Tax Authorities with Provision no. 360494 of 23 November 2020 introduced substantial changes to the rules related to transfer pricing documentation that allows the non-application of penalties for fraudulent tax return in case of transfer pricing adjustments (so-called penalty protection).

These new rules are applicable for the first time on the tax year 2020 within the upcoming date to forward the relative tax return.

The Provision introduced several changes and the main ones are briefly described below:

  • Type of documents to be prepared: The documentation for all Italian entities is now composed by both Masterfile and Local File.
  • Changes to the content of the Masterfile, as:
  • Business carried out by the group and main profitability drivers of the group;
  • Intangible assets of the group with the following details: global strategy of the group, list of intangible assets, rulings/APAs concerning intangible assets, transfer pricing policy for R&D activities, transactions concerning intangibles between related parties;
  • Intercompany financial activities with the following information: description of how the group is financed, central financing functions, general transfer pricing policies related to financing arrangements between associated enterprises.

Furthermore, a copy of the existing unilateral, bilateral or multilateral advanced pricing agreements (APAs) and the cross-border rulings signed with or issued by the Tax Authorities of the countries in which the group operates and  the group consolidated financial statements have to be attached to the Masterfile.

  • Changes to the content of the National Documentation, as:
  • General description of the local entity with the following details: organization chart, business carried out and entrepreneurial strategy pursued;
  • Intercompany transactions with an overview of flows and amounts. For each material transaction, the following information must be provided: description of the transactions (with indication of amount of intra-group payments and receipts for each category of controlled transactions involving the local entity, comparable transactions performed with third parties – both internal and external – and profit level indicators), comparability analysis, an indication of the transfer pricing method applied (i.e.  description of the selected transfer pricing method and of the reasons determining its compliance with the arm’s length, criteria of the application of the selected transfer pricing method), results and critical assumptions made in applying the transfer pricing methodology.
  • Financial information, including: (i) annual financial statements (including, where available, certification issued by independent auditors); (ii) information, reconciled with the financial statements, on the financial data used in the application of the transfer pricing method, as well as (iii) the relevant financial data for comparable companies used in the analysis.

In addition, a copy of the existing unilateral, bilateral or multilateral advanced pricing agreements and of the cross-border rulings which the resident entity is not a party to, but that are connected to the intra-group transactions described in the Local File to be attached.

  • Documentation for low-value adding services:  for these services there is an obligation to prepare specific documentation – in addition to Masterfile and Local File – by including description of services, relevant intercompany agreements, enhancement of operations and calculations.
  • Form, communication of possession and deadline for providing the transfer pricing documentation: the Masterfile and the Local File should be prepared in Italian language – however the Masterfile can be prepared also in English language – and electronically signed by the legal representative or his /her delegate by electronic signature with a time stamp to be put by the date of submission of the tax return for the year to which the documentation refers. The documentation should be provided to the Tax Authorities within 20 days of the relative request.

Further new is the simplification of the documentation for small and medium – sized enterprises (i.e. companies with turnover or revenues not exceeding Euro 50 million) to which is allowed not to update the comparability chapters related to intra-group transactions for two fiscal years subsequent to the one to which the documentation refers provided that the comparability analysis is based on information found from publicly available sources and does not change substantially.

It is worth mentioning that the Provision introduced the possibility to indicate in the Masterfile and the Local File only some of the intercompany transactions. In such case the penalty protection regime will be applicable with exclusive reference to the indicated operations.