Transfer pricing documentation and suitability requirements

The formal and substantial innovations introduced by the Provvedimento reflect an important evolution in the Tax Authorities’ attitude towards transfer pricing, in addition to the intention of aligning the Italian documentary requirements to the most recent OECD recommendations (e.g. Action 13 of the BEPS Project, whose contents have been transposed in the 2017 version of the OECD Guidelines).

The new requirements also seem to provide a definite answer to some issues subject of discussion over the years due to the lack of specific indications. Finally, the innovations introduced show the interest of the Tax Authorities for an increased taxpayers’ commitment in managing transfer pricing compliance.

In line with past, preparing the Documentation remains optional for those taxpayers intending to benefit from the penalty protection regime, but the requirements for the Documentation’s suitability  have become stricter.

1. Suitable Documentation

The first novelty introduced by the Provvedimento is related to the norm providing that all taxpayers intending to benefit from the penalty protection regime have to prepare a set of documents including Local File and Masterfile, regardless of their qualification as holdings, sub-holdings or subsidiaries. Compared to the past, the requirements according to which a different set of documents was required for different types of taxpayers no longer applies and the new provisions apply equally also to Italian permanent establishments of foreign entities and to foreign permanent establishments of Italian entities.

In line with the past, the Provvedimento requires the Documentation to be drafted in Italian, with the possibility for the Masterfile to also be filed in English. Further clarifications on this point by the Tax Authorities would be appropriate, in order to clearly identify the circumstances and ways in which it will be possible to make use of a Masterfile drafted in English.

The Local File and the Masterfile thus change, with a substantial alignment of their structure and contents to the recommendations on transfer pricing implemented in the latest version of the OECD Transfer Pricing Guidelines.

Both documents contain information useful to outline, in a more effective way compared to the past, the specific features of the multinational group to which the taxpayer belongs (the Masterfile) and the specific features characterising the business model and the operations of the local entity (the Local File), with a focus on those details aimed at identifying the substantial elements underlying the relations within the multinational group and the analyses carried out.

The Masterfile is the document aimed at providing a high level information framework on the multinational group to which the taxpayer belongs. It can be drafted considering the entire scope of operations of the multinational group, or by separately analysing each business area in which it operates, especially in those cases in which “the group carries out different activities regulated by specific transfer pricing policies”.

In this latter case, it would advisable for the Tax Authorities to provide the necessary confirmations on their expectations on the scope of the analysis of a suitable Masterfile, specifically in those cases in which the taxpayer operates only in some of the business areas of the group it is part of and considering the possibility to prepare the Documentation limited to some operations involving the taxpayer.

Among the new contents of the Masterfile are:

• details on economically relevant activities thanks to which the group generates value;
• details on the value chain relevant to (i) the first five products/services of the group in terms of turnover and (ii) the products/services generating a turnover over 5% of the total turnover of the group;
• details relevant to corporate reorganisation operations, if any, carried out on the group during the year;
• details on the agreements for the provision of intercompany services;
• a major focus on intangible assets, on which a complete disclosure is required. The information required include a description of the groups’ strategies as concerns intangibles, a complete list of intangible assets held and employed by the group with indication of the subjects having their legal ownership, the agreements, the transfer pricing policies, as well as significant transactions carried out during the year concerning intangible assets;
• a major focus also on the intercompany financial assets, aimed at clearly outlining how the group is financed, at describing the possible centralised treasury functions, as well as how the financial operations adopted are remunerated.

As concerns the Local File, the Provision also requires the adoption of an approach more focused on substance and on details compared to the past.

Taxpayers are required to provide evidence (i) of the relations existing with other entities of the group, also from an organisational point of view, providing details of lines of reporting and decision makers within the group; (ii) of the effects on the local entity of the implementation of specific strategies, extraordinary operations, transfer of intangibles, if any; as well as (iii) of the competitive context in which the taxpayer operates.

The most relevant novelties concerning the Local File requirements concern the level of detail required in the approach to the analysis of intercompany transactions in which the taxpayer was involved during the year.

In addition to the qualitative information already required with reference to transactions with related parties and those relevant to possible comparable transactions with third parties, taxpayers are also explicitly required to provide all useful details for a full understanding of the analysis carried out and the relevant underlying actions, as well as of any comparability adjustment made. The section of the Provvedimento relevant to the application of the selected method also contains an explicit reference to the possibility to carry out multi-year analyses, illustrating the reasons of said choice. Clarifications by the Tax Authorities are awaited on this point.

In the light of the above, in order for a quantitative analysis to be considered as adequate, it should be fully replicable in case of a tax audit. The analyses also need to be accompanied by the annual accounts of the foreign counterparties involved in the transactions analysed (together with the auditors’ reports, where available), as well as by internal information and accounting spreadsheets allowing the reconciliation of data used to carry out quantitative analyses aimed at the evaluation of the compliance of the transfer prices applied to the transactions with the arm’s length principle.

The analyses relevant to transactions concerning the so-called low value-adding services are to be prepared according to the specific indications set forth in the Provvedimento.

2. Timestamp and timeframe for making the Documentation available

The most significant novelty included in the Provvedimento is the introduction of the electronic signature and timestamp. Such provision, in line with what provided for the patent box, is not surprising considering that the Italian regulation on documentary obligations on transfer pricing provides benefits for taxpayers preparing said documentation.

Besides the obligation to flag the dedicated box when preparing the income tax return, the timestamp requirement for the Documentation (prior to the income tax return filing date for the same tax period) makes the regulation even stricter.

The Tax Authorities clarified an issue that gave rise to doubts and discussion in the past, i.e. the completion of the Documentation contextually with the submission of the income tax return. The time stamp is essentially aimed at demonstrating and confirming the truthfulness of what declared by the taxpayer to the Tax Authorities by flagging the income tax return, i.e. that it has prepared the Transfer Pricing Documentation and has it available.

The term for the submission of the Documentation when required by the Tax Authorities in case of a tax audit has been extended to twenty days (previously ten). The introduction of a longer term is of course welcome, but clarifications are awaited from the Tax Authorities in order to fully understand the ratio of the intervention considering the principle according to which no further amendment can be made to the Documentation after the apposition of a time stamp.

On the contrary, no change applies to the terms provided for the handling of requests of information by the Tax Inspectors in case of a tax audit: taxpayers will have to provide the required information within 7 days, a term which can be extended depending on the complexity of the request.

As a final note, the Provvedimento introduces the possibility, under specific circumstances, to amend the Documentations also after filing the income tax return, with the filing of a tax return adjustment. Operational indications are awaited on this point as well, allowing to clearly outline the circumstances and ways in which taxpayers can make use of this possibility, as well as if and in which situations could the possibility to file a supporting tax return be provided, even if only with reference to the flagging (after submitting the income tax return) relevant to the preparation of the Documentation.

3. Simplifications and specific cases

Small and medium enterprises

The Provvedimento confirms the possibility for small and medium enterprises, already provided in the past, to submit “simplified” supporting documentation.

Said regime grants the possibility to small-medium enterprises (defined as “companies whose turnover does not exceed 50 million Euros) not to update the quantitative analyses based on publicly available data for two years subsequent to the one in which the analyses were carried out, provided that the comparability analysis of the transaction did not undergo significant changes from one year to the other.

From a practical point of view, the simplified regime introduced by the Provvedimento currently provides the possibility not to update the entire analysis (comparability analysis and quantitative analysis) for the two fiscal years following the first one, upon condition that the comparability analysis does not undergo significant changes.

The extension of the simplification is nonetheless accompanied by the tightening of the scope of the beneficiaries of this provision, through a more stringent definition of small-medium enterprise. The Provvedimento actually sets forth that the category of small-medium enterprises includes taxpayers whose turnover does not exceed 50 million Euro, thus expressly excluding from the category all those entities which directly or indirectly control or are controlled by subjects not included in the category of small-medium enterprises as defined above.

This clarifies one of the issues undetermined in the previous regulation and thus often subject of debate.

Partial documentation

The Provvedimento introduces, for the first time, the possibility for taxpayers to prepare the Documentation with reference to specific transactions and to benefit, also in this case, from the penalty protection regime for the sole transactions documented.

Of course, this being a new provision, the indications and operational clarifications which will be provided by the Tax Authorities will undoubtedly be useful to understand the circumstances and rules for the application of the norm for the preparation of a set of documents suitable, though partial.

Low value-adding services

Following to what provided for under the Ministerial Decree, the Provvedimento introduced documentary requirements for transactions involving low value-adding services. As better explained below, the analyses which taxpayers are required to perform with reference to this type of transactions are essentially aligned with what, under the OECD terminology, would be defined as benefit test, aimed at evaluating the inherence of a service (and of the relevant cost) and, only as a second step, its consistency with the arm’s length principle.

For further information please contact Rossana Pieringer.