The International Standard Ruling: cooperation between taxpayers and tax administration in Italy

The International Standard Ruling:

cooperation between taxpayers and tax administration in Italy

1. What is the International Standard Ruling?

The International Standard Ruling is part of the tax compliance policy which aims at improving cooperation and dialogue between taxpayers and the tax administration in Italy, providing legal certainty to both of the parties, preventing legal disputes and reducing the risk of international double taxation. This procedure came into force in 2004, but actually took effect only in February 2005 after the favorable advice of the European Commission. It is addressed to “enterprises with international activity” which intend to agree in advance with the Italian tax administration regarding their transnational intra-group transactions.
The areas covered by the advance agreement procedure concern:
1. the correct transfer pricing methodology applicable to the transactions carried out with related parties,
2. the tax treatment provided for by law, including tax treaties, in respect of dividends, interest, royalties or other income paid to or received from nonresident persons in specific cases,
3. the application of the provisions of the law, including tax treaties, to specific cases related with the attribution of profits or losses to permanent establishments in Italy of non-resident enterprises as well as to permanent establishments abroad of resident enterprises.
The access to the international standard ruling procedure occurs on a voluntary basis and, unlike other countries, is not subject to the payment of an accession fee. The application for an international standard ruling, as provided for by article 8, paragraph 5, of Decree Law no. 269 of 2003, must be sent by registered letter with return receipt on unstamped paper in an unwrapped envelope to the International Ruling Office – International Division – Central Directorate for Tax Assessment of the Revenue Agency, which is organized into two branches based in Rome and Milan. The features of the international standard ruling are those of an Advance Price Agreement (APA) between the Revenue Agency and the tax payer, an institution become quite popular among OECD countries.

2. Requirements and content of the application

The requirements to access the procedure are both subjective and objective.
Subjective requirements pertain to being defined as an “enterprise with international activity”, for both residents and nonresident subjects.
For resident subjects, the status of “enterprise with international activity” is recognized to those enterprises which alternately or jointly:
a) are directly or indirectly controlled by foreign nonresident enterprises, or control directly or indirectly foreign nonresident enterprises,
b) either hold stakes in the assets, funds, capital of nonresident persons or have stakes in their assets, funds, capital which are held by non-resident persons;
c) have paid out to or received from non-resident persons dividends, interest or royalties.
For nonresident subjects, the status of “enterprise with international activity” is recognized to nonresident enterprises which carry on business in Italy through a permanent establishment that qualifies as such according to the relevant provisions of the Italian Tax Code.
Objective requirements mainly pertain to the content and form of the application. The application must include, on pain of inadmissibility, information such as the name of the enterprise, its registered office or fiscal domicile, the taxpayer identification number and VAT registration and, if the case, the national address for the procedure, different from the enterprise, to whom communications relating to the procedure itself are to be sent. Applications by resident enterprises must be accompanied by documents giving evidence of possession of the subjective requirements, while applications by nonresidents must indicate the presence of a permanent establishment in Italy in order to be eligible for the procedure.
On pain of inadmissibility, the application must also clearly indicate the object of the ruling.
With regard to transfer prices, the application must specify the goods and/or services which are the object of the cross border transactions between related parties, as well as the nonresident companies with which the relevant transactions are carried out. Finally, the application must illustrate the criteria and methods used to determine the arm’s length value of the relevant transactions and the reasons why they are considered consistent with the law.
As a general rule, transactions may concern: the transfer of tangible and intangible property, the provision of services as well as cost sharing agreements.
In addition, the international standard ruling may be focused on the tax treatment applicable, under the law and the tax treaties, to cross border flows of interest, dividends, royalties and other income in specific cases.
In such cases, the application for accessing the international ruling procedure must indicate:
a) the details of the case in relation to which the application is being filed;
b) the solution devised by the taxpayer in terms of application of the relevant legislation and the reasons why the solution is deemed to be compliant with the tax rules;
c) any nonresident subjects beneficiaries or issuers of dividends, interest, royalties or other income.
Finally, the application for an international standard ruling may also concern the attribution of profits or losses to the permanent establishment abroad of a resident enterprise, or to the permanent establishment in Italy of a nonresident enterprise. In this case, the application must include the identification of the permanent establishment in Italy or abroad.

3. Procedure and deadlines

The International Ruling Office has thirty days from the receipt of the application to evaluate the existence of the eligibility requirements. If so, the Office schedules a meeting with the taxpayer in order to define the terms and developments of the procedure. In case, the Office can request additional information to the taxpayer.
If, on the other hand, any of the essential requirements are lacking, the Office declares the inadmissibility of the application. In any case, the application cannot be declared inadmissible if further examination can be carried out in order to ascertain that the applicant meets the conditions required.
During this examination the term of thirty days is suspended.
The procedure is structured in several informal “pre-filing” meetings with the taxpayer, during which further documentation can be requested by the Office. During this preliminary procedure, the Office and the taxpayer may agree that the tax officers dealing with the procedure pay one or more visits to the premises where business is carried on, in order to obtain direct knowledge of the circumstances represented in the application.
The procedure must be completed within 180 days from the date of filing the application. Nevertheless, as this term is merely formal, according to circumstances, the parties may agree to extend the procedure. The procedure is completed by signing an agreement illustrating the criteria and methods for calculating the normal value of the transactions described in the application, or, in other cases, the criteria for application of the relevant legislation.
The international standard ruling agreement, which is binding for both parties, remains in force for five years (three up to FY2013) starting from the tax period in which it is signed.
During this period the Revenue Agency, and more specifically the International Ruling Office, verifies that the terms of the agreement are complied with and also ascertains whether any change has occurred to the de facto or de jure conditions at the base of the agreement. This activity is carried out also by means of one or more agreed visits to the premises where the enterprise carries on business.
At the end of the five-year period of validity, and at least ninety days before it expires, the taxpayer may submit an application for renewal. A final clarification concerns the case in which a change in the de facto or de jure conditions is ascertained: in such a case it is possible to proceed by modifying the existing agreement.

 

4. Statistics

The Revenue Agency (“Agenzia delle Entrate”) publishes annually some descriptive statistics on the ruling application received and under consideration. The last report (March 2013) highlights how an increasing number of firms is turning to the International Ruling as an instrument of advance tax planning.
Some interesting insights concern the applications related to transfer pricing agreements. These types of application represent the majority of all the applications and have been increasing in the period 2009 – 2012. The following table summarizes the application by type of activity concerned in the case of transfer pricing, and the other categories of operations concerned as well:

Table 1. Pre-filing, categories of operations

In the report, it is also underlined how the Transactional Net Margin Method for transfer pricing purposes is applied in the majority of cases.
When looking at the total of the applications presented, it can be noted that out of 135 applications presented in 2004 -2012, 110 were accepted for consideration and either concluded or under way:

Table 2.

	2004        2005	2006	2007	2008	2009	2010	2011	2012	Total
Applications presented	18	10	6	6	12	16	29	38	135
Procedures concluded	2	2	4	5	6	7	11	19	56
Procedures under way	14	20	16	11	15	21	37	54
Applications rejected for inadmissibility	1	2	2	2	2	0	1	2	12
Procedures ended by withdrawal of one of the parties	1	0	4	3	1	3	1	0	13

Finally, the elaboration and conclusion of the ruling application in the period 2004 -2012 took about 16 months, while in the last three years the procedure became relatively faster, decreasing to less than 15 months.

5. The latest innovations introduced

International standard ruling extended to the preliminary assessment of the existence of a permanent establishment in the territory of the Italian State (Article 167 of Tuir) and extension from three to five fiscal years in terms of endurance of the ruling agreement, whose jurisdiction is now centralized in a single office (the International Ruling Office).
These are the two most interesting news introduced by article 7 of Decree law called “Destinazione Italia”, dated December 2013, that provide for a new plan of the Italian Government aimed at drawing foreign capital able to sustain the national economy, encouraging the formulation of tax agreements between firms and financial administration.
The aforementioned article of the Decree law extends the international ruling institution, modifying some aspects of the legislation.
The plan introduced by the Government also provides the institution in the Revenue Agency of a special desk to encourage the foreign investments in Italy. The service provided by the assistance centre consists in information and support to the foreign firms’ activities. The desk will aim to collect international ruling instances also for any dispute concerning the interpretation of the rules.
Currently, however, the only tasks of the assistance centre concern the advance resolution of potential tax disputes and the addressing of foreign investors towards cooperation instruments such as the same ruling. The activity provided by the desk, however, is not provided exclusively to foreign entities, but also to domestic firms willing to invest capital over a certain thresold.
As previously announced, thanks to the new provisions, the international standard ruling agreement, which is renewable, will remain into force for five years from the tax period in which it is signed.

Source: Agenzia delle Entrate