The Revenue Agency has published the draft Circular, open for public consultation until 12 October, on the documentation enabling the assessment of the compliance with the arm's length principle of transfer prices applied by multinationals

On September 20, the Italian Revenue Agency launched a public consultation on the draft of the Circular letter which provides clarifications regarding the preparation of the transfer pricing documentation suitable for assessing the arm’s length nature of the transfer prices applied in cross-border transactions. Interested operators will be able to send their proposals and comments by 12 October next.

In principle, it is worth underlining that the Circular is still in draft form, and therefore could probably be subject to subsequent clarifications or revisions. However, it is reasonable to expect that the proposed interpretations will be confirmed in the final version.

The Circular, relating to the transfer pricing rules in fulfilment to the “penalty protection regime” foreseen by art. 1, par. 6 and art. 2 par. 4-ter, of Legislative Decree 471/1997 contains, among other matters, clarifications regarding the structure of the documentation, the terms of delivery and communication of the same, indications about the content of Masterfile and Local File, the conditions of effectiveness, permanent establishments and low value-adding services, with the provision of certain new elements compared with the past.

Following the provision of the Director of the Revenue Agency no. 360494 of 23 November 2020, both Masterfile and Local File must be signed by the legal representative (or his/her delegate) of the taxpayer by means of electronic signature with time stamp within the date when the corporate income tax return is electronically filed, giving notice of its possession by ticking the box in the appropriate field provided in the tax return.

The first significant issue of the Circular concerns the full applicability of the options for the “penalty protection regime”, when set out in subsequent submission of a supplementary tax return (in Italian: “dichiarazione tardiva”) within 90 days of the deadline set for the submission of the tax return. In this case the documentation must be signed by the date of submission of the “dichiarazione tardiva” thus giving taxpayers a further opportunity to complete and sign it.

In addition, another significant clarification regards the possibility of benefiting from the discipline of the so-called “remissione in bonis” as per art. 2 par. 1 of Legislative Decree 16/2012, which allows, upon the occurrence of certain rules and regulations, to exercise even belatedly the communication of the possession of the documentation, consistently with what is already provided for in the matter of Patent box.

With regards to the section dedicated to the purpose and structure of the administrative provision, the Circular, in mentioning that with reference to both the Masterfile and the Local File, the structure envisaged by the administrative provision must be understood as not modifiable, without prejudice to any partial changes, makes an explicit reference to the OECD Guidelines, providing that "[...] taxpayers, in case of doubts about the contents to be indicated in the two documents (Masterfile and Local File), may refer to the aforementioned Guidelines".

Also of interest are the clarifications relating to the preparation of the Masterfile, a subject for which the draft provides for the possibility of using the document prepared by the non-resident parent company, supplemented where appropriate by a specific "local appendix", which integrates the Group Masterfile with any specific information required by Italian law.

The Circular reiterates some of the more significant changes introduced by the administrative provision, including the possibility for the taxpayer to present the appropriate documentation with regard to only part of the transactions carried out. In this case, the exemption from sanctions will be applied with exclusive regard to said transactions; there is also a reference to the documentation necessary to apply the cd. "Simplified approach", introduced by art. 7 of the D.M. 14 May 2018, for low added value services.

Last but not least, it should be mentioned that among the hypotheses of omissions or partial inaccuracies that are not likely to compromise the analysis of the tax authorities, the omitted documentation of marginal operations compared to the total number of intercompany operations can also be considered included, as well as the partial omission of the attachments, indicated in chapter 4 of the Local File, where they are not prejudicial to the application of the exemption from sanctions, without prejudice to the request for additional or supplementary documentation.

It is to be hoped that, with the final version of the Circular, the Revenue Agency will confirm what has been set forth in the draft, not excluding possible further clarifications, also in light of the observations that will be collected in this advance stage of the draft Circular.

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