international procedure to eliminate double taxation when the reassessment challenges the existence or the inherence of an item of income rather than the congruity of its quantification. This may be the case, for example, when a reassessment denies the deduction of costs charged pursuant to a management service agreement. In a similar circumstance it happened that the Italian tax administration refused to initiate the procedure because the denial to deduct was grounded on the fact that the services were not rendered to the Italian entity or were not beneficial to the latter rather than on the inadequacy of the cost sharing system in place or level of mark-up adopted.
Another typical situation where the Italian tax administration is reluctant to participate to an international procedure to eliminate double taxation is represented by the existence of an agreement between the Italian entity and the Italian tax administration to settle the reassessment. Indeed, the Italian tax administration considers the settlement as final and does not accept to amend it for whatever reason, including an international procedure. In this regard please note that on 5 October 2015 the OECD has published the final report on action plan 14 (Making Dispute Resolution Mechanisms More Effective) in the context of the BEPS project. Para. 2.6 of such report states as follows: “Countries should clarify in their MAP guidance that audit settlements between tax authorities and taxpayers do not preclude access to MAP. If countries have an administrative or statutory dispute settlement/resolution process independent from the audit and examination functions and that can only be accessed through a request by the taxpayer, countries may limit access to the MAP with respect to the matters resolved through that process. Countries should notify their treaty partners of such administrative or statutory processes and should expressly address the effects of those processes with respect to the MAP in their public guidance in such processes and in their public MAP programme guidance”. As far as we know, Italy has not made any of the above mentioned notifications so far. Moreover, the Italian tax administration has no clarified whether the “accertamento con adesione” procedure (settlement before litigation) should be considered as an “audit settlement between tax authorities and taxpayers” (that does not preclude access to MAP) or as an “administrative or statutory dispute settlement/resolution process independent from the audit and examination functions and that can only be accessed through a request by the taxpayer” (that precludes access to MAP).
Finally, the Italian tax administration typically refuses to activate the European Arbitration Convention when serious penalties have been applied. Italy has taken the view (through a unilateral declaration attached to the Arbitration Convention) that “the term ‘serious penalties’ means penalties laid down for illicit acts, within the meaning of the domestic law, constituting a tax offence”. In line with the recommendation of the above mentioned Code of Conduct the Italian tax administration usually considers that serious penalties occur only in exceptional cases of fraudulent behaviors, generally not arising in transfer pricing cases.
8. Is tax collection suspended during the procedure?
The law does not provide any suspension of tax collection in the framework of a mutual agreement procedure initiated on the basis of a treaty. The taxpayer may however get access to the remedies ordinarily available, such as the administrative suspension or the suspension granted by a tax court. To that end, it is necessary to demonstrate that the reasons invoked by the taxpayer to oppose the reassessment are somehow grounded (fumus boni iuris) and that the collection would cause severe damages to the taxpayer (periculum in mora).
The situation is different with regard to the European Arbitration Convention. In fact, the law that has ratified the Convention provides that, while the procedure is pending, the Italian tax administration may authorize the suspension of the collection of taxes, interest and penalties. However, if the taxpayer is carrying on at the same time an appeal against the same items falling into the scope of the international procedure initiated, the authorization about the suspension of the tax collection is granted subject to condition that the taxpayer withdraws from the appeal.
9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
The agreement is in general implemented through a reduction (or cancellation) of the reassessment that has provoked the procedure. If the collection was not suspended, amounts already paid in excess of those due based on the reduced reassessment are refunded to the taxpayer with interest.
10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?
Most of the treaties entered into by Italy contain an interpretative provision saying that the mutual agreement procedure is not alternative to the national contentious proceedings, which shall be preventively initiated when the claim is related to an assessment of Italian tax not in accordance with the Convention. The parallel progress of a MAP and a domestic court appeal might potentially lead to a conflicting outcome between the domestic court judgment and the agreement achieved by the competent authorities involved. If this happens, the Italian tax administration would be unable to comply with the mutual agreement. As a result:
should the competent authorities agree to eliminate double taxation before a judgment is issued by an Italian tax court, the taxpayer can accept this agreement, but must stop the procedure initiated in front of courts in order to give execution to the agreement;
should a judgment be issued before the competent authorities reached an agreement, the Italian competent authority will inform its foreign counterpart of the outcome of the domestic litigation and, if double taxation has not been eliminated by the judgment, it may not be avoided unless the foreign competent authority adopts the same position expressed by the Italian tax court.
With regard to the European Arbitration Convention, as Italy is one of those jurisdictions where administrative authorities cannot deviate from the decision of a judicial body, the arbitration phase may be activated only and insofar as the deadline to file an appeal has expired, or the entreprise has withdrawn any such appeal before a decision has been delivered. Moreover, should the request for opening the procedure be submitted before withdrawing from the judgment, the two years period only runs from the date the enterprise has withdrawn from the first grade of appeal.
Accordingly, in the event the taxpayer simultaneously submits a mutual agreement procedure opening request and carries on the appeal against the reassessment, the existence of a litigation proceeding does not prevent the mutual agreement procedure to begin and/or the competent authorities to exchange views regarding the case or information on the pending judicial proceeding. However, in the event a judicial decision occurred and yet double taxation has not been eliminated, the latter will not be removed unless the foreign competent authority signs a mutual agreement consistent with the domestic judicial decision.