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    New Italian transfer pricing draft regulations

    The Italian Ministry of Finance and the Italian Tax Authority launched a public consultation on:

    • draft implementation measures of transfer pricing regulations, clarifying criteria for applying transfer pricing provision and applicable methods;
    • draft procedural measures for requesting corresponding adjustments in case of a tax audit in a foreign country.

    All interested stakeholders can submit their comments and observations on these two draft regulations before 21 March 2018. Along with these draft regulations, the Ministry of Finance also published an Italian translation of the 2017 OECD TP Guidelines.


    Draft Ministerial Decree on the implementATION measures of transfer pricing provision

    The draft Ministerial Decree builds upon the revised Italian provision on transfer pricing (article 110, para. 7, of the Italian Income Tax Code) which was amended on April 2017 to establish the arm’s length principle, as well as upon the new OECD TP Guidelines and BEPS Actions 8, 9 and 10.

    The aim of the draft Decree is to address the issues that, in the past, caused most of the controversies between taxpayers and tax authorities. The main issues addressed are the following:

    • Definition of the ownership threshold for being considered “associated enterprises” (50% threshold);
    • Criteria to define comparability (same as the OECD Guidelines’ five comparability factors);
    • Transfer pricing methods accepted and criteria for selection of the most appropriate method;
    • Criteria to apply “bundled” vs. “unbundled” approach;
    • Acceptance of the (entire) arm’s length range as compared to the tax authorities’ static preference for the median point in the range, which was very often the case in the past.

    The former Italian TP provisions were quite formal in nature. The only legal reference to a price comparison was made to establish “normal value” in intercompany dealings. Reference to OECD methods was only implicitly done, causing several disputes and misunderstandings between taxpayers, tax authorities and tax judges. On several occasions, the Supreme Court ruled that the only method accepted under Italian law was the CUP method.

    The draft Decree now clearly acknowledges the OECD methods. It is also in line with the OECD Guidelines, clearly stating that the most appropriate method should be applied and that only in those cases where a traditional and a transactional method are equally applicable, preference should be given to the traditional method (and to the CUP method above all).

    Furthermore, the draft Decree clearly acknowledges that, when assessing compliance with the arm’s length standard during a tax audit, Italian tax authorities should consider the entire arm’s length (interquartile) range of results. They should not only refer to the median point in the range. This was very often the case in previous transfer pricing audits. Italian tax judges only recently started to sanction this behaviour.

    Draft Regulation on corresponding adjustments

    The draft regulation lays down the procedures for Italian group companies on how to request recognition of unilateral tax adjustments to the Italian tax authority in case of foreign tax audits. However, it does not clarify which principles the Italian tax authority should apply when deciding whether or not to approve the tax refund.

    The draft clarifies that, in those cases where the request is rejected, the taxpayer always has the right to refer to the tax treaty or the EC mutual agreement procedures to avoid double taxation.


    If you have any questions on the above, please contact us. We will be happy to assist you.

    Enrico De Angelis