Transfer pricing

The term “Transfer Pricing” identifies the rules on transfer pricing that affect commercial transactions between companies fiscally resident in Italy and companies fiscally resident abroad, linked to each other by direct or indirect control relationships and, therefore, include:

Subsidiary companies established in Italy (subsidiary) by non-resident companies;
Permanent Establishments located in Italy (branch) by non-resident companies.

In particular, the Transfer Pricing accounting practice is aimed at countervailing the adoption of tax base transfer policies by multinational groups to and from countries with privileged taxation, for the sole purpose of securing tax savings.
In compliance with the Directives issued by the European Union, the Italian legislation has transposed the relevant tax provisions into Art. 110, paragraph 7 of the TUIR, which establishes that “the positive net income from intragroup transactions are valued on the basis of their
normal value”.

In essence, the legislation introduces the obligation to perform a comparative assessment of the consideration charged in inter-company
commercial transactions of multinational groups with the average price charged between independent parties operating under conditions of
free competition and in comparable circumstances. Failure to comply with the principle of free competition (so-called “arm’s length principle”) results in:

➤ the recalculation of income on the basis of the “normal value” in lieu of the consideration;
➤ the application of penalties from 90% to 180% of the greater tax due.

Incentive system of “paperwork submission burden” (so-called “Penalty protection”) Italian tax legislation allows taxpayers to adopt a
regime of optional paperwork submission burden with reference to the transfer prices of goods or services falling within the scope of application of Article 110, paragraph 7, of the Consolidated Tax Law (TUIR) in order to disapply the penalties related to the adjustment of the normal value of transfer pricing. However, the non-application of the sanctions is subject to the prior preparation by the taxpayer of specific documentation suitable to allow the verification of the conformity of the transfer prices applied, drawn up according to the specifications provided for by the law (the so-called country file and master file).