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New Regulations Apply to Transfer Pricing Documentation

14 Mar 2011

Recent Italian legislation on Transfer Pricing states that penalties shouldn't be applied in the event of tax assessment based on transfer pricing if taxpayers hold supporting updated and detailed documentation on their transfer pricing policies.

The law aims to protect taxpayers from administrative penalties in the event of subsequent upward adjustments. Particularly, if taxpayers hold appropriate documentation which allows the tax authorities, in case of a tax assessment, to control the transfer prices charged and shows they have made consistently with the arms' length principle as detailed in the supporting documentation. Taxpayers holding the records mentioned in the Italian regulations, shall notify the Tax Authorities.

According to Implementing regulations of such provisions, taxpayers that do not declare that they hold such documentation may be listed as uncooperative taxpayers by the Authorities and subsequently audited. Taxand Italy reviews the new regulations for transfer pricing documentation and how taxpayers can prepare to benefit.

According to the Italian law and to the Commissioner of Revenue Agency a tax assessment based on transfer pricing will not give rise, together with the higher taxes assessed, to the application of penalties, provided that Italian entities part of MNE's hold documentation that's been appropriately drafted, allowing the authorities to confirm that transfer prices have been applied consistently using the arm's length principle.

Although the Italian regulation recalls and largely mirrors the Code of Conduct adopted by the EU Council on 27 June 2006, the documentation must be drafted in line with the form, structure and content indicated by such implementing regulations.

In particular, the documentation shall include:

  • the Master file, to be drafted either in English or in Italian, concerning the multinational group, with specific regard to its history, the market sector in which it operates and its organisational structure (including a list of group members and a description of the participation of the parent company)
  • the National file, to be drafted in Italian language, which describes the company, its history, the sector of the market in which it operates, its operative structure and its general business strategy.

The National file should detail the intra-group transactions, their economic reasons, legal aspects and amounts, describing the functions and risks of each enterprise involved. Intercompany agreements shall be annexed to the file.

Special rules on the structure of the documentation are provided for sub-holdings located in Italy.

The files should be updated every FY, except for companies whose turnover is less than 50 EUR / million, which can update the files every 3 FYs.

Italian companies that are in possession of the documentation must declare this in their yearly tax return. Communication regarding the FY 2010 shall be made in the tax return filed in 2011. If no communication is made, taxpayers have no protection from penalties in the event of upward tax adjustments arising from a tax assessment based on transfer pricing.

Any set of documentation should be prepared for each tax period.

The non application of penalties may also be applied to FYs previous to the tax period in force as at July 2010. The exclusion from penalties to previous FY's years open these FYs open to assessment provided that:

(i) the transfer pricing documentation is made consistent with the Italian Commissioner Regulation structure and content requirements

(ii) the communication to hold such documentation is filed with the Tax Authorities prior to any audits or inspections by tax authorities.

FY's currently open to tax assessments are 2006 onwards.

Taxand's Take

To benefit from the non application of penalties, taxpayers should hold the Transfer Pricing documentation updated and in line, as to its structure and content, with the Italian regulations.

Communication of holding the appropriate documentation for FY 2010 should be made in the yearly tax return. For FY's from 2006 to 2009 the updated documentation can be filed prior to an audit. Around 1,300 taxpayers have already filed the communication with the tax authorities.

Companies wishing to apply such a regime should first review and update the appropriate transfer pricing documentation in line with the Italian regulations. An in depth analysis of the form and content of the documentation is advisable prior to making the communication.

Your Taxand contacts for further queries are:
Guido Petraroli
T. +39 02 7260591

Alberto Ferrario
T. +39 02 7260591

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Taxand's Take Author