Six Things to Know About Transfer Pricing in Italy
1.) Transfer pricing audits are conducted by the Revenue Agency, and the first step is a request for transfer pricing documentation. Prepare documentation contemporaneously, so it’s ready upon request—penalties here are so steep, that they can almost double the amount of transfer pricing adjustments.
2.) Hidden permanent establishments are a huge concern in Italy, and even routine transfer pricing audits can lead to tax authorities claiming they exist. Local entities operating under a commissionaire, agent, or a cost-based service-provider model are especially vulnerable.
3.) The Italian tax authorities routinely audit Italian entities that perform sales and distribution functions or provide sales support and marketing services to foreign affiliates. Scrutiny is common for business models characterized as limited risk distributors, commissionaires, and contract service providers.
4.) The Italian tax authorities were once known for surprising taxpayers, now they take a fairer approach. If an adjustment is under consideration, you’ll be notified and the “right to be heard” principle allows you to defend your position before the adjustment is issued.
5.) Audits are the most intense if you don’t have documentation. Avoid penalties by ensuring your documentation is:
- Prepared on time
- Produced promptly if requested by the Italian tax authority
- Complies with Italian regulations (including electronic signatures, a stamped date, and the country file is submitted in Italian) and is complete
6.) Italian tax authorities are known to challenge:
- TP methodology, especially if it doesn’t align with the functional and risk profile
- Comparable companies in the benchmark set (companies in a loss position are generally excluded)
- Intragroup services. They’ll want proof that services have been provided, are relevant or beneficial to the local business
- Criteria for determining arm’s length value in an intragroup business reorganization
