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The most appropriate pricing method should be selected on a transaction-by-transaction basis, providing the most reliable measure of an arm’s length result in each case. The current OECD methods, namely the comparable uncontrolled price, resale price, cost plus, transactional net margin, and profit split methods are all accepted, but the method used must be in line with the functional and risk profile of the tested party.
There is no set hierarchy as the Italian legislation refers to the OECD Guidelines. In practice, however, a ‘natural hierarchy’ may be said to favor the 'comparable uncontrolled price method' and the 'traditional transaction methods' in general.
Alternative methods can also be used if justifiable and appropriate.
Transfer pricing documentation is not compulsory in Italy, but necessary if you want to benefit from the 'penalty protection regime'.
Masterfile and Local File should be prepared on a yearly basis.
If the taxpayer prepares transfer pricing documentation that complies from both a formal and substantial point of view with the Implementation Decree of the Italian Inland Revenue Director dated 23 November 2020, it benefits from the so-called 'penalty protection regime'.
As a general principle, the TP documentation should allow the Tax Authority to 'walk through' the transfer pricing policy applied and the economic analysis. Formal errors do not prevent the taxpayer to benefit from the 'penalty protection regime'.
Lack of carefully prepared documentation will generally be seen as (at least) 'careless' behavior with no application of the 'penalty protection regime' in the case of a tax audit. Therefore, any adjustment may result in penalties.
Masterfile and Local File must be signed electronically by the Legal Representative or a delegated substitute. The electronic signature gives certainty (through a 'time stamp') to the signing date, which must be prior to the tax return filing date for the relevant fiscal year. Failure to comply with this requirement will not allow the taxpayer to be eligible for a penalty protection regime.
Masterfile and Local File must be prepared in Italian language and should be available at the latest within 20 working days from the official request by the Tax Authority. An English version of the Masterfile can be used.
Italy has introduced, by implementing the ad-hoc Directive, the CbCR regulations which are effective for fiscal years starting on or after 1 January 2016 for groups with revenues over €750m.
Advanced Pricing Agreements (APAs) are written agreements between one or more taxpayers and one or more Competent Authorities to govern the appropriate transfer pricing method for a forward-looking period. The Italian Competent Authority manages both APAs and MAPs.
The Italian Competent Authority manages both bilateral and unilateral APAs.
The timing of a bilateral or multilateral APA negotiation may depend upon the practice of the other Competent Authority/Authorities involved.
If certain conditions are met, the roll-back of the APA is applicable up to the last assessable fiscal year.
For the filing of a Bilateral or Multilateral APA request, a fee is required by the Italian Competent Authority. The fee varies on the basis of the amount of the Group’s consolidated revenues:
Fee of €10,000 for Groups with consolidated revenues up to €100 million
Fee of €30,000 for Groups with consolidated revenues up to €750 million
Fee of €50,000 for Groups with consolidated revenues over €750 million.
The fees here above listed are reduced to 50% in case of renewal.
For further information on transfer pricing in Italy please contact:
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Lorenzo Carminati
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