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Italy Tax: Italy approves draft decree on documentation requirements

The Italian government has approved a draft law decree that for the first time introduces the possibility of avoiding administrative penalties in the event of a transfer pricing adjustment, provided the taxpayer is able to document its transfer pricing policy in compliance with specific documentation requirements. The requirements are not known yet, since the draft decree states that they will be set forth by means of specific administrative instructions to be published within 60 days from the final conversion of the draft decree into law.

The draft decree will become official when it is published in the Official Gazette, which should occur within days. Parliament is then asked to examine and approve the decree within 60 days after publication in the Official Gazette. If Parliament fails to approve the decree within the 60-day period, the decree's provisions will expire as if they had never been in force. When Parliament approves the decree, it is converted into law and is deemed to have been in force from the day of publication in the Official Gazette. Note, however, that the "conversion law" may include amendments to the original provisions of the decree.

Although the decree does not yet represent a "contemporaneous" documentation obligation, given that there seems to be no formal connection between preparation of documentation and submission of the tax return, the appeal to Italian taxpayers of properly documenting their intercompany transactions will increase substantially.

Although no specific penalties for the lack of transfer pricing documentation are contemplated, the advantage of demonstrating compliance with the documentation standards that are yet to come will be significant, if we consider that ordinary administrative penalties equal to 100 percent to 200 percent of the additional tax assessed would normally apply. Should said decree become final, compliance with the documentation requirements would allow taxpayers to completely avoid any penalty, and be liable just for the additional tax assessed, plus interest.

The new provisions would be effective from the fiscal year in which they are introduced into Italian law (presumably 2010 for companies with tax years that coincide with the calendar year) and most likely for earlier fiscal years, within the statute of limitations, provided an audit of those years has not commenced.

So far, no details have been revealed regarding the content and type of documentation that will be required and deemed by the tax authorities as sufficient to avoid the application of administrative penalties. However, it is reasonable to assume that the documentation requirements will make reference to those established in the OECD's Transfer Pricing Guidelines.

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