Italian Transfer Pricing Overview. Mazars, Rome

Transcription

1 Italian Transfer Pricing Overview Presented by Michele Muratori and Patrick Harteveld Presented by Michele Muratori and Patrick Harteveld Mazars, Rome

2 Agenda Italian transfer pricing rules Overview of Italian transfer pricing documentation Required documentation Penalties Overview of ftp methods International Tax Ruling

3 Italian Transfer Pricing rules Relevant rules / regulations Art. 9, par 3 and 110, par. 7 of dpr 917/1986 Art. 8 D.L. 30 settembre 2003, n. 269 Art.26ofD.L.31May2010,n.78convertedintoLawof30July 2010, n. 122 Circular Letter of the Ministry of Finance of 22 September 1980, n. 32/9/2267 Circular Letter of the Ministry of Finance of 12 December 1981, n. 42/12/1587 Bylaw 29/09/2010 ( Instructions of the Italian Tax Authorities ) Circular Letter of the Italian Tax Authorities of 15 December Circular Letter of the Italian Tax Authorities of 15 December 2010, n. 58/E

4 Italian Transfer Pricing rules (cont) Relevant rules / regulations Art. 110, par. 7 of dpr 917/1986 establishes that intercompany transactions (involving goods and/or services) need to occur at their fair value, i.e. the at arm s length and not at the agreed price Art. 9, par. 3 of dpr 917/1986 sets out that the fair value is set at the price or fee which is averagely applied on goods and services, as normally applied in free market conditions (..)

5 Italian Transfer Pricing rules (cont) Concept of control Art of the Italian Civil Code Having the majority of the votes during a shareholders meeting Being able to benefit from a sufficient amount of votes to exercise a dominant influence during the shareholders meeting A company is under the influence of another company by virtue of a contractual obligation

6 Italian Transfer Pricing rules (cont) Concept of control Circular Letter of the Ministry of Finance of 22 September 1980, n. 32/9/2267 / The concept of control needs to be extended beyond the scope of art of the Italian Civil Code, in the sense that it should cover any possibility to have some kind of potential economical influence (..), being in particular related to The exclusive sale, by a company, of products manufactured by the other company Impossibility to function without the capital, products and cooperation of the other company Right to appoint Board Members and Board Members in common Family ties Etc.

7 Overview of Italian documentation requirements No general obligation exists to keep a set of documentation for transfer pricing purposes Recently an incentive has been introduced d to promote the preparation of transfer pricing documentation

8 documentation Introduction of the incentive ex. art. 26, par. 1 of D.L. n. 78/2010 which establishes the following: the penalty for untruthful income tax return (from 100% to 200% of the higher tax) is not applied, when, in case of a tax audit or similar activity, the taxpayer hands over to the financial administration the documentation (Master-file and Country specific) which shows that the fair value has been correctly applied by the Italian company in the intercompany transactions.

9 documentation ti (cont) The new rule does not introduce new methods to determine transfer prices (the current references to any directives and OECD reports are still valid); The introduction of a scheme of documentation allows, during a tax audit, the verification of the fair value of the transfer prices It is an option and not an obligation

10 documentation ti (cont) The rule is not penalizing but instead creates an incentive, insofar it gives the taxpayer the possibility to demonstrate its good faith setting up a set of documents for transfer pricing purposes It is necessary to communicate the availability of the documents in anticipation to the Italian tax authorities, through which the taxpayer declares to possess the required documentation mentioned in the implementing rules The object of the communication to the Italian tax authorities j does not consist of transmitting the relevant documentation, but simply informing them to be in its possession and the possibility to show it to the tax agents in case of a tax audit.

11 documentation (cont) Subjects covered Differently from other tax authorities, the rule is applied on all companies, also small ones: Italian resident participation being part of a multinational group Holding companies resident in Italy Sub-holding companies resident in Italy Permanent establishments in Italy of non-resident companies

12 documentation ti (cont) Nature The documentation requirement covers a series of intercompany transactions among others: Purchase and sale of goods within the scope of the company s activities Service provision Commissions Management Fees Royalties Interest Cost-sharing agreements, etc.

13 documentation (cont) Main positive aspects Allows the avoidance of an administrative penalty for untruthful income tax return (from 100% to 200% of higher taxes ascertained) in case of claims by the Italian tax authorities through a tax audit In case of an adjustment, only the higher taxes ascertained are due Differently from the international tax ruling it is not required to send in anticipation to the tax authorities the documentation (which will be prepared p and keptby the taxpayer)

14 documentation (cont) Main positive aspects (2) Reinforces the concept according to which the burden of proof is placed on the tax authorities to prove that the transfer prices were not carried out against their fair value Possibility of penalty protection for previous tax years

15 documentation (cont) Main negative aspects It is not a ruling procedure and therefore the taxpayer is not protected from a tax audit It has no effect on tax-criminal litigation, but can anyway contribute by showing the good faith of the taxpayer Companies that do not prepare a set of documents can find themselves in a weak position in front of the Italian tax authorities which could reverse the burden of proof position on charge of the company

16 documentation (cont) Main negative aspects (2) The taxpayer is not entitled to the penalty protection in case no communication was send to the Italian tax authorities Unless part of a small or medium sized business the Unless part of a small or medium-sized business the documentation needs to be updated each year

17 documentation ti (cont) The Bylaw 29/09/2010 The Bylaw sets out the documentation requirements and refers to keeping a Master-file and Countryspecific file as predicted The documentation needs to be set up in Italian, whilst the Master-file may be in English The documentation needs to be signed by the Company secretary or someone else by proxy on every page and authenticated by digital signature

18 documentation (cont) Master-file: 1. General description of the multinational 2. Group structure 2.1. Organization of the structure 2.2 Operative structure 3. General group strategies t 4. Operational flows

19 documentation (cont) Master-file (2): 5. Intercompany operations 5.1. sale of tangible, intangible assets, services etc services functional lin carrying out tintercompany operations 5.3. cost sharing agreements 6. Functions carried out, good used and risks assumed 7. Intangible assets 8. Transfer pricing policy 9. Relationships with other EU member state tax authorities concerning Advance Pricing Agreements and ruling as to transfer prices

20 documentation (cont) Country-specific file: 1. General description of the company 2. Sector in which the company operates 3. Organization structure of the company 4. General strategies used by the company and changes applied 5. Intercompany operations 5.1. Operation description of activities iti comparability analysis transfer price method used

21 documentation (cont) Country-specific file (2): 6. Intercompany operations (cost sharing agreements to which the company adheres) 6.1. subject, object and duration 6.2. perimeters of activity and covered projects 6.3. method of determining expected benefits for each participating company ( ) 6.4. form and value of each contribution given by the participant companies (..) 6.5. formalities,,procedures and consequences on entering and leaving of the agreement by a company (..) 6.6. forecasts concerning extra payments or changes in the agreement depending on the circumstances 6.7. changes occurred within the agreement neither being short nor long term

22 documentation (cont) Which set of documents needs to be prepared? Italian resident participation being part of a multinational group Only the Country-specific file Holding companies resident in Italy Master-File and Country-specific file Sub-holding companies resident in Italy Master-file concerning only the companies controlled by the Italian sub-holding plus the Country-specific file Permanent establishments in Italy of non-resident companies Applicable as above depending on whether the non-resident mother company can be qualified as a holding, sub-holding or controlled company

23 documentation (cont) The documentation can be disallowed by the Italian tax authorities when: even though respecting the formal structure as indicated in the bylaw, the documentation does not provide complete information nor information in line as requested by the bylaw; the information pro ided ithin the sho n the information provided within the shown documentation are not true or partly true

24 documentation (cont) Deadlines in informing the Italian tax authorities: Current tax year (2010) and following years The communication needs to be done within the ordinary deadline for filing the income tax return (31 September 2011, for tax year 2010) Previous years still ascertainable ( ): The communication can be retained valid when filed but only when no tax audits, inspections etc. by the Italian Tax Authorities have been initiated The communication has to be transmitted digitally by using the so-called Entratel system

25 documentation (cont) Deadlines (when in possession of relevant documentation): Documentation ti needs to be handed d over to the Italian tax authorities within and not beyond - 10 days, after its request If additional information is required, following a tax audit or similar activity, the information needs to be handed over to the Italian tax authorities within 7 days or longer if the underlying information is complex, after its request

26 Penalties There are no specific penalties in relation to transfer pricing violations Therefore it is necessary to make reference to the general e available a ab tax and criminallaw a penalties es Penalties will differ along with having prepared or not the transfer pricing documentation

27 Penalties (cont) If transfer Pricing documentation has been prepared then no administrative penalty for unfaithful tax return will be applied but merely the higher ascertained taxes are due If no transfer Pii Pricing documentation ti has been prepared then an administrative penalty for unfaithful tax return is applicable p y pp (from 100% to 200% to the higher ascertained taxes) in case of higher ascertained corporate income taxes

28 Criminal tax penalties Criminal tax penalties can be applied under certain circumstances Fraudulent tax return (evaded tax > approx and income subtracted from taxable base > 5% of total income; 18 months till 6 years of imprisonment Unfaithful tax return (evaded tax > approx and income subtracted from taxable base > 10% of total income; 1 year till 3 years of imprisonment) i No criminal tax penalty is applied whenever the intercompany operations have been mentioned in the note to the financial statements and the estimated valuation differs from the real valuation value by less than 10%

29 Overview of TP methods Traditional transaction methods Comparable Uncontrolled Price Method Resale price method Cost-plus method Alternative methods Repartition of global profits (ripartizione dei profitti globali) Profit comparison (comparazione dei profitti) Income from invested capital (redditività del capitale investito) Gross margin method (margini lordi) In practice also the Transaction net margin method as referred to by the OECD is accepted by the Italian tax authorities

30 International Tax Ruling Art. 8 of D.L. 30 September 2003, n. 269, converted into Law 24 November 2003, n. 326, introduced d the International ti Tax Ruling in the Italian tax setting The international tax ruling is referred to companies operating internationally, that wish to rule out, beforehand, any conflicts with the Italian tax authorities and can be specifically used to establish the fair value of an intercompany transaction The taxpayer can start the procedure by filing a request to the International Ruling Office (either Rome or Milan) The International tax ruling will be applied for a period of three years

31 Questions?