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Transfer Pricing provisions generally require international transactions between related parties to be carried out at arm’s length. And as transfer pricing continues to be an area of focus with respect to the multinational groups, there has been an increased interest shown by the Italian ministry of Finance. The intense scrutiny implies significant risks for the unwary and unprepared, especially in intercompany transfer pricing where every transaction needs to be analyzed under a different set of facts and circumstances.

In an international business expansion compliance with the legal precedents and regulations is a complicated and expensive task. Under a new decree, companies in Italy can avoid transfer pricing adjustment penalties if they are able to submit adequate transfer pricing documentation to the local tax authorities during an audit.

Transfer Pricing Penalties
As Italy does not have a specific transfer pricing penalty regime, it is the general tax penalty regime that is applied. Over the last two years, penalties were applied in a minimum of 50% of cases where transfer pricing adjustments were issued. Where penalties were imposed, they ranged from a minimum of 100% up to 200% of the transfer pricing adjustment and it is anticipated that the assessment of penalties will remain the same in the next two years.

The law decree 78

The law decree 78 has been converted into law by the Italian Parliament. In September 2010, the tax authorities issued the documentation guidelines. The law decree 78 states that:

Civil penalties can be avoided on any tax adjustments required by the Italian tax equalization expat authorities where the intercompany transactions are deemed not to be at arm’s length if both the conditions below are met:

1. The required transfer pricing documentation is provided during a tax audit, supporting the arms length nature of the transactions.
2. Within a period of time yet to be notified by the Italian revenue authorities, the taxpayer informs the tax authorities about the existence of the transfer pricing documentation.

The Implications of Transfer Pricing (Law Decree 78)

1. The effect of having transfer pricing documentation in relation to criminal penalties that can be assessed if certain tax assessment thresholds are reached is not yet clear.
2. Once the new law is implemented, companies that do not notify local tax authorities of the existence of transfer pricing documentation may face greater risk of tax audits.
3. The introduction of a specific deadline to notify tax authorities of available documentation for past years means multinationals may need to review promptly their current transfer pricing policies regarding Italy to catch any potential compliance issues with the new requirements.
4. Even though it is not mandatory for companies to follow the documentation requirements, it is critical for taxpayers to prepare documentation supporting the arm’s length nature of their intercompany transactions to avoid civil penalties from tax audits.