Italy has introduced a number of transfer pricing-related changes within its Finance Act 2014 (Law No 147/2013). These changes will have an effect on both administrative procedures and fundamental transfer pricing concepts.
Article 1, Paragraph 281 clarifies that transfer pricing adjustments have a bearing on regional corporation taxes (IRAP). This clarification has been given retroactive effect for every financial year beginning on January 1, 2008 or later. However, Paragraphs 282 and 283 specify that penalties should not be due on the additional amount of IRAP due for tax years ending on December 31, 2012 or earlier. Special rules apply for taxpayers whose financial year does not match the calendar year. The transfer pricing penalty waiver does not apply to deficiencies notified prior to January 1, 2014.
This development is likely to be of particular importance for Mutual Agreement Procedures (MAPs). With this clarification, Italian taxpayers may now claim IRAP tax relief under MAP if they have been subject to a transfer pricing adjustment in a foreign country. Italy has also introduced other changes of particular relevance to the digital economy, which are currently being discussed by the OECD as part of the action plan on base erosion and profit shifting (BEPS). The Finance Act 2014 now expressly excludes the cost plus method for online advertising services (including any auxiliary services), unless an APA says otherwise (Article 1, Paragraph 177). Under Paragraph 177 of Article 1, Italian entities involved in online advertising and related activities for a foreign related entity must use a profit level indicator (PLI) that is not related to the costs incurred.
Decree Law No 145/2013 has extended the scope of APAs to the issue of permanent establishments (PEs). From now on, taxpayers will be able to obtain advance rulings as to whether they have a PE in Italy. In order to reduce the competent authority’s backlog, their duration is also extended from three to five years.