News on the Italian transfer pricing documentation

On November 23, 2020 Italy introduced relevant amendments to the rules governing the transfer pricing documentation requirements (Administrative provision of the Italian Revenue Agency n. 360494 – the “Provision”).

Starting from the current fiscal year, the taxpayers that intend to benefit from the penalty protection regime must prepare their transfer pricing documentation according to the structure and prescribed methods contained in the new implementing provisions.

The innovations are many and, among the most relevant, it is worth mentioning the following ones:

• Increased documentation requirements for taxpayers in terms of types of documents to be prepared. The obligation to prepare both the Local File (documentazione nazionale) and the Masterfile has been extended to all resident entities belonging to multinational groups, including also subsidiaries of foreign headquartered multinationals (while before the Masterfile was required only for Italian holding and sub-holding companies).
• Increased documentation requirements for taxpayers in terms of information and documents to be included in the documentation. The Provision modifies the structure of the Masterfile and of the Local File in compliance with the indications of the OECD Transfer Pricing Guidelines of 2017. This involves a widening of the information and data necessary to meet the requirements needed to be granted with the penalty protection:
  • With respect to the Masterfile, an higher level of detail is required regarding the intragroup financial operations, the intangible assets held by the group and the related research and development activities. In addition, all advance pricing agreements on transfer pricing and cross-border advance rulings signed with, or issued by, the tax administrations of the countries in which the group operates must be disclosed. Finally, the group consolidated financial statements must be attached to the Masterfile. Considered that the Masterfile can be submitted in English and that it is now aligned with the format of the OECD Guidelines, the new structuring of the Masterfile could lead to greater administrative efficiency for taxpayers;
  • On the other hand, the Local File must also include a series of financial information previously requested typically only in the context of tax audits and present, in any case, a new report structure. More in detail, the additional documents required refer to the annual accounts of the local entity accompanied by the auditors' report and to  documents reconciling the financial data used for the purpose of applying the transfer pricing method with the financial statements (or with other equivalent documentation). Copies of the existing unilateral and bilateral / multilateral advance pricing agreements and cross-border rulings also have to be attached, even if the resident entity is not a party to the agreement or ruling, but they are still “connected” to the intra-group transactions described. Unfortunately, the Provision provides no clarification on what it is meant by "connected" to intra-group transactions. It could be considered that this refers to agreements concerning comparable, or in any case similar, transactions.
• Introduction of specific documentation requirements for low value-adding services for which the taxpayer has decided to apply the simplified approach envisaged by the Decree of the Ministry of Economy and Finance of May 14, 2018. In particular, it will be necessary to provide details regarding the nature of the services, the perimeter of the beneficiaries, the expected or effective benefits received, the allocation criteria used and the underlying reasons for such choice, as well as the detailed explanation and documentation of the cost base and of the calculations underlying the allocation.
• Possibility of limiting the perimeter of the operations to be included under the documentation requirements. The Provision clarifies that the taxpayer has the right to prepare the Local File and the Masterfile also with respect to only some of the transactions carried out. In this case, the penalty protection shall be granted exclusively with respect to the transactions that have been described and for which the information provided is considered compliant with the requirements. This provision goes beyond the uncertain practice, applied in some cases by the tax authorities, of assessing compliance (“idoneità”) based on the number and relevance of documented transactions.
• Clarification on the parameters to be considered for the purposes of assessing the compliance with the documentation requirements (“idoneità”). More in detail, the Provision clarifies that:
  • The documentation must be considered compliant in all cases in which it provides the tax authorities with the full data and information necessary to carry out an analysis of the conditions and transfer prices applied, even in case of omissions or partial inaccuracies that do not compromise the control and audit activity;
  • The documentation cannot be considered "non-compliant" only due to the different opinion of the tax authorities on the method applied by the taxpayer for the purpose of determining transfer prices or on the transactions and / or comparable subjects selected.
• Obligation of digital signature with time stamp to be put on the documentation before the date of submission of the tax return for the relevant tax year. Once digitally signed and temporally marked, the documentation can therefore be modified only in the case of submission of a supplementary tax return “against the taxpayer” filed to correct errors or omissions concerning intra-group transfer prices, communicating the amendment via the supplementary return itself.
• Extension to 20 days of the deadline for providing the transfer pricing documentation following a request by the Tax Administration (previously 10 days). However, no extensions are foreseen for the additional deadline of 7 days for the integration of certain aspects of the documentation, on which an extension of the deadline would have been welcomed. In any case, the possibility of an extension for more complex cases remains, where, according to the needs of the audit, it is possible.

Nothing changes with respect to the methods for communicating the possession of the documentation, which, as in the past, requires ticking the appropriate box in the annual tax return.

In light of the legislative references contained in the introductive part of the Provision, the new measures continue to apply to companies resident in Italy that are part of a multinational group and that have intragroup transactions with non-resident related parties, to permanent establishments in Italy of non-resident companies and to resident companies in Italy with permanent establishments abroad that have opted for the so-called branch exemption regime for transactions between the Head Office and the permanent establishment and between the latter and other group entities.

For further information please contact: cmslegaltax@cms-aacs.com