Italy: local rules

The arm's length rule is in article 110(7) of the Testo Unico delle Imposte sui Redditi (TUIR). It applies to dealings with non-resident companies that control the Italian company, are controlled by it, or share the same parent. Adjustments that raise income are the norm. A downward adjustment is only allowed in limited cases, such as after a mutual agreement procedure or a foreign adjustment (art. 31-quater DPR 600/1973). The MEF Decree of 14 May 2018 sets the guidelines, and the Revenue Agency's Provvedimento 360494 of 23 November 2020 sets the documentation rules. Both follow the OECD Guidelines.

Italy has no mandatory TP file. Documentation is optional, but it is the only way to get penalty protection. It has two parts: a Masterfile (group level) and a Documentazione Nazionale (local file). Both must be in Italian, except the Masterfile, which may be in English. The legal representative or a delegate must sign both with an electronic signature and a time stamp by the date the income tax return is filed. The taxpayer must also tick the box 'Possesso documentazione' in line RS106 of the Redditi return. On an audit request the file must be handed over electronically within 20 days, and extra information within 7 days. Companies with turnover up to EUR 50m may skip updating the comparables analysis for the next two years if it relies on public sources and nothing significant changes. There is no revenue threshold for the file itself.

Five methods are accepted: comparable uncontrolled price, resale price, cost plus, transactional net margin and transactional profit split. The most appropriate method must be used. If a traditional method (the first three) and a profit method can be applied with equal reliability, the traditional one is preferred, and the comparable price method beats every other. Only one method is needed. An unlisted method is allowed if the taxpayer shows no listed method can be applied reliably. A range of comparable results is accepted. If the result falls outside the range, the tax office adjusts it back inside the range (DM 14 May 2018 art. 6). The decree does not name the interquartile range or the median. Low value-adding services can use a simplified cost plus 5% approach with special documentation.

For violations from 1 September 2024, understated income brings a penalty of 70% of the extra tax (minimum EUR 150) under art. 1(2) of D.Lgs. 471/1997. If the Masterfile and Documentazione Nazionale are valid, were notified in the return, and are handed over during the audit, this penalty does not apply to a transfer pricing adjustment (art. 1(6)). A similar rule covers wrongly applied treaty withholding rates on royalties and interest (art. 2(4-ter)). A return not filed at all is fined at 120% of tax due (minimum EUR 250). Late tax payments are fined at 25%, halved if paid within 90 days. Failing to file or filing a wrong CbC report is fined EUR 10,000 to 50,000. D.Lgs. 471/1997 is repealed from 1 January 2027 and its rules move to the new consolidated tax penalty code (D.Lgs. 173/2024), so check the article numbers for violations from 2027.

Italy applies the IIR (imposta minima integrativa) and the QDMTT (imposta minima nazionale) to fiscal years starting on or after 31 December 2023, and the UTPR (imposta minima suppletiva) to fiscal years starting on or after 31 December 2024 (D.Lgs. 209/2023, art. 60). Each Italian group entity files the Comunicazione Rilevante (GIR) unless a local designated entity or a parent or designated filer abroad with a qualifying agreement files it, In that case the Italian entities file a one-time notification instead. It stays valid for later years unless something changes. The group parent or responsible entity files the annual top-up tax return (dichiarazione fiscale Globe). The GIR and the return are due by the end of the 15th month after year end, or the 18th month for the group's first (transitional) year, and never before 30 June 2026. Tax is paid in two instalments: 90% by the end of the 11th month, and the rest by the end of the month after the return deadline. No penalties apply to the first three years except for intent or gross negligence (art. 53(5)), and GIR penalties are cut by 50% for those years.

Binding advance pricing agreements (APAs) are available under art. 31-ter DPR 600/1973. They cover the year they are signed and the four following years, and can apply to earlier open years in some cases. Mutual agreement procedures follow tax treaties, the EU Arbitration Convention and Directive 2017/1852. Costs from dealings with entities in EU-listed non-cooperative jurisdictions are deductible only up to normal value, unless the taxpayer proves real economic interest and execution (art. 110(9-bis) and (9-ter) TUIR). There is no separate TP return. TP data goes in section RS of the Redditi SC return, and the CbC notification goes in line RS268.