New requirements for Italian transfer pricing documentation

Prepared by Transfer Pricing Team

On November 23, 2020, the long-awaited Act of the Director of the Revenue Agency no. 360494 (hereinafter the “New Act[1]“), as provided for in Article 8 of the Decree of the Minister of Economy and Finance of May 14, 2018 (“Decree“), was published[2]. The New Act  introduces significant and substantial changes to the rules related to the “appropriate”  transfer pricing documentation which shall be prepared in order to support that the arm’s length principle has been properly applied to intercompany transactions according to the Article 110(7) of the Italian Tax Code (“ITC”), and hence establishes the new requirements for accessing to the penalty protection regime (see  Article 1(6) and Article 2(4-ter) of Legislative Decree no. 471/1997).

The New Act fully replaces the previous one  (Act of the 29 September 2010), as part of the process of alignment of the domestic transfer pricing legislation to the OECD standards, and in particular to Chapter V of the OECD Guidelines as of July 2017 (as modified by Action 13 of the BEPS project on transfer pricing documentation[3]).

In particular, the New Act is applicable to intercompany transactions between Italian and foreign entities (Art. 110(7) of ITC), Italian permanent establishments of non-resident entities (Art. 152(3) of ITC) and foreign  permanent establishments of Italian entities which opted for the “branch exemption” regime (Art. 168-ter (10) of ITC). In addition, it could be argued that the New Act is applicable also in relation to the attribution of profits to non-exempted permanent establishments of resident entities (for the computation of the foreign tax credit provided for by Art. 165 of ITC).

Several changes have been introduced, which must be taken into account by MNE groups operating in Italy starting from the current fiscal year (i.e., fiscal year 2020, for taxpayers with the calendar year).

Firstly, it is key to note that, according to the New Act, the “appropriate” documentation for all Italian entities (i.e., resident enterprises, commercial entities, entrepreneurs and Italian permanent establishments of non-resident entities) is now composed by both Masterfile and Local File. It is worth mentioning that the Masterfile was previously required only to resident entities or Italian permanent establishments qualifying as holding or sub-holding.

The new set of transfer pricing documents is characterized by substantial format changes (with different chapters and paragraphs), as well as by a significant increase in data and information – previously not requested – to be included in the Masterfile (please refer to par. 2.2 of the New Act) and in the Local File (please refer to par. 2.3 of the New  Act), in order to meet the new requirements.

Particularly,  in the Masterfile, relevance is given to  the identification of the key value driver of the  group’s profitability, operating structure and value chain, by requiring a description of the production/distribution chain for the group’s five largest products and/or service offerings by turnover plus any other products and/or services amounting to more than 5% of group turnover. In addition, with reference to the group’s intangible assets – to which an entire chapter is dedicated – detailed information shall be provided (a full list of the group’s IPs, related intercompany agreements, significant transactions that took place between associated enterprises and related transfer pricing policies). Similar importance is given to intra-group financing; in particular the New Act requires the provision  of information related to the group’s financing structure, identification of any entity within the Group that provides central financing functions  and the description of the transfer pricing policies related to intra-group financial transactions. It is also required to attach group consolidated financial statements, as well as a list of any advance pricing agreement (APA) and other tax rulings[4] entered into with the tax authorities of the countries in which the Group operates. It should be noted that the New Act confirms the possibility to present one or, alternatively, more Masterfiles, to the extent the group operates different business activities under  different  transfer pricing policies, while it would seem excluded – consistently with the exclusion  of any specific requirement for holding and sub-holding companies – the possibility to prepare a Masterfile including only information related to the perimeter of the sub-group under the Italian entity.

With reference to the Local File,in addition to the general information already required by the previous Act and related to the Italian entity (history, recent evolution, reference market, operating structure), as well as to each intra-group transaction (indication of the nature of the transactions, amount, counterparties, comparability analysis and transfer pricing method applied), several changes are provided in the New Act, such as:

  • description of the reporting lines for the human resources employed in each local organizational unit, as well as of any reorganization or transfers (including intangible assets) that affected the local entity;
  • in relation to the criteria for selecting and applying the most appropriate method, the requirement for the taxpayer to include: (i) an explanation of the reasons for performing a multi-year analysis[5]; (ii) a description of any comparability adjustments applied (if any) for the purpose of greater reliability of results (by providing an evidence on the reasons underlying the choice); as well as (iii) indicate the main  “critical assumptions” adopted in the application of the transfer pricing method, with indications of the impacts resulting from any changes thereto;
  • further information on economic-financial data, since the Local File must be integrated with: (i) annual financial statements (including, where available, certification issued by independent auditors); (ii) information, reconciled with the financial statements, on the financial data used for the application of the transfer pricing method, as well as (iii) relevant financial data for comparable companies selected in the analysis (with specific indication of related sources);
  • the requirement to include a copy of the existing unilateral, bilateral or multilateral advanced pricing agreements (APAs) and of the cross-border rulings which the resident entity is not a party to, but that connected to the intra-group transactions described in the Local File..

For small and medium-sized enterprises (i.e. companies with a turnover or revenues not exceeding Euro 50 million), the simplified documentation has been confirmed. This is in line with the previous rules, so that SME are exempted from updating chapters related to intra-group transactions in the two following fiscal years, provided that the comparability analysis is based on publicly available sources and no significant changes between the fiscal years has occurred. However, it should be noted that the New Act excludes from the SME definition residents entities directly or indirectly controlled by an entity not qualifying as a SME. As a consequence the simplification will not be available to the resident entities and permanent establishments in Italy that are part of foreign MNE groups.

It is worth mentioning that the New Act introduces the possibility to select – upon taxpayer choice – the perimeter of intercompany transactions to be included in the Masterfile and the Local File, by allowing the taxpayer to prepare such documents only with reference to some of the intercompany transactions (cherry picking). In such a case the penalty protection regime will be applicable with exclusive reference to the covered operations, for which information provided has been considered as “appropriate”.

The New Act clarifies (see  par. 7) the features of the specific documentation that is required as a necessary condition for applying  the simplified approach concerning the (non) performance of benefit test and the application of 5% mark-up on relevant costs, for the so called “low value adding services”, as defined by Article 7 of the Decree. In this regard, an ad hoc documentation – in addition to Masterfile and Local File – should be prepared, by including (i) a description of the intercompany services (with details on the beneficiaries involved, the reasons for which such services are to be intended as low value adding and allocation keys used to allocate costs), (ii) related intercompany services agreements and (iii) supporting files through which such transactions are computed (by including direct and indirect costs pooling, profit margin application and related allocation keys). Such documentation, arguably, should also be included within the Local File for penalty protection purposes.

With respect to formal requirements, the New Act confirms that transfer pricing documentation should be prepared annually and in Italian language, except for the Masterfile that can be prepared also in English language.

Among the main changes concerning the electronic format of the TP Documentation, it is worth mentioning the electronic signature (for both Masterfile and Local File) of the legal representative or his/her delegate, jointly with a timestamp to be executed no later than the date of filing of the relevant tax return. Such timestamp, which seems to be an essential condition for transfer pricing documentation ““appropriateness”, will have relevant operative impacts on the timeline for preparing such documentation. In this respect, clarifications by the Italian Tax Authorities are required with reference to the perimeter of the data and documents (i.e. attachments) that must be “certified” with the timestamp, considering the significant increase in the information required and which may not be timely at disposal of the Italian entity.

Furthermore, the deadline starting from the day of the request for the provision to the Tax Authorities is extended to 20 days (previously 10). Conversely, the 7 days (that may be extended based on the degree of complexity) within which additional or supplementary information should be provided is confirmed.

With reference to documentation “appropriateness”, the New Act reiterates and clarifies (see paragraph 5.3.3), in accordance with the Decree, that the documentation shall be considered appropriate, and hence allowing the benefit of the penalty protection,  in case it is apt to provide all cognitive elements and data necessary to analyze conditions and prices. In this regard  remarkably important is the specification referred to the accurate delineation of the transactions and the comparability analysis (including the functional analysis) as relevant profiles for “appropriateness”, regardless of the disagreement  with the Tax Authorities as for the most appropriate transfer pricing method and comparable companies selection through the performance of a benchmarking analysis. Partial omissions or inaccuracies are not relevant provided that they are not able to compromise tax audit activities. Moreover, the New Act provides that tax auditors are required to explicitly judge and provide reasons on the appropriateness, without prejudice to the power of the assessment office to make the final administrative decision.

The New Act has confirmed that the election for the transfer pricing documentation regime must be made through the annual tax return filing. However – as an element of novelty – it is provided that, in case of subsequent filing of unfavourable supplementary annual tax return – to spontaneously amend  errors or omissions referred to the application of the arm’s length principle – the taxpayer has the possibility to “integrate” or “modify” the documentation (and hence not paying penalties for the amendment to the extent that under a subsequent tax audit the documentation is considered appropriate), by giving notice in such supplementary tax return. In this regard, it is worth mentioning that, based on the text of the New Act, the reference to the concepts of “integrate” or “modify” would seem to exclude that the regime under analysis might be opted in  through the supplementary tax return: in practice integration or modification are available only to taxpayers exercised the option in the originally filed tax return (by contextually preparing the Masterfile and the Local File that is subsequently integrated or modified).

In addition, a transitional measure is foreseen as for previous fiscal years up to 2019 (still open to tax audits) with the possibility to file an unfavorable supplementary tax return and to prepare the documentation provided by the New Act within the next December, 31 2020, without application of administrative penalties and late payment interests, in cases in which Article 10(2) of Law no. 212/200 is applicable (i.e. in cases in which the taxpayer has aligned its behavior to indications contained in acts issued by the Tax authorities or if his behaviour is carried out as a result of facts directly resulting from delays, omissions or mistakes of the Tax Authorities (the so called “good faith principle”). However, the functioning of such provision is unclear and hence requires immediate additional clarifications, also considering the upcoming strict deadline.

In conclusion, the New Act represents a key step in the process of alignment of the domestic transfer pricing framework to the OECD standards on transfer pricing documentation. The New Act, in light of the several changes introduced and the increase  in data and information to be disclosed, within the timeline imposed by the timestamp, will result in an increase in  compliance burdens, as well as  efforts required to MNE  groups operating in Italy in order to fulfill the new documentation standards. This will very likely imply a review of the current transfer pricing documentation preparation process, as well as on the supporting data/information gathering activities.

Considering the relevant changes introduced, in order to clarify and provide interpretation with respect to the application of the new provisions a Circular Letter from the Italian Tax Authorities is expected.

[1] The New Act is available at the following link:

[2] The 2020 Provision (see: is also provided for in the last part of Article 110, paragraph 7 of the TUIR.

[3] By comparing paragraphs 2.2 (Masterfile), 2.3 (Country File) and 7 (Determination of low value adding services) of 2020 Act with, respectively, Annex I (Masterfile) and Annex II (Local File) of Chapter V and paragraph D3 (on low value adding services) of Chapter XVII of 2017 OECD Guidelines, a substantial alignment in terms of information contents can be found.

[4] Ruling and definitive agreement, please refer to paragraph 1, letters g and h, by cross reference to Directive 2015/2376 (so called DAC 3).

[5] It has to be noted that such an aspect is particularly relevant in the COVID-19 pandemic context, in which traditional benchmarking analysis might suffer from the so-called “time lag”, among others.

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