Executive summary

On 21 February 2018, the Italian Ministry of Economy and Finance launched a public consultation on the implementation measures associated with the application of domestic transfer pricing provisions. As part of the consultation, the following draft documents (TP Package) were issued:

• Draft of the Ministerial Decree (the Draft Decree) based on the revised wording of Art. 110, Par. 7, of Presidential Decree n. 917 of 1986 (TUIR), as amended by Art. 59 of the Law Decree n. 50/2017 to clarify certain transfer pricing issues
• Draft of the Commissioner of Revenue Agency Paper (the Draft Paper) provided for by Art. 31-quater of Presidential Decree n. 600 of 1973 regarding the newly introduced procedure allowing Italian taxpayers to obtain a unilateral downward adjustment on their taxable income as a result of transfer pricing adjustment made by foreign tax authorities as opposed to initiating the ordinary mutual agreement procedure (MAP)
• An Italian translation of the relevant sections of the 2017 Organisation for Economic Co-operation and Development's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TPG)

The business community has 28 days to provide comments on the TP package (i.e., until 21 March 2018) before the final documents will be issued.

The main purpose of the Draft Decree (supported by the Italian translation of the OECD TPG) is to address certain issues that may give rise to controversial interpretations during a tax audit. The issues addressed include:

• Definition of ownership required to be considered "associated enterprises" (i.e., more than 50% ownership)
• Guidance to define comparability based on the five comparability criteria provided by the OECD TPG
• Criteria to identify the transfer pricing methods available and selection of the most appropriate method
• The possibility to analyze different transactions jointly (e.g., portfolio approach)
• Definition of the arm's-length range

The main purpose of the Draft Paper is to eliminate the double taxation arising from a foreign transfer pricing adjustment provided that this is final in its quantification and consistent with the arm's-length principle. The Draft Paper is structured as follows:

• General definitions and scope of application
• Access to the procedure, also by means of applications filed via certified electronic mail (PEC)
• Admissibility to the procedure (to be confirmed within 30 days)
• Review of the application and decision by the competent body (Ufficio Accordi preventivi e controversie internazionali – the same group that is also in charge of the MAP)
• Possible causes of termination of the procedure
• Relationships with the MAP

Detailed discussion

The Draft Decree provides a number of explanations but also does not address a number of issues for which the public consultation is expected to generate further clarifications. These can be summarized as follows:

• The definition of the term "associated enterprises" has been aligned with the definition included in the OECD Model Tax Convention clarifying that companies under the control of the same individual would be considered as associated companies. Therefore, both juridical and de facto control should be considered.
• The "reduced hierarchy" of methods provided by OECD TPG is explicitly mentioned and is connected to the provision of Art. 4, Par. 6 of the Draft Decree, indicating that the tax administration is bound to respect the application of the transfer pricing method selected by the taxpayer, provided that all the relevant conditions underlying its choice are met.
• The arm's-length range should be considered in principle as a valid reference for establishing the arm's-length conditions. No practical indication is provided, however, on which point of the range should be considered in the case of adjustments. Accordingly, further guidance is required.

The content of the Draft Paper can be summarized as follows:

1. Scope of the procedure: the procedure can be started by Italian taxpayers (including Italian permanent establishments of foreign multinationals) involved in intragroup transactions with foreign affiliates that have been subject to transfer pricing adjustments in the foreign country.
2. Content of the application: (i) identification of the taxpayer; (ii) object of the request; (iii) mandatory attachments such as copy of the foreign tax assessments (including courtesy translation) and certification issue by the foreign tax administration that the assessment is final; and (iv) description of the reasons for which the adjustments are considered in line with the arm's-length principle.
3. Admissibility: within 30 days from the filing of the request, the Revenue Agency declares it admissible or requests additional documentation. If not all the requirements are met or the additional documentation is not provided, the request is declared inadmissible.
4. Procedure: the competent body reviews the request and may invite the taxpayer for a discussion. The term for the procedure is set at 180 days from the filing, however the competent body may also start an exchange of information with the foreign tax authorities and this could extend the mentioned timing.
5. Conclusion: the request is finally accepted or rejected. If accepted, a notification is sent to the foreign tax authorities and the refund is granted to the Italian taxpayer via a decision of the Commissioner of Revenue Agency. If rejected, the taxpayer can still apply for a MAP.

Implications

As evidenced by the launch of a public consultation process and by the provision of a preliminary translation of the OECD TPG, Italy is working to align as much as possible with the OECD approach and practice, even in presence of a limited timeframe to provide comments (28 days). In this respect, there are at least two main aspects that it is worth noting in the TP Package, as compared to the current TP indications:

• The Draft Decree represents the official "retirement" of the outdated Circular Letter no. 32 dated 1980 (based on a former version of the OECD TPG) that did not reflect the recent developments of the international best practices.
• The Draft Paper appears to supersede the MAP Circular Letter no. 21/E dated 2012 on the relationship between MAPs and local procedures. The Draft Paper, with its current text, would allow the opening of a MAP even after the definition of the adjustment on a unilateral basis and would implicate a discussion of the case (even after the denial of the refund from the Italian Revenue Agency).

The Draft Decree does not at this time address the relationship between the local transfer pricing documentation regime for penalty protection purposes and the recent developments in terms of documentation as a result of Action 13 of the Base Erosion and Profit Shifting project. It is also worth noting that the preliminary translation of the OECD TPG completely omits the revised Chapter V that implemented the three-tiered approach consisting in the Country-by-Country Reporting, Master File and Local File.

On an overall basis, the release of the TP Package is expected to increase the attractiveness of the Italian tax landscape and it should be read in conjunction with the "relocation" of the Ufficio Accordi preventivi e controversie internazionali issued by the Italian Revenue Agency, which is also designed to attract foreign investments.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Studio Legale Tributario, Milan

• Marco Magenta, International Tax Services
  marco.magenta@it.ey.com
• Davide Bergami, Transfer Pricing
  davide.bergami@it.ey.com
• Giusy Bochicchio, Transfer Pricing
  giusy.bochicchio@it.ey.com
• Massimo Bellini, Transfer Pricing
  massimo.bellini@it.ey.com
• Luigi Colantonio, Transfer Pricing
  luigi.colantonio@it.ey.com

Studio Legale Tributario, Rome

• Livio Zallo, FSO – Transfer Pricing
  livio.zallo@it.ey.com
• Fabio Zampini, Transfer Pricing
  fabio.zampini@it.ey.com

Ernst & Young LLP, Italian Tax Desk, New York

• Emiliano Zanotti
  emiliano.zanotti2@ey.com
• Fabrizio Iachini
  fabrizio.iachini1@ey.com

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ATTACHMENT

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