On 31 May 2010 the Italian Government issued Law Decree number 78 concerning “urgent measures for financial stabilisation and economic competitiveness”. The Decree came into force with immediate effect but must now be converted into Law by the Parliament within 60 days (i.e., by 30 July 2010).
Among the measures implemented by the Decree, the Government has introduced for the first time a specific provision on transfer pricing documentation. Until now, unlike other countries, Italy has had no provision of law addressing the documentation that multinational enterprises (MNEs) should keep and make available to the tax authorities in case of an audit concerning transfer pricing.
The new provision can be summarised as follows:
- Where an adjustment to intercompany transfer prices is made by the tax authorities, no penalty can be imposed on the taxpayer if the latter, during the audit, provides the tax auditors with appropriate documentation in order to allow the inspection of the arm’s length nature of the transactions.
- The documentation to be provided by the taxpayer must be compliant with the requirements specified in apposite regulations to be issued by the Revenue Agency within 60 days of the date of effectiveness of the Law converting the Decree.
- The same regulations will also specify the timing and modalities for the taxpayer to communicate the existence of this documentation to the tax authorities. In any case, the communication on the existence of the required documentation concerning previous fiscal years must be provided within 90 days of the issuance of the regulations by the Revenue Agency.
- If the taxpayer fails to provide this documentation to the tax authorities during the audit, or fails to communicate its existence within the timing and modalities to be determined by the regulations issued by the Revenue Agency, the ordinary penalties ranging from 100 to 200 per cent of the assessed taxes will be imposed if a transfer pricing adjustment is made.
In essence, the Decree does not introduce an obligation for MNEs to set up transfer pricing documentation, but the existence of adequate documentation to support the arm’s length nature of intercompany transactions is necessary to avoid severe penalties in case of adjustment by the Italian tax authorities. MNEs that fail to communicate to the tax authorities the existence of the transfer pricing documentation are likely to face a higher risk of being selected for a tax audit specifically aimed at inspecting intercompany transactions.
The Decree does not provide any specific indication as to what documentation must be made available to the tax authorities. It only indicates that the new provision is intended to bring Italian legislation in line with the Organisation for Economic Co-operation and Development’s (OECD) guidelines on transfer pricing documentation, as well as with the general principle of collaboration between taxpayers and the Tax Administration. It is therefore necessary to wait until the issuance of the regulations by the Revenue Agency (expected in late September 2010) to know the actual content of the documentation required. It is likely, however, that the Revenue Agency will adhere to the EU Council Resolution of 27 June 2006 on a Code of Conduct on transfer pricing documentation for associated enterprises in the European Union (http://eur-lex.europa.eu/JOHtml.do?uri=OJ:C:2006:176:SOM:en:HTML), and will also take into account the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, at least as far as MNEs having non-EU resident associated companies are concerned.
In any case, it can be expected that MNEs with operations in Italy will need to make a significant effort in the coming months to verify whether their group is compliant with the new Italian transfer pricing documentation standards. It is certainly recommendable to begin a prompt review of current policies and the status of their documentation for previous fiscal years, in light of the strict deadline imposed by the Decree.