New transfer pricing requirements in Italy

New transfer pricing requirements in Italy

Thu 10 Feb 2022

On 26 November 2021, the Italian tax authorities (“ITA”) issued the final version of Circular Letter no.15/E (the “Circular”), providing clarification on the new transfer pricing requirements introduced by Measure no. 360494 (“New Measure”) on 23 November 2020. This article analyses the most important amendments to the transfer pricing documentation rules in Italy, and what they mean for international organisations.

1. New Italian transfer pricing documentation requirements

Formal aspects

Italian TP documentation requirements changed significantly, increasing the administrative burden for taxpayers. 

Starting from FY 2020, the TP documentation must be electronically signed by the legal representative (or by a delegate) with a time stamp (so-called “marca temporale”) to be affixed by the date of the submission of the annual tax return, i.e. 11 months after the closing of the fiscal year.  

However, taxpayers may communicate the possession of the TP documentation within 90 days from the above date, by presenting a late or supplementary tax return[1] and paying the related penalties. In this case, the TP documentation must also be digitally signed with a time stamp before its submission.

The Circular specifies that if the taxpayer submits a supplementary tax return and the TP documentation is considered appropriate, administrative penalties for an unfaithful tax return do not apply[2].

The Circular expressly denies the possibility of preparing the TP documentation after the extended 90-day period, but it does allow the taxpayer who omitted to flag its possession in the related tax return to communicate the retention within the term for filing the subsequent annual tax return and before the start of a tax audit (so-called remissione in bonis). 

The new rules also provide that, when amending the tax return, if the taxpayer decides to use the institute of active repentance to define the penalties for unfaithful declaration, the related amount cannot be refunded, nor it can be modified during a tax assessment.

Masterfile and Local File

According to the new rules, the mandatory TP documentation for all Italian entities (including permanent establishments) is now comprised of both a Masterfile and a Local File, which must be drafted following the structure provided in the New Measure[3].

With reference to the Masterfile, Italian entities can rely on the document prepared by the Group (as a whole or by the specific subdivision), if it contains the information requested by the ITA.  Although, an appendix to the Masterfile can be added to align the actual structure to the Italian one, and to integrate any missing information[4].

In general, the criteria used to assess the “proper documentation” is based on a formal structure and the inclusion of complete and truthful information. Another definition of “proper documentation” used in the Circular requires the TP documentation to present all the necessary information, defined as the substantial and essential elements as indicated in the OECD Transfer Pricing Guidelines (the “TP Guidelines”). The Circular’s use of different definitions of ‘proper documentation makes it difficult to assess whether that term has been fully complied with.    

A very important innovation of the New Measure is the assessment of the penalty protection on every single transaction and not on the document “as a whole.” Therefore, during a tax audit, the ITA will assess whether a transaction has been properly described, and penalties can apply only to such transactions, while other well-documented transactions will not be impacted.

In addition, the New Measure introduced the concept of “marginality”, whereby inter-company transactions not exceeding the threshold of 5% of the total value of intercompany operations (costs and revenues), can be considered not significant and, therefore, the taxpayer can decide whether or not to fully document it. 

However, if such transactions are not fully described, penalty protection may not apply in cases of a tax adjustment. Such an approach does not appear to be aligned with the TP Guidelines[5]. Therefore, a prudent approach would be to analyse all transactions.

Low value-added intercompany services

The New Measure introduced (implementing the simplified approach established by the Italian Ministerial Decree of 14 May 2018) the low value-adding intra-group services approach in compliance with the relevant TP Guidelines, requiring that the TP documentation must include specific information on those services.

Amongst the information to be included is the calculation details illustrating the determination of the aggregation of direct and indirect costs related to the provision of the service and the markup applied. This type of information is not always made available for the local entities.

Therefore, this approach cannot be properly considered as “simplified” and is likely to be perceived by the taxpayer as additional compliance.

Small and medium enterprises

The New Measure confirms that small and medium-sized enterprises (“SME”) may not update the chapters relating to intra-group transactions (i.e., the functional and economic analysis) in the two fiscal years following the one in which the documentation is prepared.

The New Measure excludes from the definition of SME those entities that directly or indirectly control or are controlled by an entity that does not qualify as an SME[6].

However, entities that were confirmed to be SMEs in FY2019 under the previous regime, may not update the economic analysis in the two subsequent tax periods.

Permanent establishments

The New Measure states that the TP documentation for permanent establishments (hereinafter “PEs”) of non-resident companies and for PEs (of Italian entities) located abroad, consists of both the Masterfile and the Local File.

The Circular also specifies that resident companies with PEs located abroad and operating in the branch exemption regime may present the TP documentation on the transactions between the resident company and the PEs, as well as regarding transactions between the latter and the other group’s entities.


The new requirements highlight an increase of compliance burdens for the Italian taxpayer.

Indeed, the excessive request of information to be included in the TP documentation for penalty protection purposes could work to the detriment of the taxpayer during an audit.

However, it is expected that the cooperative approach of the taxpayers will be counterbalanced by the tolerance of the ITA in those cases where it was not possible to gather all the requested information in the tight deadlines set by the authorities.

[1] In case of submission of a supplementary tax return, the amended Masterfile and Local file must be electronically signed, and a new time stamp must be included by the date of presentation of the supplementary tax return.

[2] If the TP documentation is deemed unsuitable, the determination of the penalties is left to the competent office.

[3] Before the changes, the type of documentation requirement depended on the entity (i.e., holding, subsidiary, permanent establishment, etc.).

[4] Alternatively, taxpayers may decide to prepare themselves a Masterfile following the Italian rules.

[5] Chapter VII, section D, par. 7.43 (and subsequent) of OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017.

[6] Such a new definition essentially excludes most of the companies and permanent establishments resident or established in Italy and belonging to foreign multinational groups.