Relation between Transfer Pricing and DAC6 in Italy

The Italian Tax Agency issued several documents to provide taxpayers with its interpretation of domestic and international tax...

The Italian Tax Agency issued several documents to provide taxpayers with its interpretation of domestic and international tax issues. The latest ruling it issued dealt with the link between year-end transfer pricing adjustments and reporting obligations under DAC6.

Concerning this ruling, taxpayers requested information from the tax authorities on how to determine whether the making of year-end transfer pricing adjustments should be treated as a reportable cross-border arrangement under C.1. where the related counterparties are located in non-cooperative jurisdictions or in jurisdictions where the corporate income tax rate is close to zero.

The Inland Revenue responded that the year-end transfer pricing adjustments involve a “deductible cross-border payment” to counterparties located in non-cooperative jurisdictions or in jurisdictions where the corporate income tax rate is near zero.

It mentioned that final transfer pricing adjustments cannot be treated separately from the total flow of intercompany transactions and must be reported (under C.1 tag), even if they are intended to comply with the arm’s length principle for tax purposes and do not involve “the creation of any new economic rights between the parties.”

Therefore, it is reasonable to expect that the tax authorities’ interpretation may extend to the entire C.1 hallmark, i.e., all intercompany payments (and year-end transfer pricing adjustments), which benefit from certain exemptions.

However, when the transaction is purely commercial and when transfer pricing adjustments are made to observe the arm’s length principle, taxpayers may incur an excessive administrative burden that can be overwhelming for small and medium-sized companies.

In this regard, taxpayers would be required to identify the principal benefit test in almost all circumstances of stamp C.1, calculating the weight of the tax advantage over the overall benefits derived from the transaction.

Such an approach deviates from the ultimate goal of the “mandatory disclosure” rules, which is to promptly report potentially aggressive cross-border tax planning arrangements to create a fair taxation environment, not to impose indiscriminate tax obligations on taxpayers.

Year-end transfer pricing adjustments as a cross-border arrangement mean that any policy changes could trigger the reporting obligations under the C.1 hallmark. However, all transfer pricing policies implemented before June 2018 should be excluded from the reporting obligations, even if taxpayers continue to make year-end transfer pricing adjustments to comply with that policy.

Source: MNE Tax 09/02/22

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