Starting from 2013 with the BEPS project, and specifically with action 13, the OECD has provided specific indications as concerns the documentary requirements for transfer pricing; such indications have subsequently been implemented in the 2017 OECD Guidelines.
Art. 8 of Ministerial Decree dated 14 May 2018 provided for the alignment of the existing regulations to the international standards contained in the OECD Guidelines.
On 23 November 2020, the Italian Revenue Office, with provision no. 360494 - the “Provvedimento” - implemented art. 8 of Ministerial Decree, thus updating the norms relevant to the Transfer Pricing Documentation (the “Documentation”).
The new Provvedimento, entirely replacing the former one, introduces a series of innovations to the requirements that taxpayers have to comply with in order to be eligible for the so-called penalty protection regime starting from the fiscal year underway as at 23 November 2020, or from the 2020 fiscal year for taxpayer whose FY corresponds to the calendar year.
For all taxpayers whishing to benefit from the penalty protection regime, the Documentation required includes both a Masterfile and a Local File to be prepared in Italian, with the possibility for taxpayers to prepare the Masterfile in English. Compared to the previous Provvedimento, taxpayers are no longer classified as holdings, sub-holdings and subsidiaries, with the possibility provided for the latter to prepare only the Local File.
Nowadays, all companies also have to prepare the Masterfile. Actually, the domestic regulation have aligned with the OECD Guidelines, which in turn implemented the provisions of Action 13 of the BEPS project which already included such indication.
The same requirements also apply to Italian permanent establishments of non-resident entities, as well as to companies resident in Italy with permanent establishments abroad.
Aim of the Documentation is to provide evidence that intercompany transactions are consistent with the arm’s length principle.
As anticipated, the Provvedimento aligned the structure and contents of the Masterfile and of the Local File to those contained in the latest version of the OECD transfer pricing recommendations. In general terms:
1. Masterfile
The Masterfile must contain information on the activities of the multinational group and on the global allocation of income among its various entities. Among the new provisions contained in the Provvedimento are:
Should the multinational group carry out different business activities regulated by specific transfer pricing policies, then taxpayers are allowed to file different Masterfiles.
2. Local File
The Local File supplements the Masterfile with a focus on the local entity.
Such 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.
Among the new provisions introduced by the Provvedimento with reference to the Local File, it is worth mentioning the request of a specific documentation concerning financial information. In particular:
As a final note, it is worth mentioning the request to include, in addition to the usual intercompany agreements, a copy of all existing bilateral/multilateral advance pricing agreements and of the cross-border rulings which the taxpayer is not part of, but which nevertheless are related to the intercompany transactions described in the Local File.
One of the main innovations introduced by the Provvedimento is the provision related to the electronic signature of the Documentation and the apposition of a time stamp.
In order for the Documentation to be considered as adequate, it will have to be signed electronically by the legal representative (or by a delegated substitute), with the apposition of a time stamp, so as to guarantee the Revenue Office certainty of 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 the penalty protection regime.
In case of a tax audit, the Documentation must be submitted within 20 days from the request of the Tax Inspectors. Any additional information that may be requested during a tax audit has to be provided within 7 days. Such term can be extended depending on the complexity of the request.
In order to be eligible for the penalty protection regime, the taxpayer must communicate to the Tax Authorities the possession of the Documentation upon filing the relevant tax return.
Should a supplementary tax return be filed in order to amend mistakes or omissions deriving from the non-compliance of the transfer pricing conditions and prices applied with the arm’s length principle, the taxpayer is allowed to amend the Documentation. In this case, a specific notification needs to be submitted by filing an amended tax return.
Further clarifications are expected from the Tax Authorities on this topic.
According to the Provvidemento, taxpayers are entitled to report in the Documentation only specific intercompany transactions occurred during the relevant fiscal year.
In this case, eligibility for the penalty protection regime would apply only with respect to the documented transactions.
According to the definition provided by the Provvedimento, a SME is a company with a turnover not exceeding 50 million Euros.
SMEs are allowed not to updated their quantitative and qualitative analyses referred to intercompany transaction described in the Local File for the two years following the one in which the initial analysis was carried out, provided that the following requirements are met:
A novelty has been introduced also with reference to this aspect. Entities directly or indirectly controlled by or controlling an entity with a turnover exceeding the 50 million Euro threshold actually do not fall within the definition of SME and thus do not qualify for the simplified documentation regime.
A major novelty concerns the so-called “low value-adding services”. In order to apply the simplified approach provided by the OECD Guidelines and confirmed by art. 7 of Ministerial Decree, the Local File needs to be supplemented, as concerns this category of services, with a detailed quantitative analysis on the nature of services.
Said analysis must include a detailed description of the nature of the transactions and of the benefits obtained or expected by the recipients (i.e. benefit test). Furthermore, taxpayers are also required to include clear and precise details on the criteria applied to determine and allocate the amounts underlying the transactions.
As mentioned above, the new requirements introduced by the Provvedimento will apply starting from the tax period underway as at 23 November 2020.
For further information please contact Marina Vitale.
