Industries: International Business
Services: International Business
In November of 2020, the Italian tax authority issued new instructions in regard to transfer pricing documentation for Italian resident enterprises and permanent establishments. The new measures are applicable starting in 2020, and replace provisions in place since September of 2010.
The preparation of transfer pricing documentation in Italy is elective, but is necessary to receive protection from penalties in the case of a transfer pricing adjustment.
Under the new instructions, all companies, including Italian permanent establishments, will have to prepare both the master file and local file to receive penalty protection. The new instructions provide details regarding the structure and content of the master file and local file that must be prepared. The content aligns with the guidance provided by the OECD in Chapter V of its Transfer Pricing Guidelines.
A provision is provided that allows small- and medium-sized enterprises, which are defined as having revenues not exceeding €50 million, to only have to update certain sections of the documentation once every three years, with certain restrictions.
Another provision allows that the documentation only be prepared for select intercompany transactions, which provides taxpayers the ability to decide which transactions to analyze based on materiality, potential risk, or other factors. In such cases, only the transactions covered by the documentation will be protected from penalties.
The approach taken by Italy differs from that of most countries, as Italy does not provide for revenue or transaction value thresholds to complete either the master file or the local file. Most countries have a €750 million revenue threshold for completion of the master file. The lack of such a threshold signals an aggressive approach taken by the Italian tax authority in regard to transfer pricing documentation.
Actions To Take Now
To receive penalty protection, the master file and local file must be completed by the time the taxpayer’s income tax return is submitted, which is generally by September 30 or November 30.
It is important that the transfer pricing approach taken in Italy is also in compliance with all other jurisdictions involved. For Italian companies with operations in the US, or US companies with operations in Italy, all intercompany dealings involving operations in both countries must comply with the transfer pricing rules in both Italy and the US. Our US team can help navigate these issues with the help of our foreign colleagues in Italy and any other relevant jurisdictions.