Transfer Pricing: The Italian Revenue Agency published the Circular Letter no. 16/E (the “Circular”) providing clarifications for a proper interpretation of “the arm’s length range” concept

Prepared by the International Tax & Transfer Pricing Department

On May 24, 2022, the Italian Revenue Agency published the Circular Letter no. 16/E containing some key clarifications on the  proper interpretation of the “arm’s length range” concept, as provided for by Art. 6 of the Decree issued by the Italian Minister of Economy and Finance on  May 14, 2018 (hereinafter “Decree”), when applying the provisions set forth in Art. 110(7), of the Italian Tax Code (“ITC”) i.e., the provisions contained in the Double Tax Treaties entered into by Italy that comply with Art. 9 of the OECD Model Tax Convention.

The indications provided are in line with the principles stated in the OECD TP Guidelines (par. 3.55-3.66). 

These include:

Using  the “full range” when there is  a “same” degree of comparability with respect to the tested transaction

The Italian Revenue Agency clarified that “If the comparability analysis is reliable and all the third-party transactions identified have the same level or degree of comparability, when applying the most appropriate method and the related financial indicator, the “full range” should be taken into consideration since all the values included in the range shall be considered at arm’s length”. This is consistent with par. 3.55 of the OECD TP Guidelines, which states that reference can be made to the full range when the comparables have the same level of comparability (“[..] all of which are relatively equally reliable”). Moreover, the fact that there is a range including several figures is due to the fact that independent companies, even if operating under comparable circumstances, might apply different prices. This means that the full range can be used only if all the third-party transactions included in the “full range” have the same degree of comparability compared to the tested transaction.  Further, where it is possible to identify third-party transactions with a not sufficient degree of comparability, they should be eliminated from the range (par. 3.56 of the OECD TP Guidelines). Albeit aligned with the OECD TP Guidelines, it will be quite complex to determine the meaning of “same degree of comparability”. Therefore, this will most be discussed with tax authorities in both administrative (e.g., tax audits and following alternative dispute resolutions) and litigation proceedings before the tax courts on a case by case basis.

Use of “statistical tools” (so-called narrow range) instead of the full range

The Italian Revenue Agency clarified when the so-called “statistical tools”, i.e. the narrow range, should be used, as an alternative to the use of the full range. Whereby statistical tools  mean the use of measures of central tendency  (e.g., the interquartile range or other percentiles), such as to “narrow” the range and to eliminate the “extreme results” or outliers. 

On this point, the Revenue Agency specifies when reference should be made to:

  • the narrow range (the interquartile range i.e. from the 25th to the 75th percentile), or
  • the “most central tendency figure within the range” (not necessarily the median – we might add).

In specific: (i) the first approach (i.e., selection of any point in the narrow range) should be preferred where certain comparables show “comparability defects” which cannot be identified nor quantified in a reliable manner e hence adjusted (this in order to enhance the reliability of the analysis); while (ii) the use of the most central tendency figure within the range (aimed at minimizing the risk of error due to comparability defects) must be limited to cases where the range does not comprise results with a sufficient degree of comparability. If this is the case, it cannot be even made reference to the narrow range calculated based on statistical tools, however this must be clearly justified. 

The Italian Revenue Agency set a three-tiered approach: from full range to narrow range, to central tendency figures – depending on the level of reliability, or rather comparability, of the range under analysis. 

Recommendations to tax auditors and burden of proof

With respect to the burden of proof, the Circular Letter states that whether a “full range” is adopted or a narrower range based on “statistical tools” must be identified, all figures contained within the range must be considered at arm’s length. 

Therefore, should the financial indicator fall within this range (either full or narrow range), no adjustment will be necessary. Conversely, the taxpayer will be required to provide an appropriate documentation aimed at supporting the compliance of the financial indicator to the arm’s length principle and therefore avoiding any adjustment. 

In this regard, it should be highlighted that the Italian Revenue Agency recommended tax auditors to provide the specific reasons underneath the selection of a specific point within the range which best complies with the arm’s length principle. 

Loss-making companies

With reference to the inclusion of loss-making companies within the benchmarking analysis, the Circular Letter follows the indications provided in the OECD TP Guidelines (see par. 3.63-3.65). Before, Italian tax authorities generally excluded loss-making companies systematically; now, based on this clarification, it will be necessary to argue the reason for excluding the loss-making companies by means of an appropriate analysis. 

The Takeaway

The approach outlined by the Italian Revenue Agency appears substantially compliant with the OECD TP Guidelines and reasonably acceptable. Further, it provides important operational guidance to tax authorities, taxpayers and professionals. 

However, it is still to be determined how the above-mentioned three-tiered mechanism (from full range to central tendency figures) will apply.  The implementation of such a mechanism derives from an evaluation which is mostly qualitative (i.e., based on an assessment of the degree of comparability). Therefore, due to its nature, it cannot easily apply by means of consistent and standardized objective criteria.

Let’s Talk

For a deeper discussion, please contact:

Dario Senccar

PwC TLS Avvocati e Commercialisti


Lina Jukneviciute

PwC TLS Avvocati e Commercialisti


Giorgio Massa

PwC TLS Avvocati e Commercialisti


Giovanni Criscuolo

PwC TLS Avvocati e Commercialisti

Senior Manager


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