ITALY 10/2010

Legal references
Vienna convention 1969 art. 11, Supreme Court pron. n. 22023 of 22.6.2006 (1); Art. 4 L.D. 74/2000 (2); Art. 2427 Italian Civil Code (3); art. 9 and art. 76 - now 110, p. 5, R.P.D. 917/1986 (4); p. 1, art. 8, L.D. 269/2003 (5); L.D. 231/2001 (6); art. 26 and 8.1 L.D. 78/2010 amending the p. 2-ter of the art. 1 L.D. 471/1997, point 2 - converted into Law 122/2010 (7); Ministry of Finance notice n. 32/1980 (8).

Arm length's value
The so called 'arm length's value' (valore normale) is considered in detail from the Italian law (4) as: '… the price applied as average for goods or services of the same kind or similar, in conditions of free competition and at the same trading phase.' This principle might for example create difficulties to the higher deduction in Italy, of costs which competence might be of a mother or sister company of a multinational group.

In such example, and for Italy, it is duty of the tax office to prove in advance that the tax liability of the foreign sister company would be lower that the Italian one, with an analytical report related to the prices applied in all the companies of the group.

Probationary charge
According to the OECD principles, it is delegated to the local legislation to establish if the probationary charge, is at a first instance of the public administration or of the company (1).

Penal sanctions
According to a specific provision of 'fraud' for income tax declaration not in compliance with truth, it is still applicable a penal sanction in Italy (2), although the general OCSE guidelines are recommending only administrative penalties, as long as the ceiling of 10% (it is still uncertain to confirm upon which amount – all transfer pricing values or single goods - according to current legislation) is exceeded. In order to avoid the penal sanction it should also be respected in the report (3) enclosed with the annual balance sheet the specification of the transfer pricing applied method, although this might be a strictly confidential matter and becoming in such way an information of public domain might create problems with shareholders or competitors/ third parties. For the penal sanctions the law (2) is foreseeing also an omitted corporation/Vat tax ceiling of € 103.291,38 or 'omitted active elements' for which it has been 'avoided taxation' of € 2.065.827,60 or 10% of the taxable base. The sanction is imprisonment from 1 to 3 years for the company legal representative, which can be added to other penal sanctions (6) in case an adequate control system has not been foreseen internally. Penal cases in Italy are currently not frequent (3 in the last 15 years)

Prevention & resolution of conflicts (A.P.A.)(advanced pricing agreements)
Safe Harbour, E.U. arbitration convention and (preliminary) international ruling: these instruments are deputed to these related specific functions.

Safe Harbour Agreements: These agreement might be organized from public bodies with the intention to protect or to keep under control, certain specific industrial or services activity areas, and the presence of the enterprises in such areas should make them consider to be part of such controls, restrictions or facilities, when dealing with international transfer pricing agreements, in order to plan carefully any possible related action.

E.U. arbitration: The EU Arbitration Convention establishes a procedure to resolve disputes where double taxation occurs between enterprises of different Member States as a result of an upward adjustment of profits of an enterprise of one Member State. Whilst most bilateral double taxation treaties include a provision for a corresponding downward adjustment of profits of the associated enterprise concerned, they do not impose a binding obligation on the Contracting States to eliminate the double taxation.

The Convention provides instead for the elimination of double taxation by agreement between the contracting states including, if necessary, by reference to the opinion of an independent advisory body. The Convention thus improves the conditions for cross-border activities in the Internal Market. For clarifications concerning some practical aspects of the Convention, see also the Code of Conduct for the effective implementation of the Arbitration Convention' and the revised Code of Conduct.

The international ruling: the Italian tax office, in the first report of 21.4.2010, has confirmed that such process in Italy is engaging if approved only the Italian authority (therefore has a limited value by an international point of view). The access (5) to the application is allowed to any enterprise with international activity, independently from the company kind. Within 30 days from the same the essential requirements of participation will be controlled, then the company will be invited to a meeting from the tax office to check the completeness of the collected information, then within 180 days the tax office (also with possible inspections in the meantime) will confirm the possible ruling subscription (in practise until now that tax office has instead needed an average term of 20 months to complete the analysis).

If signed the agreement will be valid for 3 fiscal years, and could be renewed if the taxpayer should apply within 90 days before the expiration of the agreement.
During such period it is not excluded from the tax office side the possibility of an inspection and possible modification of the agreement, should the preliminary conditions of the same be changed, and also any inspection not connected with the same contents of the ruling cannot be excluded. The tax office has in additional qualified an international company a company that:

1. is controlling or being controlled from a foreign company or is controlled from the same entity which is also controlling the foreign company.
2. has a share capital participated from foreign residents or is participating to the share capital of non resident entities.
3. has received from or paid to non resident entities, dividends, interests or royalties.

Documents custody obligations
There is no specific legal requirement in Italy which is establishing if and what documents should be shown in case of inspection to the tax office, but in 2010 the Italian Government has foreseen (7) on 29/9/2010 that the administrative penalties applicable in case of omitted taxable income declaration and payment (from 100% to 200% of the major tax or minor credit audited), will not be applicable in case of transfer pricing inspection, if the taxpayer should show the following documents:

1. Masterfile (in Italian or English) including:
   
   • general description of the multinational group
   • structure of the group
   • general group strategies updating in case the previous fiscal year ones
   • flows of the transactions & intra-group operations (ex. cost sharing etc. (8))
   • relations with the other EU countries tax authorities related to transfer pricing agreements
   • group transfer pricing policy
   • immaterial goods & services managed
   • key enterpreneuerial risk-taking' functions (KERT)/ instrumental assets used
   Country specific file (in Italian): including

• operative structure of the company
• general strategies applied & updates from the previous fiscal year
• intra-group operations
• intra-group operations and cost sharing/contribution agreements (CSA/ CCA (8), the duration of the same, )

It is important to remind for the CSA/CCA that any cost without a specific proof of 'utility', advantage of the user and inherence of the service, is considered 'not fiscally relevant'.

Both documents will have to be available in the Italian territory in case of inspection, by the address notified to the tax office a place of custody of all the original accounting documents (general & Vat ledgers in Italian, original invoices of accounts payable and receivable, bank reports and reconciliations, corporate books, F24 forms for payments, corporation & Vat tax return forms etc.). In case of inspection, said documents and any possible integrative one on demand, should be shown respectively within 10 days and 7 additional days. Documents should be supplied in electronic .pdf version sent by 'certified electronic mail' or in hardcopy signed from legal representative in original on each page.

Facilities for small & medium enterprises
Companies under 50.000.000 € of turnover, can update the above documentation every 3 years, while for the others the fulfilment will have to be completed on annual base.

Notification to tax office
Further, a mandatory second joint condition to avoid the application of the penalties as from the point above, is also the obligation to send within the 28th of December 2010, or in case of new companies anyway before any possible access of inspection or any tax office audit activity, a specific notice by the tax office intranet Entratel system, including the confirmation that the above documentation is available by the company also for the last and the previous 4 fiscal years.

Demand to HTLC Network to apply for such service as authorized intermediary for the Entratel tax office intranet, will be accepted no later than November the 30th, 2010, for companies wishing to regularize the 4 years in arrear.
"This note was compiled on the basis of information available to HTLC Network A.G. at the time of writing (24.10.2010). It reflects our understanding of the principal issues arising from the new legislation for member companies, and any errors might be those of HTLC Network A.G.; however, this note is not intended to constitute legal advice and no business or legal decision should be taken based solely on its content. Companies concerned about the impact of legislative changes on their business should seek expert legal/specialists assistance by HTLC Network or elsewhere. HTLC Network is available to supply specialized consulting on demand for all the items treated in this document.".