Italian TP provisions update for FY 2020 onward

On November 23 2020, the Italian Revenue Agency published new official instructions (“Provvedimento”) for the preparation of Transfer Pricing Documentation in Italy, replacing  the provisions of September 29 2010.

In general terms the new measures, which are applicable from the 2020 tax period, make the Italian TP documentation more compliant with the last version of OECD Transfer Pricing Guidelines in terms of contents of documentation.

It is worth mentioning that, being transfer pricing a not exact science (OECD par.1.13), the preparation of an adequate transfer pricing documentation is a great opportunity for multinational companies operating in Italy. In the case of the predisposition of suitable documentation, companies in fact can benefit from the so-called “penalty protection regime” in case of transfer pricing adjustments by the Italian tax administration.

Entry into force

The new requirements will apply starting from the ongoing fiscal year at November 23rd, 2020.

Accordingly, for the previous fiscal years former provisions dated September 29, 2010 still apply, provided that the Italian Company has declared the possession of TP documentation filing the tax declaration within next December 31, 2020.

WHAT ARE THE MAIN NEWS FROM A PRACTICAL POINT OF VIEW?

1) Masterfile document  has to be prepared along with Local file

The previous provision (i.e. 2010) provided for a diversification of the documentation to be prepared according to the type of company:

• Holding and sub-holding companies had to prepare a masterfile and local file; and
• Controlled companies only had to prepare the local file.

From 2020, all companies (including Italian permanent establishments) that intend to benefit from penalty protection will have to prepare both the Masterfile and the local file.

Master File

A Master File containing common information relevant to all group members (i.e. information on the multinational group activities and global allocation of income among different entities) must be prepared.

Unlike the local file that must be prepared in Italian, it is also possible to present the Masterfile in English, considering that in some countries this latter document is already mandatory and must be prepared according to OECD standards.

Furthermore, the content of the Masterfile is fully aligned with the guidance provided in Annexes 1 to Chapter V of the OECD Transfer Pricing Guidelines, accordingly, it is more likely than the Masterfile should not be a problem to be made available to the local Italian subsidiary for 2020 onward, otherwise should be prepared accordingly by the latter with the help provided by its headquarters or by the entity which provides the consolidated financial statement.

Local File (so-called “Countryfile”)

The Local File supplements the Master File with a focus on the local entity. Such a document contains specific information on the peculiarities of the local entity, as well as the transfer pricing analyses related to the transactions occurring between the latter and related parties located in different jurisdictions.

2) updating the qualitative and quantitative analyses (annual VS 3 year validity)

The possibility is confirmed for “SME” small and medium-sized enterprises (with revenues not exceeding €50 million) not to update, in the two tax periods following the one to which the local file relates, certain chapters concerning intra-group transactions (concerning the five comparability factors).

As opposed to the past, the Provvedimento makes clear that entities directly or indirectly controlled by or controlling an entity whose turnover exceeds the 50 million Euro threshold will not fall within the definition of SME and, therefore, will not qualify for the above-mentioned simplified documentation regime.

Furthermore, such simplification will be granted only if the comparability analysis is based on information obtained from publicly available sources and provided that the elements referred to the five comparability factors are not significantly modified in those tax periods.

In detail according to the Provvedimento, a SME is defined as a company whose turnover does not exceed 50 million Euros. Whereby a company falls under the definition of a SME and is involved in intercompany transactions that satisfy the following requirements:

• no significant changes in the comparability analysis occur in the period at issue
• the analyses are carried out by relying on publicly available data

it will have the possibility not to update the qualitative and quantitative analyses referred to the aforementioned intercompany transactions in the Local File for the two years following the one when the analysis was performed at first.

Anyway by explicitly mentioning that entities directly or indirectly controlled by or controlling an entity whose turnover exceeds the 50 million Euro threshold will not fall within the definition of SME seems to exclude most part of the multinational companies from this simplification. Clarification from the Italian Revenues agency is expected on this point.

3) possibility to opt for testing only selected inter-company transactions

It is also possible to prepare the documentation only for selected inter-company transactions. Therefore, taxpayers will be able to decide which transactions to analyze, considering the degree of materiality or risk of the transactions. In such cases, penalty protection will be guaranteed only for the transactions covered by the transfer pricing documentation.

4) simplified approach in testing Low value-adding services

As already provided by OECD  Guidelines since 2017, if an intercompany service transaction provided by/ charged to the local entity can be qualified as low value-adding service – as defined by the OECD Guidelines –  then a “simplified approach” can be employed in the local file TP documentation in order to test the arm’s length nature of the intercompany transaction.

Accordingly, a thorough qualitative analysis is required on the nature of the services for which the taxpayer may consider applying the “simplified approach” as defined by the OECD Guidelines. The Local file should encompass such qualitative analysis by including a detailed description of the nature of the transactions and of the benefits obtained or expected by the recipient entities (i.e. “benefits test”).

Furthermore, the taxpayer is also required to include clear and precise details on the criteria used to determine and allocate the amounts underlying the transactions (i.e. cost pool data and underlying allocation keys/direct costs employed).

5) Timestamp  

The Masterfile and the Local file must be signed by the taxpayer’s legal representative or his delegate by electronic signature with a timestamp to be appended by the date of submission of the income tax return. Therefore, the transfer pricing documentation must be finalized within the deadline for the submission of the income tax return (generally within next November 30, e.g. November 30, 2021 for FY ending December 31, 2020). Failure to comply with this requirement will not allow the taxpayer to be eligible for the penalty protection regime.

In line with the current regulatory provisions, the communication of the availability of the transfer pricing documentation must be made in the annual income tax return.

6) Possible amendments of TP Documentation

Only under certain circumstances, the taxpayer is allowed to amend the Documentation. In this case, a specific communication has to be submitted by filing an amended tax return. Further clarifications are expected from the Tax Authorities on the topic.