Italy: DAC6 Reporting - Year-End TP Adjustment

The Italian Tax Agency recently issued a ruling (No. 78/E dated December 31, 2021) analyz­ing the application of the DAC6 legislation with respect to TP adjustments.

In particular, Italian taxpayers have requested clarifications regarding year-end TP adjust­ments and if they should be interpreted as cross-border agreements (under hallmarks C1, points b.1 and b.2).

Based on EU Directive 2018/822 (“DAC6 Directive”) as enacted in the Italian domestic law with decree no. 100/2020, such cross-border arrangements are reportable if at least one of the following conditions is met, i.e. the entity benefitting from the TP adjustment is a tax resident:

• i. in a jurisdiction which does not impose any corporate income tax or imposes a corpo­rate income tax at the rate of zero or almost zero (less than 1%);
• ii. in a non-cooperative jurisdiction.
   

According to the taxpayers ruling request, since TP adjustments have the specific purpose of enabling subsidiaries to achieve a marginality in line with the arm’s length principle, they should not qualify as “deductible cross-border payments” under the DAC6 framework and, therefore, they should not be relevant even if they are executed in favour of subsidiaries located in jurisdictions with characteristics listed in hallmark C.

The Italian Tax Agency, in the ruling, confirmed that TP policies are legally binding arrange­ments, even if not formalized, between associated entities, and as such they fall within the notion of “agreements” included in the DAC6 Italian Decree and they shall be reported should the above conditions be met.

The Italian Tax Agency also focused on the timing of the reporting obligations. The taxpayer shall report within 30 days after the cross-border mechanism takes place (performs the first act with legal effect) or the financial transaction occurs. For communications made after the initial one, the 30-day period runs from the date of approval of the financial statements of the parent company that has issued the TP adjustment.

Unfortunately, the ruling adds further obligations, requesting taxpayers (and intermediar­ies) to report pure business-driven transactions without any abusive purpose.

The Circular of the Italian Revenue Agency No. 2 of February 10, 2021, that provided clarifi­cations on the application DAC6, always requires a comparison of the tax resulting from the mechanism with the effects that would occur in its absence.

It is not clear how the tax result can be determined in the absence of the “TP” mechanism. In addition, the resolution does not explain the way in which the main benefit test is to be verified in the case at hand. Considering that the TP policy must be in line with the arm’s length principle, the year-end adjustments would aim at implementing this principle, as there is no purpose in obtaining a tax savings.

The Tax Agency also focused on the timing of the reporting obligations. The first disclosure must be made within 30 days after the cross-border mechanism takes place or the financial transaction occurs. For other communications, the 30-day period runs from the date of approval of the financial statements of the parent company issuing the adjustment.

Nevertheless, resolution 78/E seems to formally confirm for income tax purposes the common practice adopted by Italian taxpayers, who should be allowed to carry out year-end adjustments to comply with the arm’s length principle, aligning with OECD guidelines.

It should be noted that in the last update (December 2021) of the OECD Italian Transfer Pricing Country Profile, the Italian Tax Agency, to the question “does your jurisdiction allow/ require taxpayers to make year-end adjustments?”, answered with a mere “no” without giving further indications. This information requires revision.

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