TAX NEWSLE T TER / M AY 2018 PIROL APENNUTOZEI.IT PIROL APENNUTOZEI & ASSOCI A PIROL A PENNUTO ZEI & ASSOCI ATI

Transcription

1 TAX NEWSLETTER / MAY 2018 PIROL APENNUTOZEI. IT PIROL APENNUTOZEI & ASSOCI PIROLA PENNUTO ZEI & ASSOCIATI

2 TAX NEWSLETTER MAY INDEX LEGISLATION Guidelines on the application of measures as per Art. 110, paragraph 7, of the Italian Income Tax Act (TUIR), approved with Decree of the President of the Republic dated 22 December 1986, No. 917, on transfer prices. Published in the Italian Official Gazette No. 118 dated 23 May Tax credit recognized for R&D activities Operative problems in presence of extraordinary operations. Ministerial Circular dated 16 May 2018, No. 10/E Ruling as per Art. 11, paragraph 1, lett. a), Law dated 27 July 2000, No Business restructuring and access to group taxation regime - Articles 117 and 120 of the TUIR (Italian Income Tax Act). Anti-abuse as per Art. 10-bis Law No. 212/2000. Ministerial Resolution dated 17 May 2018, No. 40/E Assignment of credits for the deductions recognized for energy efficiency improvements - Article 14 of Law Decree dated 4 June 2013, No. 63, converted, with amendments by Law dated 3 August 2013, No. 90. Ministerial resolution dated 18 May 2018, No. 11/E CASE LAW Permanent establishment assumptions Supreme Court, Judgement dated 18 May 2018, No

3 TAX NEWSLETTER MAY LEGISLATION LEGISLATION 1.1 Guidelines on the application of measures as per Art. 110, paragraph 7, of the Italian Income Tax Act (TUIR), approved with Decree of the President of the Republic dated 22 December 1986, No. 917, on transfer prices. Published in the Italian Official Gazette No. 118 dated 23 May 2018 Decree dated 14 May 2018, providing the guidelines to implement Art. 110, paragraph 7, of the TUIR (on transfer prices) was published in the Italian Official Gazette No. 118 on 23 May The Decree first remembers that the arm s length principle must be applied to each transaction singularly. However, in the event that a related party carries out two or more controlled transactions that are closely linked, or which form a unitary whole that cannot be reliably evaluated singularly, these transactions must be treated as one for the purposes of the comparability analysis and for the application of the most appropriate method to determine transfer prices. The Decree intervenes on the following points: Comparability A controlled transaction 1 can be compared with an uncontrolled transaction 2 for the purposes of implementation of paragraph 7, Art. 110 of the TUIR when: none of the differences between the transactions could materially affect the factor being examined in the most appropriate methodology; or if reasonably accurate adjustments can be made to eliminate or significantly reduce the material effects of any such differences. Comparability factors (i.e. economically relevant characteristics) are as follow: 1 Transactions between two enterprises in their commercial or financial relations that are associated enterprises with respect to each other as in accordance with agreements or, should contractual terms be lacking or behaviors of the parties different, by their actual behavior. 2 Transactions between two unrelated enterprises in their commercial or financial relations.

4 TAX NEWSLETTER MAY LEGISLATION the contractual terms of the transaction; the functions performed by each of the parties to the transaction, taking into account assets used and risks assumed, including how those functions relate to the wider generation of value by the multinational group to which the parties belong, the circumstances surrounding the transaction, and industry practices; the characteristics of property transferred or services provided; the economic circumstances of the parties and of the market in which the parties operate; the business strategies pursued by the parties. Transfer pricing methods Article 4 describes the methods (traditional and profit methods) that can be used to establish whether a transaction is consistent with the arms length principle and states that the selection of a transfer pricing method must always aim at finding the most appropriate method for a particular case. For this purpose, the selection process should take account of: the respective strengths and weaknesses of the recognized methods; the appropriateness of the method considered in view of the nature of the controlled transaction; the availability of reliable information (in particular on uncontrolled comparables); and the degree of comparability between controlled and uncontrolled transactions, including the reliability of comparability adjustments that may be needed to eliminate material differences between them. The methods presented in the Decree (traditional methods and profit methods) are hereinafter listed: 1. comparable uncontrolled price method (CUP method): the CUP method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances; 2. resale price method: the resale price method compares the gross margin realized from a reseller which purchased from an associated enterprise and resold the item/s to an independent enterprise to the gross margin realized in comparable uncontrolled transactions;

5 TAX NEWSLETTER MAY LEGISLATION 3. cost plus method: the cost plus method compares the gross margin realized on costs that directly or indirectly relate to the controlled transaction to the gross margin realized in comparable uncontrolled transactions. The above are traditional methods. Among the methods based on profits we can list: 1. transactional net margin method: the transactional net margin method compares the net profit relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction to the net profit relative to the same appropriate base that a taxpayer realizes from an uncontrolled comparable transaction; 2. transactional profit split method: the transactional profit split method splits the profits/losses realized from the controlled transactions (determined based on the division of profits that independent enterprises would have expected to realize from engaging in comparable transactions) in which the associated enterprises are engaged for each associated enterprise. The effective role each controlled enterprise has had into the controlled operation is duly considered or, in case this is not possible, each enterprise is assigned with a quota of the profit/loss once that all functions are determined based on one of the above described methods. It is specified that in case a traditional method and a profit based method be both reliable, the traditional method should prevail, the CUP method being the most appropriate. It is not required to apply more than one method in order to determine whether the transaction is arms length compliant. The taxpayer is also entitled apply a method which has not been listed above by demonstrating that: none of the methods could provide a reliable evaluation of the transaction to be arm s length compliant, and that; the outcome of the different method determine a coherent price that uncontrolled parties would have realized under comparable circumstances. If the taxpayer applied one of the above described methods in order to assess a controlled transactions,

6 TAX NEWSLETTER MAY LEGISLATION the Tax Administration must verify correspondence of the transaction with the arm s length principle by applying the same method applied by the enterprise. Arm s length range A controlled transaction, or a group of controlled transactions, is considered complaint with the arm s length principle when the related financial indicator is included within the arm s length range of figures. Should the indicator fall outside the range, the Tax Administration can adjust the value in order to include the same within the range considered complaint. It is possible for the taxpayer to provide documentation in support of the transaction and its compliance with the arm s length principle. The Tax Administration can counter the taxpayer s position by presenting argument and evidence as to why the taxpayer s transfer pricing was not arm s length and why the assessment is correct. Low value-adding services When the services at issue are low value-adding intra-group services, the taxpayer is allowed to use a simplified approach for the determination of arm s length charges. Should all documentation requirements required be met, all direct and indirect costs incurred by all members of the group in performing the low value-adding services are pooled and a fixed mark-up (5%) is applied. Low value-adding services for the purposes of the simplified approach are services which: 1) are of a supportive nature; 2) are not part of the core business of the group; 3) do not require the use of unique and valuable intangibles and do not lead to the creation of unique and valuable intangibles; 4) do not involve the assumption or control of substantial or significant risk by the service provider and do not give rise to the creation of significant risk for the service provider. It is specified that any category of services rendered to unrelated customers cannot qualify as low value-adding service. The Decree also specifies that the documentation (prepared by the taxpayer) must be considered reliable when including all necessary elements to evaluate compliance of the transfer prices with the arms length principle notwithstanding the fact that the method, the comparables or transactions selected by the taxpayer may differ from that specified by the tax administration. The Tax Administration may not qualify the documentation unreliable in presence of omissions and/or partial mistakes that still allow the proper evaluation by competent bodies.

7 TAX NEWSLETTER MAY Tax credit recognized for R&D activities Operative problems in presence of extraordinary operations. Ministerial Circular dated 16 May 2018, No. 10/E The Revenue Agency, with Circular No. 10/E/2018, profusely intervened on the discipline of tax credit for R&D activities (as introduced by Article 3 3 of Law Decree No. 145/ ) when in presence of extraordinary operations. Preliminarily, it must be observed that the tax benefit at issue is autonomous and unrelated also in presence of extraordinary operations 5 to the ordinary way of determining income. Indeed, as specified within Circular No. 5/E/2016, reference to the principle of tax relevance (Art 109 of the TUIR Italian Income Tax Act) has a general application and it does get applied to all eligible costs (i.e. in order to determine the tax credit, companies whose income is determined based on cadastral value or based on a flat-rate system must allocate each costs eligible to the fiscal periods subject to the benefit as in compliance with Art. 109 of the TUIR). In addition to this, the qualification, temporary allocation, and balance sheet classification criteria established for subjects drafting their Financial Statement based on the International Accounting Principles do not concur to the formation of the credit at issue 6. With specific reference to the temporary allocation, it is specified that also capitalized costs whose tax 3 This article is replaced by Art. 1, paragraph 35 of Law dated 23 December 2014, No. 190 (2015 Stability Law) amended by Art. 1, paragraph 15 of Law dated 11 December 2016, No. 232 (2017 Budget Law). It is herein remembered that the R&D tax credit is equal to 50% of the enterprise s extra spending on personnel engaged in eligible R&D activities, depreciation charges on the purchase and use of instruments and laboratory tools, R&D conducted in collaboration with universities, public research institutes and innovative startups, and technical expertise, industrial and biotechnological patents, semiconductor topography rights or plant variety rights, even if acquired from external sources. 4 Reference is herein made to previous clarifications expressed with Ministerial Circular No. 5/E/2016 and Ministerial Resolution No. 121/E/ The Circular clarifies that the tax benefit is independent compared to the ordinary way of determining tax credit even in presence of difficulties in determining such credit in case of extraordinary operations especially if these are carried our within the scope of group or correlated parties. 6 As specified within the Circular, implementation of Art. 109 of the TUIR (Italian Income Tax Act) is valid also for subjects different from micro-enterprises as per Art ter of the Italian Civil Code, whose income is determined as that of IAS adopters subjects (see Art.. 83, paragraph 1,third section of the TUIR).

8 TAX NEWSLETTER MAY deduction is postponed to subsequent fiscal periods do concur to the determination of the tax credit for each fiscal year for which the benefit is recognized 7. Determination of the tax credit in presence of mergers or divisions In the event that the merger was finalized in one of the fiscal periods relevant for the calculation of the historic average of reference (three years period ) the subject resulting from the merger must include also costs necessary to determine the historic parameter of reference born by the incorporated or merged companies. The Circular provides the following examples: in case all subjects involved in the merger are organized under solar fiscal period and be established prior to year 2012, the company resulting from the merger shall consider all costs borne in years 2012, 2013 and 2014 by all companies involved in the merger and divide the result by 3 8 ; in case a company established in year 2013 performs a merger through acquisition (effective as from 1 July 2014) of a company established in 2012, all costs borne by the merged company from the 1st January 2012 up to 30 June 2014 with those born by the merging company in 2013 and 2014 must be computed and the result divided by 3 in order to determine the average of reference; in case of merger with retroactive effects for tax and accounting purposes from 1st January 2014, the average is equal to the sum of all costs borne by the merged company from 1st January 2012 up to 31st December 2013 and by the merging company 1st January 2013 up to 31st December 2014 (herein included also costs borne by the merged company from 1st January 2014 to 30 June 2014, which due to the retroactive effects of the merger, are computed to the merging company) and the result divided by 3. In case of merger operations with no retroactive effects for tax and accounting purposes finalized in one of the period eligible to the benefit, all companies merged or incorporated must close their fiscal period as the merger is completed and this period will thus constitute a separate tax period. With reference to 7 According to the Revenue Agency, it is clear that the tax benefit and the ordinary determination of income systems do follow two separate paths also when it comes to costs born with parties which are resident or located in non-cooperative Countries: such costs are indeed excluded from the benefit no matter the fact that they can actually be used in deduction when determining the taxable income. 8 In case the merger was finalized in one of such periods, the eventual retroactive effects of the merger are irrelevant for the determination of the historical parameter.

9 TAX NEWSLETTER MAY such period 9, the tax credit is recognized to the merged or incorporated with reference to costs borne up to the day in which the merger becomes effective and is allocated to such period based on the principle of tax relevance (Art. 109 of the TUIR). The tax credit accrued in the period pre-merger is definitive (see the example provided by Circular under pag. 27 and 28). With reference to divisions (to which the same rules valid for mergers apply 10 ), evaluations must be made with reference to elements which are not part of the assets split (distributed proportionally) and elements referring to single items or group of items object of the division (which are transferred with the going concern). According to the Revenue Agency, for the purposes of the benefit at issue, the criteria to be applied in order to determine the historical average of reference is the analytic one. The analytic criteria must be applied even in case more going concerns are being split. In the event that the analytic criteria cannot be applied, the criteria to be used shall be found in light of the nature of the R&D activities being transferred and of the costs eligible in that the outcome is similar to the one which would have resulted if the analytic criteria were applied. Determination of the tax credit in presence of transfer of business or going-concern Broadly speaking, the same rules applied for division operations (both with reference to the modalities with which the historical average of reference is determined and with reference to the modalities with which eligible investments performed in the tax period in which the transfer is realized are determined and allocated) must be applied to the operations performed among companies belonging to the same group, i.e. between correlated parties. Similar conclusions can be drawn in case of business leases or sale of business. Determination of the tax credit in presence of business change in form In presence of change of form as envisaged by Art. 170, paragraph 2, of the TUIR Income Tax Act - the 9 It is specified that, in order to determine the tax credit to which the merged company is entitled to, the presence of a taxable period lower than 12 months (period which precedes the operation) does influence the amount of tax credit to be recognized. Indeed, both the minimum amount of investments requests in order to access the benefit and the maximum amount to which one is recognized vary accordingly. 10 See the example summarized in the Circular at page 36, where the modalities with which the tax credit and the average of reference must be determined by companies involved in the split-up can be found for year 2018 and subsequent.

10 TAX NEWSLETTER MAY period between the beginning of the tax period and the date on which the change of form takes place is a separate fiscal period. It is specified that with reference to this tax period, [ ] the subject being transformed is entitled to compute the tax credit referring to eligible costs that can be allocated to such period in accordance with the principles as provided by the law of reference [ ]. With reference to the period starting from the day on which the change takes place, the benefit falls within the scope of the subject resulting after the change of form. It is also necessary to adjust the historical average and the others element relevant for the determination of the taxable income. The Circular clarifies that, in the event that a business is organized in non-ordinary tax periods (tax period whose length is not 12 months), this should not compromise the right to receive an adequate the tax credit. Should this be the case, the amount of minimum investments required in order to benefit from the measure and the maximum amount recognized per year must be adjusted accordingly (see Circular No. 5/E/ paragraph 3.1). The historical average of reference must be adjusted as well (see Ministerial Resolution No. 121/E/2017). For the sake of completeness, the reorganization operations 11 between subjects of the same group, i.e. correlated parties, cannot result in a duplication of the benefit for a single investment (see also paragraph 2.2 of Ministerial Circular No. 5/E/2016). The power of the Fiscal Administration to verify whether the operation (merger, scission, change of form) between companies of the same group is performed with the sole scope of influencing the average of reference thus obtaining a higher tax credit than the one the same companies would generate should such operation be not implemented remains valid. 2.2 Ruling as per Art. 11, paragraph 1, lett. a), Law dated 27 July 2000, No Business restructuring and access to group taxation regime - Articles 117 and 120 of the TUIR (Italian Income Tax Act). Antiabuse as per Art. 10-bis Law No. 212/2000. Ministerial Resolution dated 17 May 2018, No. 40/E Resolution No. 40/E provided clarifications on a business reorganization operation with access to the group taxation regime (Art. 117 and subsequent of the TUIR). With specific reference to the case at hand, 11 In case that, due to a reorganization operation, the average of reference is attributed to a subject different from the one which borne the costs on which the historical parameter is computed, it is necessary that the new subject enters into possess of all relevant documentation (see paragraph 7, Circular No. 5/E/2016 and paragraph of Circular No. 13/E/2017).

11 TAX NEWSLETTER MAY the new-co holding company (established on 26 June 2017) purchased 100% stock of the company Delta SRL 12 on 28 June The latter adjusted its tax period to that of the holding and of the other companies part of the consolidation regime (solar tax period). In so doing, the tax period of Delta Srl, starting on 1 July 2017, did end on 31 December 2017 and from that moment on, the fiscal periods will run from 1 January to 31 December (see similar case analyzed by Ministerial Circular No. 53/E/ Paragraph 3). Pursuant to the reorganization, the holding and the controlled company opted to enter the Domestic Tax Consolidation regime as follow: from the period 1 July 2017 to 31 December 2017 for the company of the Group Delta SRL; from the subsequent period 1 January December 2018 for the other companies. It has been considered appropriate for the holding company to enter, acting as consolidating company, the domestic consolidation regime (from the very year in which it was established) with Delta SRL limited to the incomes realized by the latter in the fiscal period of reference (1 July December 2017). More in specific, the amounts entering the consolidation shall be those realized by the new-co holding during the fiscal period going from its establishment to 31 December 2017 and those realized by Delta SRL from 1 July 2017 to 31 December The Revenue Agency raised some observations on whether such operations (access to the Domestic Tax Consolidation Regime by the companies of the Group) may qualify as performed in abuse of law as in compliance with Art. 10-bis of Law No. 212/2000. It is specified that the eventual tax savings realized pursuant to the access to the consolidation regime (more in detail, the set-off of revenues/ losses between the subjects) cannot be considered as undue, as provided by the same tax systems that generated them, and therefore in breach of law. Moreover, continues the Resolution, creating the most appropriate structure in order to access the group taxation regime cannot by itself qualify as elusive The sole tax results realized by the controlled company (the company, having just being acquired, can be considered as a new-co as in compliance with clarifications provided by the Circular No. 40/E/2016) during the fiscal period the acquired company is fully controlled by the new-co holding (1 July December 2017) can be subject to consolidation by the new-co holding. 13 See, to this extent, also Ministerial Circulars No. 53/E/2004 and No. 10/E/2005. Moreover, with reference to the identity of fiscal periods requirement for the eligibility to the group taxation regime, this is met also in case the subjects at issue anticipated the end of their fiscal period so as to adjust it to the ones of the other companies willing to enter the consolidation (see also the report to the legislative Decree No. 344/2003).

12 TAX NEWSLETTER MAY It can be therefore assessed that the reorganization of the Group for consolidation purposes (both for the period 1 July December 2017 concerning the holding and Delta SRL and for the period 1 January December 2018 concerning the other companies of the Group) was not realized in abuse of law. 2.3 Assignment of credits for the deductions recognized for energy efficiency improvements - Article 14 of Law Decree dated 4 June 2013, No. 63, converted, with amendments by Law dated 3 August 2013, No. 90. Ministerial resolution dated 18 May 2018, No. 11/E In light of 2018 Budget Law and the amendments that came with it, the Revenue Agency intervened on the assignment of credits for the deductions recognized for energy efficiency improvements on existing buildings, parts of existing buildings or single units (see Article 14 of Law Decree dated 4 June 2013, No. 63, converted, with amendments by Law dated 3 August 2013, No. 90) 14. The following issues were analyzed: subjects eligible; banks and financial institutions: CONFIDI (Credit Guarantee Consortia) whose turnover is equal to or higher than Euro 150 million, trust companies, servicers of securitization operations and securitizations as per Law No. 130/ are also excluded from the list of assignees; coming into force: with sole reference to cases for which the prior opinion expressed by the State General Accounting Office 16 (Ragioneria Generale dello Stato) was necessary, behaviors of taxpayers which, prior to the publication of the Circular 17, assigned credits for amounts exceeding those currently envisaged or to subjects different and unrelated to those with which the deduction was originated will not be subject to sanctions. 14 See also Measure of the Director of the Revenue Agency dated 28 August 2017, Prot. No The initial assignment of the credit nor the eventual further assignment from the first assignee cannot be made in favor of the companies that do classify as financial companies no matter the fact that they are part or not of a group of companies. 16 An opinion by the State General Accounting Office was requested in order to take the impact of such measures on public finance into consideration. 17 As in compliance with what envisaged by Measure of the Revenue Agency dated 28 August 2017.

13 TAX NEWSLETTER MAY CASE LAW CASE LAW 3.1 Permanent establishment assumptions Supreme Court, Judgement dated 18 May 2018, No With Judgement No /2018, the Supreme Court provided clarifications with reference to a permanent establishment for VAT purposes. It is assessed that the presence in Italy of a business center (sede di direzione) of a foreign company is not sufficient to configure a permanent establishment. Reference is herein made to the concept of fixed establishemnt as per Art.9, paragraph 1, VI Council Directive No. 77/388/EC. The EU jurisprudence has indeed often stated that a fixed installation used for the sole purpose of carrying out activities of a preparatory or auxiliary nature, such as the recruitment of personnel or the acquisition of technical means necessary for the performance of the activities, does not constitute a permanent establishment (see for instance Judgements E.ON Global Commodities SE and Planzer Luxembourg Sarl).

14 Via Vittor Pisani, Milano T F TAX NEWSLETTER MAY 2018 LEGISLATION, MINISTERIAL AND CASE LAW AT 31 MAY THIS NEWSLETTER IS INTENDED AS A SUMMARY OF KEY TAX DEVELOPMENTS AND HIGHLIGHTS MATTERS OF GENERAL INTEREST, AND THEREFORE SHOULD NOT BE USED AS A BASIS FOR DECISION-MAKING. FOR FURTHER DETAILS AND INFORMATION, PLEASE CONTACT YOUR RELATED PARTNER OR SEND AN TO UFFICIOSTUDI@ STUDIOPIROLA.COM MILANO ROMA TORINO PADOVA BOLOGNA BRESCIA NAPOLI VERONA PARMA FIRENZE LONDRA PECHINO SHANGHAI