Transfer pricing documentation implementation: more and more benefits

In 2015 new Italian legislation on transfer pricing and international taxation has heavily increased the importance that, in tax terms, proper transfer pricing documentation represents for companies with international activity (multinationals or not).

As you might know, since 2010  preparing, in fact, a specific supporting documentation the taxpayer could benefit from the non application of administrative penalties (in synthesis from 100% to 200% of the additional tax assessed in Italy) in case of disputes and transfer pricing adjustment.

Since 2015 the following benefits will add to the penalty protection:

• Patent Box regime: possibility to opt for a lighter regime that allows to benefit from an exemption (respectively 30% in 2015, 40% in 2016 and 50% in 2017 and subsequent years) of income from  intangible assets determined using the transfer pricing methods (with reference to the trademark or other marketing intangibles, to qualify for this exemption may be necessary to present the option  by December 31, 2015 or earlier, as such intangibles may be excluded from the benefit as a result of a subsequent change in the law)
• Customs duties: the taxable value for customs duties on imports shall refer to the transfer pricing rules (i.e. Countryfile)
• Deductibility of costs arising from transactions with countries or jurisdictions in Black List to the extent they conform to the arms’ length principle (or to a greater extent, but only if it is shown the actual economic interest and the effective execution of transactions)

Below here it is a brief description of the main changes mentioned above.

1 Patent Box opportunity

The financial Law of 2015, approved by the Italian parliament on December 22, 2014, has introduced an optional system that guarantees a substantial exemption from corporate income tax (IRES, generally applied to 27.5%) and local tax (IRAP, generally levied at 3.9%) on income from intangible assets (patents, know-how and other intellectual property rights), provided that the companies benefiting directly or indirectly carry out research and development activity. The exemption shall be equal to 30% for 2015, 40% for 2016 and 50% from 2017 onwards. The exemption could apply on the income from licensing or from the direct exploitation of intangibles. Transfer pricing methods should be used to determine the income from the intangible assets.

The corresponding decree was signed on last July 30 and duly registered on September 23, 2015 by Corte dei Conti.

This system may be applied from the first year following the year in progress at 31 December 2014 (for companies that close the accounts at 31 December 2014, the first year of applicability would be starting on 1 January 2015) and is characterized by a length five years, which means that the option of joining the scheme can not be revoked for a period of five fiscal years. The option is renewable.

To access the Patent Box taxpayers will have to exercise an option. This option can be exercised electronically (more details will be provided in the Regulation on the way) in the first two years, while in the following years will be exercised in the relating tax return. With reference to the trademark or other marketing intangibles, to qualify for this exemption may be necessary to present the option by December 31, 2015 or earlier, as such intangibles may be excluded from the benefit as a result of a subsequent change in the law.

2 Validity of the analysis and documentation on transfer pricing also for Customs

The validity of the transfer pricing policy for customs purposes has been definitively established by the World Customs Organization (WCO).

For customs purposes, in fact, the taxable value of the goods is determined with reference to the price actually paid or payable for the imported goods. That price should not, however, be influenced by dependency relationships that exist between the parties of the transaction in case of the same belong to the same group.

For the purposes of direct taxes, this principle is of fundamental importance and led to the issuance of the regulations on transfer pricing.

However, the need to standardize the criteria for determining the value of the transaction both for the purpose of direct taxes and for those customs was actually the subject of a long debate, and the same Supreme Court (judgment no. 7713 of 2013) denied in the past the request for refunding of customs duties paid in excess by contributors due to the adjustments of the transfer price originally incurred.

In the debate had obviously been actively involved both the OECD and the World Customs Organization that in his commentary of 2010 had, however, already stressed the importance of TP documentation also for customs.

With the document “Guide to New WCO Customs Evaluation and transfer pricing” dated June 2015, the WCO has finally recognized definitively the validity of the documentation and analysis of transfer pricing also for customs. This approach in fact allows to permanently eliminate the possibility that the values for the purposes of direct taxation diverge from customs with reference to the same transaction, for example in cases where the transfer price of a certain transaction declared for custom duties purposes is subsequently amended because of the application of a specific transfer pricing policy.

Guidelines  to regulate the impact on the customs value of such adjustments have to be provided nowadays to make fully operational the new approach and to this end a joint interpretative document is expected to be released by the Revenues Agency and Customs Agency that will prevail over the opposite law jurisprudence occurred in the past on this issue and will finally place Italian practice aligned with other developed Countries such as Germany, Belgium, the Netherlands, Australia, USA, Canada and China.

3 Deductibility of the costs arising from transactions taking place with Countries or jurisdictions included in blacklist attached to the normal value and new criteria for identifying the blacklist Countries

Important news on the deductibility of business income of the costs arising from transactions with countries or jurisdictions included in a blacklist (“cost black list”) were introduced by the decree on internationalization finally approved by the Government and published in Official Gazette laying down measures for the growth and internationalization of companies.

In the same way, new criteria for identifying the blacklist Countries were introduced by the financial law (legge di stabilità) in 2015 in order to take into account international environment changes, characterized by greater cooperation between Countries to fight against tax avoidance and tax evasion.

Regarding the deductibility of blacklist costs, Article 110, Paragraph 10 of Presidential Decree 917/1986 has been amended as follows:

<< Expenses and other charges arising from transactions, which have had actual execution, taking place with resident firms or firms located in states or territories with privileged tax systems are allowed to be deducted within the threshold of its normal value, determined pursuant to Article 9. States or territories considered as privileged are identified by decree of the Minister of the Economy and Finance, in consideration of the absence of an adequate exchange of information. >>

Furthermore, the following words included in Paragraphs 11 of Article 110 have been eliminated:

<< foreign firms carrying out actual business activity, or that >>.

Under the previous version of Article 110 blacklist costs were deductible only if the Italian firm was able to demonstrate either that i) foreign firms were generally carrying out actual business activity, or that ii ) the transactions were incurred because of an authentic economic interest and that the same were actually executed. Accordingly, following the above mentioned amendments to the Paragraphs 10 and 11 of the article 110, blacklist costs will now be deductible within the limit of its  normal value (i.e. arm’s length value) of goods and services purchased.

The result of this regulatory change will be that the provisions relating to transfer pricing (Article 9, Paragraph 3 and Article 110, Paragraph 7 of Presidential Decree no. 917/1986) and, consequently, all the methods prescribed by the OECD guidelines regarding transfer pricing (e.g. the comparable uncontrolled price method, cost plus, resale price method, profit split method, the transactional net margin method) have to be used necessarily to calculate the normal value regardless, in principle, that the transaction occurs between independent parties or companies belonging to the same group.

The importance and validity of the transfer pricing analysis and the related documents of support is in fact extended to transactions between independent parties with reference to the costs from black listed Countries and is confirmed and emphasized with reference to intercompany transactions, considering the underlying impact on the deductibility of those costs.

Compliance with the arm’s length value may be deemed irrelevant only and exclusively whether the taxpayer proves the actual economic interest and the effective execution of the transactions, in which case it will still be able to deduct these costs over this threshold. The changes introduced by such recent legislation also provide for a separate indication in the income statement between expenses deductible pursuant to Paragraph 10 (ie within the limits of the normal value) and expenses pursuant to the first sentence of Paragraph 11, carried on operations that respond to an actual economic interest and at the same time have had concrete execution.

With reference to the criteria for identifying the blacklist Countries, the law of stability in 2015 has provided new criteria for its identification, changing the previous law (Ministerial Decree Jan. 23, 2012).

In particular, as confirmed by article 5 of the legislative decree on internationalization above mentioned, the only existing criteria to be included or not under the new country black list will be the existence of an adequate exchange of information, while the old one related to the appropriate level of taxation will be eliminated.

Will therefore be considered as blacklisted only those Countries Italy has not concluded an agreement with allowing an adequate exchange of information, while Countries and jurisdictions with which is in effect a bilateral or multilateral agreement allowing an adequate exchange of information on tax matters are excluded (i.e. are not considered as blacklisted).

Alert deadlines 2015: possession documentation and Patent Box option within December 31

• Expired the term for indicating the possession of a TP documentation in the tax return. How to fix it?

If your Company did not indicate the possession of a TP documentation in the last tax  return (whose terms for the filing are expired last September 30) please be aware that, as general rule, the taxpayer is given anyway the possibility to amend the tax returns under the terms below.

In more detail, since such amendment would be “in favour” of the Italian taxpayer (that will not be charged of penalties in case of higher income assessed) the deadline by which taxpayer would be entitled to amend tax return notifying  the possession of such TP documentation certainly might be accomplished  within 90 days from the e-filing deadline of the related original tax return (i.e 90 days from 30th September in case the closing  fiscal period coincides with the calendar year).

Anyway, based on the recent changes concerning the amendability of the tax return,  it is still under examination the possibility  granted to the taxpayer to amend “in favour” the  tax return within one year after the expiry of the deadline for submission of the same or,  if  the amendment would be “against” the taxpayer (e.g. higher income declared) – according to the new Italian budget law for 2015 – only notices of assessment or tax redetermination would prevent the possibility of amending tax return (“against” the latter). In such cases however  it is necessary  to consider that such amendments would open again the terms granted to the Agency Revenue to make tax verifications,  in fact  in the case of the filing of an amended tax return the aforesaid expiry terms shall run from the date of the amendment itself, but  this is not the case of the  aforesaid amendments within 90 days .

• On December 31, expires the Patent Box option for the year 2015

Stefano Franchini – Transfer Pricing Italy

Do not hesitate to contact us at the following email address info@transferpricingitaly.com for any further detail about the content of this article or information regarding our services.