Italy: Comments on the planned change of the arm's length principle


Published on Mai 8, 2018


Recently, the Italian Tax Authorities drafted a law decree proposing various amendments to the arm's length principle. Amongst others, the draft concerns the definition of the scope of application of the arm's length principle (i.e. the definition of an ”associated enterprise”), the comparability criteria, the hierarchy of transfer pricing methods and the general procedure in case of transfer pricing adjustments. The parties concerned were invited to comment the draft. The most important comments in our view are listed below: 


The area of application should be defined more precisely: While the respective law (i.e. Art. 110 c. 7 of TUIR) indicates that the arm's length principle is only applicable to enterprises, the decree states that also natural persons could create a link between two enterprises and thus define them as ”associated”. In addition, special situations, such as the treatment of joint ventures, should also be defined.


In accordance with the relevant regulations at OECD level, the realization of losses should in principle not be a reason to characterize companies as ”not comparable”. Alternatively, Tax Authorities should at least distinguish between companies with permanent losses and companies with occasional losses.


During tax audits, the Tax Authorities should only be allowed to use financial data that was available to the taxpayer at the time of determination/documentation of transfer prices.


The decree should clearly indicate that in Italy the concept of the "Most Appropriate Method" applies in Italy and no longer the ”Best Method Rule”.


In case several comparable values are available, the decree should clarify that transfer price adjustments can only be made if the taxpayer's result is outside the interquartile range of the comparable values. In addition, adjustments should not necessarily always be made to the median.


The draft and the respective comments will be discussed during a public hearing between the Tax Authorities and the parties concerned at the end of May. The final version of the decree will then be published.




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