The Italian Ministry of Economy and Finance launched a public consultation on the implementation measures associated with the application of domestic transfer pricing provisions on 21 February 2018.
The main purpose of the Draft Decree (supported by the Italian translation of the OECD TPG) is to address certain issues that may give rise to controversial interpretations during a tax audit. The issues addressed include:
- Definition of ownership required to be considered “associated enterprises” (i.e., more than 50% ownership)
- Guidance to define comparability based on the five comparability criteria provided by the OECD TPG
- Criteria to identify the transfer pricing methods available and selection of the most appropriate method
- The possibility to analyze different transactions jointly (e.g., portfolio approach)
- Definition of the arm’s-length range
The main purpose of the Draft Paper is to eliminate the double taxation arising from a foreign transfer pricing adjustment provided that this is final in its quantification and consistent with the arm’s-length principle.
The Draft Decree provides a number of explanations but also does not address a number of issues for which the public consultation is expected to generate further clarifications. These can be summarized as follows:
- The definition of the term “associated enterprises” has been aligned with the definition included in the OECD Model Tax Convention clarifying those companies under the control of the same individual would be considered as associated companies. Therefore, both juridical and de facto control should be considered.
- The “reduced hierarchy” of methods provided by OECD TPG is explicitly mentioned and is connected to the provision of Art. 4, Par. 6 of the Draft Decree, indicating that the tax administration is bound to respect the application of the transfer pricing method selected by the taxpayer, provided that all the relevant conditions underlying its choice are met.
The arm’s-length range should be considered in principle as a valid reference for establishing the arm’s-length conditions. No practical indication is provided, however, on which point of the range should be considered in the case of adjustments. Accordingly, further guidance is required.
