Author Archive
The International Standard Ruling: cooperation between taxpayers and tax administration in Italy
The International Standard Ruling: cooperation between taxpayers and tax administration in Italy 1. What is the International Standard Ruling? The International Standard Ruling is part of the tax compliance policy which aims at improving cooperation and dialogue between taxpayers and the tax administration in Italy, providing legal certainty to both of the parties, preventing legal disputes and reducing the risk of international double taxation. This procedure came into force in 2004, but actually took effect only in February 2005 after the favorable advice of the European Commission. It is addressed to “enterprises with international activity” which intend to agree in advance with the Italian tax administration regarding their transnational intra-group transactions. The areas covered by the advance agreement procedure concern: 1. the correct transfer pricing methodology applicable to the transactions carried out with related parties, 2. the tax treatment provided for by law, including tax treaties, in respect of dividends, interest, royalties or other income paid to or received from nonresident persons in specific cases, 3. the application of the provisions of the law, including tax treaties, to specific cases related with the attribution of profits or losses to permanent establishments in Italy ...
The benefits provided by a proper documentation on transfer pricing: two relevant Italian sentences
The judgements no. 83/1/2013 and no. 84/1/2013 issued on January, 2013 by the Regional Tax Commission of Lombardy emphasize the importance of a proper documentation on transfer pricing, providing guidance to multinational groups in order to avoid adjustments and penalties, since a suitable documentation prevents the application of high administrative penalties in the event of a tax assessment and allows the defence of the transfer pricing policies adopted against adjustments. Moreover, the two sentences shed some light on the allocation of the burden of proof. In fact, the Court established that in transfer pricing litigations the onus probandi has to be allocated between the Italian Tax Authority and the taxpayer on the basis of the legal principle of the "proximity" of the parties to the evidential facts related to the adequacy of the transfer prices applied. According to the decision of the Supreme Court, the burden of proof should be allocated by taking into account, in practice, the possibility for one or the other party to prove facts and circumstances that fall within their respective spheres of action. In detail, while it will be on the Tax Authority the burden ...
Guidelines to tax audits and assessments in Italy (*)
Specific rules regulating the frequency of tax audits The Italian law provides general guidelines about the frequency of the tax audits. In principle, large companies (annual turnover > 25 €/mil) should be object of tax audit at least each two years, while other companies should be at least each four years but the actual application of those guidelines is presently far from being completed. The Italian Tax Law also provides special Tax control procedures for those enterprises whose total turnover does not exceed €/ 7.5 (€/mil 5.16 up to fiscal year 2006). These latter procedures are based on standardized (on statistic basis) economic models of the different business fields and are aimed at assessing whether or not a specific subject’s taxable income is in line with its own standard model. The procedure is computer based. The software is provided and regularly updated by the Tax Authority and operates on data which refer to the economic situation of the taxpayer (location of the business, number of employees, ect.). When a taxpayer’s taxable income is not in line with the standard model, the taxpayer comes to be subject to a higher possibility of undergoing a tax audit. The ...
Transfer pricing – Management Fees
The transaction The parent company of a group that operates in the field of high value-added services for operators of a specific sector, following the decision to centralize its executive and strategic services at the headquarter level, arranged the delivery of certain intercompany services for its foreign subsidiaries including the Italian entity. Activities carried out Development of an economic analysis on Transfer Pricing designed to support the fair market value (arm's length) of the management fees charged to the Italian company from the foreign parent. Details of the project In particular the services covered by the analysis were: a) Coordination activities and managerial support; b) Support activities to develop and implement a strategy for internal and external communications; c) Provision of financial and accounting services; d) Provision of service of internal accounting and administrative control e) Provision of legal assistance and support; f) Assistance in strategic planning; g) Assistance in issues regarding personnel, selection, payroll service and other matters relating to human resources management; h) Support in developing sales and marketing strategies; i) Consultancy in the tax and treasury management field; j) Supply of accounting services, consulting and assistance in the ...
Transfer pricing – Intra-group guarantees
The transaction The parent company of an European group operating in the financial sector, upon payment of a fee, agrees to reimburse the Italian subsidiary in case of bad debts from end-customers to whom the Italian company has granted credit. Activities carried out During the preparation of the local country transfer pricing documentation, an economic analysis on Transfer Pricing was required aimed at determining the arm’s length market value of the remuneration paid for granting the guarantee to the Italian subsidiary. Details of the project In particular, in order to verify whether the rate of remuneration paid by the Italian company against the issuance of the Guarantee is at arm's length, the following aspects were considered: the creditworthiness of the Italian company in a given period of time; other features of intra-group Guarantee. Starting from the above-mentioned aspects, a specific database has been used to identify market price quotations on transactions comparable to the financial transaction under analysis. In particular, in order to compare the price, data were used to show the market yields for comparable categories of guarantees substantially comparables to the transaction under analysis in terms of credit rating, issue date and guarantee terms. For this purpose, based on existing factors characterizing the transaction under ...
Financial transfer pricing
The transaction The parent company of a multinational group operating in the financial sector granted intercompany loans to its subsidiaries, including the Italian company, in order to provide them with liquidity necessary to provide loans to their end customers. Activities carried out Within the preparation of the local transfer pricing documentation it was required to perform an economic analysis on Transfer Pricing for the determination of the fair market value of intercompany loans lent in particular to the Italian company. Details of the project In particular, the following analysis were carried out: Method selection With specific reference to intercompany financial transactions, both the OECD report (1) and the Italian Ministry of Finance (2) have considered preferentially adoptable the method of comparable uncontrolled price: under this method, the arm’s length nature of funding is determined by comparing the interest rate under analysis with what would be charged for comparable transactions between independent enterprises (the so-called external comparison), or between one of the companies carrying out the transaction and an independent company (the so-called internal comparison). Application of the method Under this method, as clarified by the Ministry of Finance and the ...
Transfer pricing – Worldwide distributor
The transaction The multinational group, headquartered in Italy, is engaged in the development and manufacture of machines and plants for production of goods belonging to a specific industry sector. In particular, the Italian company is engaged in the production of machinery and equipments which are then sold to the Group’s foreign subsidiaries engaged in the distribution. Activities carried out An Economic Analysis on Transfer Pricing has been performed to support compliance to the arm’s length principle of the transfer prices applied to the transaction under analysis. Details of the project The work was meant at identifying the proper remuneration of the foreign group distributors. On the basis of the functional analysis performed the latter resulted, in fact, the most appropriate parties to be testified. Considering that the trading partners were located in Europe, USA and Canada with a level of functions and risks lower than those of the Italian company, the tested parties of the transaction were considered the foreign distribution companies on the basis of the OECD guidelines and the Italian transfer prices regulations. For this purpose two benchmark analyses were performed (one for the European market and the other for the North ...
Transfer pricing – Italian Contract Manufacturer
The transaction A Group, European market leader in the production of clothing, located in Italy with a subsidiary engaged in typical activities of on demand production (contract manufacturing). In particular, the Italian company produces garments on the basis of specifications provided by the parent and resells them to the same with direct shipping to the parent’s final client. Activity carried out Following a notice of assessment aimed at challenging the existence of an Italian permanent establishment (foreign company) within the manufacturing company, the Group has requested a qualitative opinion on the company’s specific risk with particular reference to the Transfer Pricing policies hitherto practiced. Following this examination, the company has decided to conduct a study to support the adequacy of the transfer pricing applied as well as to document the new transfer pricing techniques to be adopted for the future. It was then carried out a benchmark analysis aimed at identifying the proper remuneration of the transaction between the parent company which distributes worldwide and the Italian manufacturer company. Details of the project The study was aimed at identifying the correct remuneration of the Italian producer for his activity of producer of garments designed and commissioned by the European parent. The following activities ...
Transfer Pricing – Sales agent and working capital adjustments
The transaction The Group, which operates both in the distribution and production in a particular industry sector, has decided to centralize in a single country the logistics and its related services of management and maintenance of the stock and to operate in single local markets through companies belonging to the group and acting as agents. Activities performed An economic analysis on transfer pricing has been carried out in order to support the compliance with the Advice on the redetermination of the value chain in the case of corporate restructuring and reallocation of functions abroad or in Italy. Assistance in case of tax audits and defense in case of tax litigation. Arm's length principle Advice on the redetermination of the value chain in the case of corporate restructuring and reallocation of functions abroad or in Italy. Assistance in case of tax audits and defense in case of tax litigation. Details of the project In particular, the analysis has been aimed at identifying the correct Italian agent's remuneration for his work as a sales promoter (exclusive agent) of the European parent company’s products. For this purpose, a benchmark ...
