Global Tax Alert | 3 January 2014

Italy issues new laws with important transfer pricing and VAT implications

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Executive summary

On 23 December 2013, the Italian Parliament passed the budget law for 2014 (2014 Stability Law) which was published in the Official Gazette no. 302 of 27 December 2013. The 2014 Stability Law provisions should generally enter into force as of 1 January 2014.1

On the same day, the Italian Government issued Law Decree no. 145/2003 (Destination Italy Decree) which was published in the Official Gazette no. 300 of 23 December 2013. The Destination Italy Decree entered into force on 24 December 2013 and the Parliament has sixty days to convert it into an ordinary law.

The 2014 Stability Law contains amendments which may impact the business of Digital Economy companies with respect to transfer pricing and VAT. In addition, it also includes changes regarding transfer pricing rules applied for the computation of the Regional Tax on Productive Activities (IRAP).

The Destination Italy Decree extends the scope of the International Standard Ruling procedure to preliminary assessments of Italian permanent establishments of foreign entities and provides that the validity of agreements reached through the International Standard Ruling procedure (e.g., including APAs) is increased from the previous three year term to five years.

This Alert outlines the significant changes that might require immediate attention.

Detailed discussion

Applicability of transfer pricing adjustments for IRAP purposes

The 2014 Stability Law (Article 1, paragraphs 281-284) provides clarifications on the application of the transfer pricing rules to the determination of the IRAP base for the tax years following the one in progress at 31 December 2007.

According to a 2008 legislative change the computation of the IRAP base is no longer linked to the Corporate Income Tax (IRES) rules.2 Since transfer pricing rules are included in the IRES provisions (and not in the IRAP provisions) there was uncertainty as to whether such rules should still apply to IRAP.3 The 2014 Stability Law provides clarity by providing that transactions between resident and nonresident companies belonging to the same group must comply with the arm’s length principle also with reference to the years following the one in progress at 31 December 2007.

With reference to any value adjustments that result from the application of transfer pricing rules for IRAP purposes, penalties provided by law do not apply. However, this benefit is limited to the tax years following the one in progress at 31 December 2007 through those for which, at the date of entry into force of the new provision, the deadline for the filing of the tax return has elapsed.

Notwithstanding the above, penalties will apply if the relevant legal measure (e.g., court decision) became final before the entry into force of the 2014 Stability Law.

Digital Economy

The 2014 Stability Law (Article 1, paragraphs 33 and 177-178) provides important changes for groups involved in certain on-line businesses.

From a transfer pricing perspective, the new rules provide that entities involved in the collection of on-line advertisement and in related auxiliary services on behalf of foreign group companies must use profit level indicators other than those applicable to the costs incurred in the conduct of their business. However, the 2014 Stability Law does not provide any guidance about alternative transfer pricing methods to be used. Exceptions apply to companies that reach an APA with the tax authorities by way of the International Standard Ruling procedure (outlined in the following section).

From a VAT perspective, the new legislation provides that, starting from 1 July 2014, advertising services and sponsored links purchased on-line as well as on-line advertising spaces and sponsored links appearing in the results pages of search engines (search advertising services) viewable in the Italian territory during a visit of a website or the use of an on-line service through a landline or network and mobile devices, must be purchased exclusively through entities holding an Italian VAT registration. The enacted provisions appear questionable from a European Law perspective as they seem to infringe upon the freedom of establishment principle as well as Article 196 of Directive 2006/112 regarding the person liable to pay VAT on cross border B2B services.

Moreover, for the purchase of on-line advertising services and related ancillary services, the new legislation states that it is mandatory to use bank or postal accounts or any other means of payment allowing full traceability of transactions, including the VAT identification number of the supplier. The Revenue Agency will define the pattern of transmission of the information required.

International Standard Ruling

As of 2005, companies with international activities may apply for a specific type of ruling (International Standard Ruling) which allows them to agree in advance with the Italian tax authorities on the following matters:4

  • Transfer pricing methodologies (APA);5
  • The tax treatment of dividends, interest and royalties;
  • Attribution of profits or losses to Italian permanent establishments of nonresident companies and to foreign permanent establishments of resident companies.

The Destination Italy Decree introduces significant changes to the International Standard Ruling procedure by:

  • Extending its scope to preliminary assessments of Italian permanent establishments of nonresident entities. As a result, nonresident companies operating in Italy might reach a preliminary agreement with the Italian tax authorities in order to define the nature of their presence in Italy and verify whether or not such presence amounts to a local permanent establishment.
  • Extending from three to five tax years the legal validity of the ruling. Specifically, it is provided that the agreement will bind both parties for the tax period in which it is concluded and for the following four (while prior to the amendment the duration was established in three tax periods including the period in which the agreement was concluded).

The Destination Italy Decree also centralized the management of the applications for the International Standard Ruling procedures into a single office.

Implications

As a consequence of all the above-mentioned changes, taxpayers will need a robust framework of transfer pricing policies, processes and systems able to produce the required analysis and documentation in order to be ready for a tax audit or for a ruling application.

The new legislation increases burdens on taxpayers both from a transfer pricing and VAT viewpoint. Companies should review the impact of this new legislation on their operations with the assistance of local tax professionals.

Endnotes

1. Some exceptions to the date of entry into force apply as a consequence of modifications brought by law decree no. 151 issued on 30 December 2013.

2. IRES (generally levied at 27.5% rate) and IRAP (generally levied at 3.9%) apply on different tax bases (e.g., broadly speaking labor costs are as a principle not deductible for IRAP purposes). Both tax bases derive from the Profit and Loss figures but different book to tax adjustments are carried out on the basis of separate principles and set of rules. IRES set of rules explicitly include transfer pricing provisions while IRAP rules do not.

3. Some scholars pointed out that transfer pricing rules would no longer be relevant for IRAP according to the change in the law. On the other hand, tax officers kept on challenging the application of the transfer pricing principles also for IRAP purposes.

4. The International Standard Ruling procedure is regulated by Article 8 of Law Decree no. 269 of 30 September 2003 as amended and converted with Law no. 326 of 24 November 2003. The regime was implemented with the Revenue Agency Director Regulation of 23 July 2004 and became effective as of 2005 following the European Union Commission approval.

5. For additional information on the APA procedure and detailed figures on the APA applications filed up to December 2012 see EY Global Tax Alert, Italy releases APA program Bulletin – second edition, dated 8 April 2013.

For additional information with respect to this Alert, please contact the following:

Studio Legale Tributario in association with Ernst & Young, Milan
  • Davide Bergami
    +39 02 851 4409
    davide.bergami@it.ey.com
  • Massimo Bellini
    +39 02 851 4428
    massimo.bellini@it.ey.com
  • Silvia Confalonieri
    +39 02 851 4559
    silvia.confalonieri@it.ey.com
  • Simonetta La Grutta
    +39 02 851 4586
    simonetta.lagrutta@it.ey.com
  • Domenico Borzumato
    +39 02 851 4503
    domenico.borzumato@it.ey.com
  • Marco Magenta
    +39 02 851 4529
    marco.magenta@it.ey.com
Studio Legale Tributario in association with Ernst & Young, Bologna
  • Mario Ferrol
    +39 335 122 9904
    mario.ferrol@it.ey.com
Studio Legale Tributario in association with Ernst & Young, Rome
  • Nicoletta Mazzitelli
    +39 06 855 67 323
    nicoletta.mazzitelli@it.ey.com
  • Livio Zallo
    +39 06 855 67 353
    livio.zallo@it.ey.com
Studio Legale Tributario in association with Ernst & Young, Treviso
  • Stefano Brunello
    +39 0422 625 106
    stefano.brunello@it.ey.com
Ernst & Young LLP, Italian Tax Desk, New York
  • Emiliano Zanotti
    +1 212 773 6516
    emiliano.zanotti@ey.com
  • Andrea De Nigris
    +1 212 773 0478
    andrea.denigris@ey.com
  • Fabio Rousset
    +1 212 773 9302
    fabio.rousset@ey.com

EYG no. CM4073