Italy: New rules on TP documentation

As discussed in our previous Newsletter, on 23 November 2020 the Italian Revenue Agency published a new Instruction (no. 360494, the “Instruction”) which materially changed the 2010 Italian Commissioner Decision on TP documentation. Starting from FY 2020, in order to benefit from the so-called “penalty protection”, MNE must comply with the requirements of the Instruction that replaces the provision introduced in 2010.

On 26 November 2021, Italian Revenue Agency published Circular Letter no. 15/E (the “Circular”) providing clarifications on the TP documentation rules contained in the Instruction. Below we discuss some of the main new rules in light of the above Circular.

Structure and content of appropriate documentation

From FY 2020, the Master File is a mandatory document for all Italian taxpayers that want to access the elective Italian TP penalty protection regime (including subsidiaries of foreign groups, for which, under the previous Decision, no Master File was required in the case of non-subholding companies). The Circular confirms the possibility for the Italian taxpayer to rely on the group MF, also written in English, and specifies that in the case where the document presents a different structure or it does not provide the set of information required by the Instruction, the Italian taxpayer must integrate the MF with a structure reconciliation document and/or one or more annexes providing the missing information.

The structure and content of the TP documentation must strictly adhere to what is prescribed by the Instruction, except for partial amendments and integrations not altering the information required (in case of doubts, reference should be made to the OECD Guidelines).

The Circular confirmed that all intercompany transactions need to be disclosed and reconciled with the data to be included in the annual ITR, but the taxpayer can limit the transactions to be fully documented in the TP documentation as an option. In such cases, the penalty protection will be granted exclusively with reference to the operations described and for which the information provided is considered compliant with the Instructions.

Clarifications have been provided with reference to the term “payment” (in relation to the amount of the intercompany transactions). Under the Circular, all the transactions must be evaluated on the basis of the amount accrued for accounting purposes.

Relevant transactions

The Circular clarifies that a transaction or a homogeneous category of transactions is considered as being not material when it does not exceed the 5% of the total amount of intercompany transactions indicated in the ITR.

However, the taxpayer must describe these transactions, even if not material, to the benefit of the penalty protection regime. In our opinion, we do not think the difference between material and not material transactions is particularly evident. It should still be specified by the Italian Revenue Agency whether a simple description will be sufficient or a complete functional and economic analysis is still required.

Timing

The Master File and the Local File must be signed by the taxpayer’s legal representative or their delegate by electronic signature with a time stamp to be appended by the date of submission of the tax declaration (recently extended to 11 months from the fiscal year-end).

The communication of the availability of the TP documentation must be made in the annual income tax return within the abovementioned ordinary deadline. The signature and time stamp can also be affixed to the TP documentation by the date of submission of a late, substitute or supplementary declaration but no later than 90 days from the ordinary deadline.

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