Italy: Corresponding adjustments made easier

Eliminating economic double taxation deriving from transfer pricing adjustments on transactions with Italy may become easier in the future thanks to recent statutory and practice developments.

Italy has recently introduced new rules concerning dispute resolution and corresponding adjustments. New Article 31(4) of Presidential Decree 600/1973 now also allows the Revenue Agency – upon taxpayer request – to make unilateral downward adjustments, where a foreign tax authority has made a primary adjustment under the arm’s-length principle.

Under the old legislation, downward adjustments were admissible “only to the extent necessary for the application of the agreements concluded with the competent authorities of foreign countries pursuant to mutual agreement procedures foreseen by international conventions against double taxation of income”. The provision dated back to 1988 and was adopted in order to adapt the Italian transfer pricing rules to the (former) bilateral treaty with the USA, the first to include a corresponding adjustment clause.

The common feature of the new and the old rules is non-recognition of compensatory tax adjustments: downward adjustments cannot thus be made by the taxpayer in the tax return (with no accounting records) where a transaction has been adjusted for tax purposes in any other country, either by the other enterprise or by its Tax Authority.

Decision 108954/2018, issued on 30 May 2018 by the Director of the Revenue Agency, provides further details on the new unilateral corresponding adjustments. Activation of the procedure requires the primary adjustment in the foreign country to be final (or at a final stage), and compliant with the arm’s-length principle. The foreign country must also have entered into a treaty with Italy which includes the adequate exchange of information.

The application does not prevent access to other dispute resolution procedures (i.e. a mutual agreement procedure, or the procedures under the Arbitration Convention or the EU Tax Dispute Resolution Directive), the activation of which may be requested using the same form.

The request must include all information on the case, and should attach a courtesy translation in Italian (or English) of the foreign tax assessment. A decision on admissibility is made within 30 days; the procedure must be completed within 180 days, with approval or refusal of the unilateral corresponding adjustment. The Revenue Agency may invite the taxpayer to discuss the issues examined, or require additional documentation when examining such a matter. After each meeting, a copy of the relevant minutes will be provided.

Under the new rules, downward adjustments are also permitted following tax inspections into international cooperation activities, the outcomes of which are shared by the participating countries. An explicit reference to the Arbitration Convention is also included.

Overall, with the introduction of Article 31(4) to Presidential Decree 600/1973, Italy appears to have aligned itself with the international standards set out in BEPS Action 14.

The new rules are expected to reduce the time needed to resolve mutual agreement procedures and lower the number of unresolved cases, as part of a development that has seen significant improvements in Italian cases. The most recent Mutual Agreement Procedure Statistics of the OECD indicate that 48 cases involving Italy were concluded in 2017. The standstill of the past has been overcome, and dispute resolution procedures can now be considered supplementary to domestic court litigation. This brings some changes to the framework of taxpayers’ strategy for meeting international tax challenges.