ITALY Law and Practice Contributed by: Marco Valdonio and Gabriella Cappelleri, Maisto e Associati
1. Rules Governing Transfer Pricing 1.1 Statutes and Regulations Transfer pricing is governed by Article 110 (7) of Presi - dential Decree, 22 December 1986, No 917 (the “Con - solidated Law on Income Taxes”, also referred to as the Income Tax Code or ITC), which provides that the prices for intercompany cross-border transactions have to be determined on the basis of the arm’s length principle (ie, based on the conditions and prices that would have been agreed between independent parties acting on an arm’s length basis and in comparable circumstances) to the extent that this gives rise to an increase in taxable income. Special rules are provided for downward adjustments. Pursuant to Article 31-quater of Presidential Decree 22 December 1973, No 600 (“Presidential Decree No 600/1973”), and related implementing regulations issued by the Italian Revenue Agency (IRA) on 30 May 2018, a downward adjustment is allowed under the following circumstances: • as a result of the implementation of an agreement reached by competent authorities pursuant to a double tax treaty (DTT), to the convention on the elimination of double taxation in connection with the adjustments of profits of associated enterprises resident in a member state of the EU (90/436/ EEC) and to Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mecha - nisms in the EU; • as a result of a joint audit carried out as part of international administrative co-operation; and • upon request of the taxpayer, following a final upward adjustment, complying with the arm’s length principle carried out by a state with which a DTT is in force and that allows an effective exchange of information. General guidelines for the correct application of the arm’s length principle set out by Article 110 (7) of the ITC were issued in the Decree of the Ministry of Economy and Finance, on 14 May 2018 (the “Ministe - rial Decree”), aligning Italian regulations with current international best practices.
1.2 Current Regime and Recent Changes Following the 1971 tax reform, transfer pricing was regulated separately by a specific provision (Articles 53, last paragraph, letter (b) and 56 (2) of Presiden - tial Decree, 29 September 1973, No 597 (“Decree No 597/1973”)) for expenses and revenues. The IRA issued comprehensive guidelines on trans - fer pricing for the first time in 1980 with Circular No 32/9/2267 of 22 September 1980 (the “1980 Circular”). The 1980 Circular was largely based on the OECD report, “Transfer Pricing and Multinationals” of 1979, and has been the sole source for interpreting Italian transfer pricing rules for a very long time. At the end of 1980, the provisions contained in Arti - cles 53 and 56 of Decree No 597/1973 were repealed and replaced by Article 75, last paragraph, of Presi - dential Decree, 30 December 1980, No 897. Further guidelines were issued by the IRA with Circular No 42 of 12 December 1981 (the “1981 Circular”), dealing with the concept of control. Subsequently, Article 75 was transposed into Article 110 (7) of the ITC, which provided that the price for intercompany cross-border transactions had to be determined on the basis of the “normal” value of goods and services, as defined by Article 9 (3) of the ITC, which reads as follows: “Normal value [...] means the price or considera - tion applied on average for goods or services of the same kind or similar, at arm’s length conditions and at the same market level, at the time and place where goods and services are purchased or rendered or, in the absence of this, at the nearest time and place. For the determination of normal value, reference is made as far as possible to price lists or tariffs of the person rendering the goods or services or, in the absence of this, to official lists, considering usual discounts. [...]”. Alignment With OECD Transfer Pricing Guidelines In 2017, in order to better align the Italian transfer pricing regulations with international standards, Article 110 (7) was amended by Law Decree, 24 April 2017, No 50 converted, with amendments, by Law No 96 of 21 June 2017: the reference to the “normal” value concept was replaced by the reference to the arm’s length principle. Therefore, the new Article 110 (7) of the ITC explicitly incorporates the arm’s length prin -
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