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TAX NEWS - FEBRuary 2010

Italy introduces new documentation requirements on intercompany transfer prices

The Italian Accounting Board (Organismo Italiano di Contabilità - OIC) recently issued an addendum to update National Accounting Standard n. 12, "Content and structure of Annual Statutory Financial Statement of trade, industrial and service companies", to take into account the changes in the law introduced through Legislative Decree 3rd November 2008, no 173 implementing EU Directive 2006/46/CE on disclosure of information in the financial statements on the economic relationships with related-parties.

These changes complete the financial statements information disclosure obligation as stated in art. 2427 of the Civil Code and discussed in National Accounting Standard n.12. The new obligation will be applicable to 2009 Financial Statements. The legislative decree has changed art. 2427 by introducing an obligation to disclose information regarding economic relationships with related parties. More specifically, the explanatory note of financial statements must disclose the amount and nature of intercompany transactions and any other information useful to improve the understanding of the financial statements, provided the transactions are deemed:

- Material, and
- Not at arm's length.

The addendum states that to identify the operations with a material amount, reference will be made to the principle of "materiality," as defined in National Accounting Standard n. 11, which states that "the Financial Statement must show only information that has an important and significant effect on the Financial Statements' content or may influence the decisionmaking of the stakeholders ."

Regarding the arm's length conditions, the decree's explanatory memorandum specifies that reference will be made not only to "pricing," but also to the reasons that led the company to enter into the pertinent transaction and to deal with related parties, rather than with third parties.

Proper documentation supporting the conclusion that the transactions were carried out at arm's length conditions should be available, if the taxpayer fails to disclose the above-mentioned information.

As regards the information concerning relations with related parties, which must be disclosed in the Explanatory Note, the OIC's Addendum specifies that the disclosure requirement must always be respected, even if the transactions between related parties that occurred during a given year are no longer in place on the financial statements' closing date.

Furthermore, this information must be coordinated with that which must be included in the annual report pursuant to art.

2428 of the Civil Code, and with that to be disclosed if the company is formally subject to direction and coordination by a related entity (art. 2497 to 2497- septies Civil Code).
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