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Tax Connect Flash | Italy: transfer pricing documentation requirements set forth on September 2010!

Article 26 of the decree No. 78 of May 31, 2010 provides that, in case of a transfer pricing assessment, no penalties (usually ranging from 100% to 200% of the higher tax to be applied on the adjusted prices) will be levied if the taxpayer both complies with specific documentation requirements and a specific communication is filed with the Italian tax authorities.

The documentation requirements and the content and terms of the communication have been set forth by the Italian Revenue Agency on September 29, 2010.

Each company belonging to a multinational enterprise (hereinafter, MNE) should prepare a Master and a National File to prove compliance with the arm’s length principle in intercompany transactions. Such files should be updated on an yearly basis and made available within 10 days from the request made by the Italian tax authorities.

In addition, a communication should be filed in order to inform the Italian tax authorities that such documentation is available. The communication is filed together with the annual tax return, i.e., by September 30 of each year for companies having a tax period coinciding with the calendar year. With respect to taxable periods prior to 2010, the communication should be sent by December 28, 2010. However, communications sent after that date will be valid provided that no tax audits have started.

The documentation

1 - General rule

No penalties shall be levied in case of transfer pricing assessment if the following documentation is delivered in case of tax audit:

  • the Master File; and
  • the National File.

Specific documentation requirements apply to sub-holding companies and small or medium-sized enterprises (see paragraphs 1.3 and 1.5).

1.1 - The Master File The Master File shall contain information about the group and shall be divided as follows:

  1. overview of the multinational group;
  2. group structure;
  3. strategies of the group and (if any) their changes compared to the past;
  4. flow chart of the intercompany transactions;
  5. intercompany transactions;
  6. functions, assets and risks;
  7. intangible assets;
  8. transfer pricing policy;
  9. APAs and rulings concerning transfer pricing with the tax authorities of EU Member States.

It is possible to deliver more than one Master File if the MNE operates in different sectors each of them being governed by specific transfer pricing policies.

1.2 - The National File The National File shall contain information about the company and shall be divided as follows:

  1. overview of the company;
  2. sectors in which the company operates;
  3. operational structure;
  4. strategies of the company and (if any) their changes compared to the past;
  5. intercompany transactions;
  6. cost contribution arrangements.

ANNEX 1 flow chart aimed at describing the flows of the operations, including those related to extraordinary transactions.

ANNEX 2 – copy of the written contracts under which the transactions are regulated.

1.3 - Documentation for sub-holding companies of MNEs A sub-holding company of a MNE is an Italian resident company that:

  • is controlled by another (resident or non-resident) person other than individuals;
  • controls one or more non-Italian resident companies.

The documentation requested for sub-holding companies shall be made of:

  • the Master File, but the information contained therein can be limited to the members of the group underneath the sub-holding company. Such Master File can be replaced by the one of the group, if drafted by a person resident in a Member State in compliance with the Code of Conduct. However, in the latter case, the Master File should be integrated if it does not contain sufficient information for the members of the group underneath the sub-holding company;
  • the National File.

1.4 - Documentation for controlled companies of MNEs A controlled company of a MNE is an Italian resident company that:

  • is controlled by another (resident or non-resident) person other than individuals;
  • does not control any non-Italian resident company.

The documentation requested for Italian companies belonging to a MNE is only represented by the National File.

1.5 - Documentation for small and medium-sized enterprises Small and medium-sized companies are those with a turnover or revenues of 50 million Euro or less.

Small and medium-sized companies have the right not to update the information relevant to the transfer pricing method for the two years following the concerned one if both:

  • the comparability analysis is based on publicly available sources; and
  • the key features of goods and services, the analysis of the functions, assets and risks, the contractual terms, the economic conditions and the strategies of the company do not undergo significant changes.

2 - Conditions to make the documentation effective and avoid penalties

The Master File and the National File shall be drafted in Italian language. However, in case the Master File is the one drafted for the whole group, the English language will be equally accepted.

The National File can be included in the Master File. However, in the latter case, the Master file shall contain the information indicated above.

The Master File and the National File shall be signed in each page by the legal representative of the company or a person entrusted by him.

The Master File and the National File shall be filed in an electronic format before the Italian tax authorities within 10 days from the request and updated on a yearly basis.

The communication

The communication shall be filed together with the annual tax return, i.e., by September 30 of each year for companies having a tax period coinciding with the calendar year.

Differently, with respect to taxable periods prior to 2010, the communication should be sent by December 28, 2010. However, communications sent after December 28, 2010 will be valid provided that no tax audits have started.

How we can help

CMS has a network of international tax specialists that can help you in reviewing, from each side of the deal, the documentation supporting cross-border transactions.

In addition CMS has a litigation department specialized in supporting the defense of tax audits at all levels, including the Italian Supreme Court and the European Court of Justice.

Authors

Picture of Federico Raffaelli
Federico Raffaelli
Partner
Rome