TAX NEWS - 
2010
Italy Tax: Italy's Revenue Agency issues first report on APA program
The agency's main purpose in releasing the report was to briefly illustrate the main features of this tool for the avoidance of transfer pricing disputes,[1] aimed at enhancing collaboration between taxpayers and the tax authorities.
The transfer pricing ruling is addressed to "enterprises with international activity" that intend to agree in advance with the Italian tax administration regarding:
- The correct transfer pricing methodology applicable to the transactions carried out with related parties, as provided for in paragraph 7 of article 110 of Presidential Decree no. 917 of 22 December 1986 (the "Consolidated Income Tax Act" or TUIR);
- The tax treatment provided for by the law, including tax treaties, in respect of dividends, interest, royalties, or other income paid to or received from nonresident persons in specific cases;
- The application of the provisions of the law, including tax treaties, to specific cases relevant to the attribution of profits (or losses) to permanent establishments in Italy of nonresident enterprises, as well as to permanent establishments abroad of resident enterprises.
With specific reference to transfer pricing, the ruling is essentially a unilateral APA, which allows the taxpayer and the tax administration to determine, in advance and for a defined period of time,[2] the method for calculating the arm's length value of the transactions covered by the agreement.
In its recent report, the Revenue Agency analyzes in detail the applications submitted to the International Ruling Office between 2005 and December 31, 2009.
The report discloses that the choice of transactional profit methods, which were adopted for 79 percent of all cases, prevails over the choice of traditional transaction methods, which were used in the remaining 21 percent of cases. The transactional net margin method (TNMM) was used in 53 percent of the agreements signed. This is a clear sign that, even if according to national and international regulations the transactional profit methods should be used only when the traditional methods cannot be applied,[3] the tax authorities have become accustomed to the use of transactional profit methods to determine the arm's length value of intercompany transactions.
The report also highlights that, even if the average time required for a ruling procedure to be completed, around 20 months, is apparently longer than in other OECD countries, this difference exists mainly because the Revenue Agency has not excluded the periods of inactivity or delays due to an insufficient cooperation of the taxpayers.
Interestingly, 63 percent of taxpayers who have submitted one or more applications for an international standard ruling procedure are medium-sized enterprises with less than €300 million in revenues, of which 76 percent had revenues lower that €100 million.
On the basis of the results of the analysis summarized in the report, it appears that the international standard ruling represents a valid instrument for enterprises of any size that wish to take a proactive attitude to prevent tax disputes on their transfer pricing policies. In fact, considering the growing complexities in the determination of objective transfer pricing policies, not challengeable by tax authorities, a transfer pricing ruling is a valid option to reduce taxpayers' uncertainty and minimize international double taxation risks.
[1] The international standard ruling is set forth in article 8 of Decree Law no. 269 of 30 September 2003, ratified through modifications by law no. 326 of 24 November 2003 and put into effect with a Provision of the Director of the Internal Revenue Agency of July 23, 2004. The instrument has been effective in the Italian tax system since 2005, following the positive opinion expressed by the European Commission.
[2] The International standard ruling procedure is completed by the signing of an agreement between the taxpayer and the tax authority, which sets out the criteria and methods for calculating the normal value (the arm's length value) of the transactions subject to the application. The international standard ruling agreement, which is binding on both parties, remains in force for three years starting from the tax period in which it is signed. During this period, the International Ruling Office verifies that the terms of the agreement are complied with and also ascertains whether any changes have occurred to the de facto or de jure conditions that constitute the premise on which the clauses of the agreement are based, also by means of one or more agreed visits to the premises where the enterprise carries on business. At the end of the three-year period of validity, and at least 90 days before it expires, the taxpayer may submit an application for renewal.
[3] In September 2009, the OECD released a proposed revision of Chapters I-III of the Transfer Pricing Guidelines which proposes the elimination of the last-resort status for the transactional profit methods proposing a standard whereby the "most appropriate method to the circumstances of the case" should be selected.
© 2009-2012 TaxRates.cc
2011 - 2012 Tax Rate Guide and Tax Help Website
