The Italian tax authorities are considered relatively aggressive in audits and with handing out penalties. Most international tax and transfer pricing professionals are aware of this. The Italian penalty protection documentation is as such something that is often opted for. The requirements to obtain penalty protection are specific. In the following blog, we zoom into these requirements. Here are some highlights to consider:
- The deadline to file the notice that you have appropriate documentation expires in most situations 9 months after year-end. This must be filed jointly with the annual income tax return (this timing has changed compared to earlier years).
- There is in principle a possibility to file for a deferred communication on the availability of TP documentation of 90 days. You may wish to avoid having to make use of this (for example not covered in case a tax audit starts within that period).
- You will require signatures and a timestamp. The Italian tax authorities offer several software providers that are accepted. These are generally local parties; DocuSign is for example not one of them.
Please find below a more detailed overview on these requirements. This was prepared in cooperation with our Italian partner Muse Strategy.
Background
In its decision no. 360494 dated 23 November 2020 adopting the provisions already contained in the ministerial decree dated 14 May 2018, the Italian tax authority provided an update of the provisions on transfer pricing documentation and set forth the requirements for proper documentation in order to benefit from the penalty protection scheme. Further clarifications have been provided through the Circular Letter n. 15/E published by the Revenue on 26 Nov. 2021.
Moreover, through Circular Letter no. 16/E of 24 May 2022, the Revenue provided clarifications regarding: the interpretation of the concept of range, the positioning of the profit level indicator within the same interval, the usability of comparables in a loss-making position and the adjustments introduced to raise the degree of comparability between the tested party and comparables. The clarifications provided show a full alignment with the OECD TP Guidelines.
Please find below the most important provisions to benefit from the non-application of the administrative penalties.
Requirements
Proper transfer pricing documentation pursuant to section 1 (6) and section 2 (4-ter) of the Italian legislative decree 471/1997 Documentation is deemed proper whenever it ensures that it can be assessed whether the terms and conditions and the transfer prices applied by multinational enterprises are following the arm’s length principle. Such documentation includes:
- A Master File that contains information on the multinational group and is divided into the sections and paragraphs specified in the decision.
- A Local File that contains information on the company’s intercompany transactions and is divided into the sections, paragraphs and subparagraphs specified in the decision.
- In addition, financial information on (i) the local entities’ annual accounts relating to the tax period concerned, (ii) the financial data information and tables on reconciliation with the annual report; (iii) the summary tables of relevant financial data for comparable entities must be disclosed.
- The annexes include a copy of the intercompany agreements entered into by the local entity and a copy of the preliminary agreements and cross-border rulings relating to the intercompany operations.
The master and local files’ structures and contents are in line with the provisions set forth under the 2017 and 2022 versions of the OECD Transfer Pricing Guidelines.
Permanent establishments
The provisions on proper documentation apply also to permanent establishments located in Italy of non-resident enterprises. This is also the case with resident enterprises with permanent establishments abroad.
Small and medium-sized enterprises (revenues of no more than EUR 50 million) – financial updates
Small and medium-sized enterprises (SMEs) may choose not to update the sections on “intercompany transactions” in the two tax periods following the one to which the local file relates if the comparability analysis is based on information from publicly available sources and provided that the functional analysis elements did not significantly change in such two tax periods. This would mean you do not require to perform a financial update on your benchmark study.
Please be advised that, apart from the confirmation of this simplification option, the definition of SMEs has been changed:
- The threshold is 50 million Euro turnover in the respective tax period of your respective Italian entity. However, entities directly or indirectly controlling or controlled (and this is the actual news) by an entity that does not qualify as “small and medium-sized enterprise” do not fall under this definition.
Documentation: language requirements and signing
The master and the local file must be prepared in Italian. The master file may however be filed in English.
It should be noted that the attachments to the local file can be presented in a language other than Italian; in the event that these attachments, and any appendices to the master file, are written in a language other than Italian or English, and during the audit or other investigation activity, the need arises to have a translation into Italian or English, the local entity must make this translation available at the request of the tax inspectors.
The documents must be signed electronically by the legal representative and a time stamp must be affixed within the deadline for the filing of the income tax return. Please note that the Italian tax authorities have prescribed a specific list of software providers that are approved for this signing procedure.
Deadline for the submission of the documentation
The documentation must be submitted to the Italian tax authority no later than 20 days from the relevant request. The documentation must be filed electronically. Due to the timestamp this deadline is however less relevant than for most other jurisdictions, i.e., if you do not have the timestamp in time, you will still be non-compliant for penalty protection if you submit the documentation within 20 days.
Notice on the possession of proper transfer pricing documentation
The notice on the possession of transfer pricing documentation must be filed jointly with the annual income tax return. Any contingent mistakes or omissions due to non-compliance with the arm’s length principle may be corrected by supplementing or amending the documentation that shall be filed again by means of a supplementary tax return.
It is relevant to consider also that belayed communication of the possession of the TP documentation can be done within 90 days from the ordinary deadline. However, in case a tax inspection (or any other official investigation activity) starts in the meanwhile, the penalty protection will not be granted.
Low value-adding services
The documentation on low-value-adding services must compulsorily contain information on and a description of intercompany services, service provision agreements and the amounts set forth for the transactions as well as the respective calculations.
The relating documentation can be included in a separate report, in addition to the master file and the local file. Hence, even such a report must be signed electronically within the deadline for the filing of the tax return – to benefit from penalty protection – and the box on the possession of transfer pricing documentation must also be ticked. As an alternative to the separate report, it is possible to include in the local file the same specific information requested for low value-adding services.
Since when does this apply?
This regime is effective as of the tax period ongoing at its publication date (23rd November 2020) and replaces the Commissioner’s Decision no. 137654 dated 29 September 2010.
Hence, the provisions applied as of the preparation of the transfer pricing documentation relating to fiscal year 2020 which had to be completed in Autumn 2021 (no later than on the date of submission of the Corporate Income Tax return) for all those with a tax period coinciding with the calendar year.
Details on timing of notice period
Recent tax reforms changed – among others – also the deadline for the submission of the corporate income tax returns. Namely, Legislative Decree n.1 published in the Official Gazette on 12 January 2024 requires taxpayers to file their income tax returns within nine months of the end of the financial year, starting from 2 May 2024. This also impacts the transfer pricing documentation timeline, as it reduces the preparation deadline by two months.
In addition, for subjects with a tax period not coinciding with the calendar year for which the deadline for submitting income tax return and regional tax on productive activities return relating to the tax period preceding the one in progress on 31 December 2023 expires after 2 May 2024, the submission deadlines in force before the same date continue to apply for the aforementioned tax period.
It is then specified that – based on article 38, paragraph 1, of Legislative Decree 12 February 2024, n. 13 – for the tax period in progress on 31 December 2023, the aforementioned deadline expires on the fifteenth day of the tenth month following the closing of the tax period.
For example, companies that close the fiscal year on 31 December 2023 will have to submit the income tax return and regional tax return on productive activities by 15 October 2024, which thus also becomes the deadline for finalizing the TP documentation relating to the fiscal year 2023. Differently, a taxpayer with a tax period from 1 July 2023 to 30 June 2024 must submit the tax return by 15 April 2025.
The possibility of a 90-day deferred communication of the possession of the TP documentation remains unchanged.
Then, starting from the following tax period (i.e., which will close on 31.12.2024 for the so-called “solar subjects”), the deadline for submitting the tax return will be the ordinary one (i.e., within nine months from the end of the fiscal year, i.e., 30 September 2025).
Final remarks
Considering the documentation requirements and the relevant attention paid by tax inspectors on transfer pricing and international taxation related matters (e.g., undisclosed permanent establishment). It is pretty clear that multinational groups must plan their operations carefully. This in order to be able to complete transfer pricing documentation within the deadline for the submission of the tax return and sign such documentation electronically. As provided for under the new documentation requirements.