Transfer Pricing Audits: Suitability of Transfer Pricing Documentation

Article 26 of Legislative Decree No. 78/2010 introduced in Italy a rewarding regime related to the non-application of penalties involving intercompany transfer pricing adjustments in connection with taxpayer’s submission to the Tax Authorities of ‘suitable’ documentation to support taxpayer’s transfer pricing policies. Assessment on the ‘suitability’ of such documentation by Tax Inspectors has given rise to a variety of critical issues in the last few years.


The latest Italian interventions on transfer pricing marked a clear-cut change with regard to the past, since a documentary regime on transfer prices was introduced for the first time in Italy, coupled with a rewarding regime to allow taxpayer – where deemed to be in compliance with the regime at issue – to obtain a favourable treatment which, in case of income adjustments, consists in the exemption from administrative tax penalties. As a matter of fact, as of 2010, the option was introduced in Italy for multinational companies to compile any documentation that is relevant to Group transfer pricing policies: the said compilation has a two-fold and useful purpose, since – on the one hand – it allows multinational enterprises to benefit from the exemption regime provided for penalties deriving from the administrative violation set forth under Article 1, paragraph 2, of Legislative Decree No. 471/ 1997, which might be triggered by any transfer pricing adjustments that might have been adopted; on the other, it allows Tax Authorities to be provided with sound documentary support during audits in order to ascertain that there is effective consistency between prices in intercompany transactions entered into with associated enterprises, and such prices applied at ‘arm’s length.


The article throws light on Article 26 of the Law decree no. 78/ 2010, Italian tax authorities assessment of documentary suitability, other documentation aspects.


To sum up, it emphasized that it may reasonably conclude that the documentation supporting transfer pricing policies might be deemed ‘suitable’ if it:


– complies with the formal requirements set forth by the Tax Authorities’ Director in the Regulation issued on 29 September 2010;


– puts the Tax Inspectors in a position to fully understand the policies adopted: the said circumstance may be corroborated by the fact that in the Official Records of Findings and in the Tax Assessment Notices, the Tax Authorities acknowledge their being fully acquainted with all of the relevant knowledge deriving from the acquisition of such documents as well as with the applicative rationale and techniques connected to transfer prices as adopted by taxpayer, even if only for the purpose of challenging them.


The rule seems therefore to clearly refer to an element that is objectively sustainable (even if subjectively appreciable), which consists in the ‘suitability’ of taxpayer’s documentation as compiled to ascertain compliance with the ‘arm’s length’ value of transfer prices adopted within an intercompany framework. In fact, ‘suitable documentation’ and tax recapture may simultaneously exist in abstract and concrete cases as well. The existence of the former avoids the application of penalties, but not the recapturing of the higher taxable matter.


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