Introduction
The new principles introduced by BEPS Actions 8 to 10 and the 2017 OECD Transfer Pricing Guidelines were reflected in Italy through Decree-Law 50/2017 amendments to Article 110 (7) of the ICT. The new Article 110 (7) includes a specific reference to the arm’s-length principle and provisions issued by the Ministry of Finance on May 14, 2018. The main points of the ministerial decree concerning transfer pricing guidelines are summarized below.
Definitions
For the purposes of the new provision, “associated enterprise” means controlled companies with a majority share (i.e. higher than 50%) in capital, voting rights or profits; or a controlling influence based on contractual obligations or shareholding interests. “Controlled transactions” are outlined via written contracts (where they exist) and the parties’ behavior.
Comparability
The notion of comparability reflects the economically relevant characteristics or comparability factors set out in the new Chapter 1 of the 2017 OECD Guidelines. An independent transaction is considered comparable to a controlled transaction when there are no material differences that significantly affect the profit level indicator that can be used in application of the most appropriate transfer pricing method. In the case of differences, comparability can be achieved by eliminating or materially reducing the differences through proper adjustments. In this regard, comparability adjustments (e.g. working capital adjustments) appear to be legitimate.
Methods
The ministerial decree of May 14, 2018 considers the five transfer pricing methods set out in the OECD Guidelines as consistent with the arm’s length principle and recommends the following selection procedure. Where the comparable uncontrolled price (CUP) method is deemed to be applied in as equally reliable a manner as another method, the former should be preferred; and when both a traditional and a transactional method are deemed to have been applied in an equal and reliable manner, the former should be selected. The taxpayer also has the option to apply a further method (the “sixth method”), demonstrating that none of the five OECD methods can be reliably applied and that it is consistent with results that would have been established among independent enterprises.
Portfolio approach
Where two or more transactions are so strictly connected that a standalone evaluation would not be reliable, the “portfolio approach” has to be applied to perform the comparability analysis.
Arm’s-length range
One of the most relevant provisions of the decree in question is article 6, where the whole range of results from the profit level indicator selected, as mentioned above, has to be considered to comply with the arm’s length principle. Thus, the entire range (and not only the median value) can be applied, but only in the case of perfect comparability between controlled and uncontrolled transactions. This interpretation of this condition needs further clarification from the competent authority.
Low-value adding services
In accordance with the OECD Guidelines, the ministerial decree introduces a simplified approach to defining arm’s-length remuneration for low-value adding services, which is a 5% flat mark-up applied to direct and indirect costs associated with such services, if they meet the conditions set in BEPS Action 8–10.
Transfer pricing package
The Italian Revenue Agency is working on the provisions regarding transfer pricing documentation, updating them to be consistent with the new international best practices. The new provision is expected to change the requirements for proper documentation, replacing the rules established in 2010 and introducing a more substantial assessment of local and master files. Further provisions will be issued by the Revenue Agency to reflect the 2017 OECD guidelines as periodically updated.
