The expression "transfer pricing" refers to an operation aimed at transferring income to another country (usually a low tax country), through the application, in infragroup transfers, of lower fees than those applied in transfers between independent companies.
Simply put, transfer pricing involves companies which are part of a multinational group. It implies:
- Sale of goods and services at lower prices than on the open market;
- Purchase of goods and services at higher prices than normal.
Transfer pricing is thus considered as a tax avoidance instrument: prices are manipulated, so that revenues can be transferred from a single branch of the multinational company to the original company, based in a "tax heaven" and therefore subject to more favourable taxation.
Transfer pricing in Italy: tax audit and methods
In case of transfer pricing it is necessary to identify the appropriate price in infragroup transfers of goods and services, i.e. transfers between companies linked to each other but based in countries with different tax regime.
Current regulation is aimed at verifying that:
- transfers comply with the principle of free competition in the market;
- prices in infragroup transfers are the same as in transfers between independent companies under free market conditions.
More in detail, legislation requires that income components coming from these operations have to be assessed on the basis of the market value of the goods or services supplied and received, pursuant to Article 9 the OECD Model Convention, supporting the principle of free competition in the market.
According to the OECD guidelines, both taxpayers and tax authorities have to assess transaction and activities involving associated companies by comparing them with free market transactions involving independent companies.
There are different methods which allow to determine the appropriate price in transactions involving companies of the same group:
- method of comparison between prices charged in transactions between companies of the same group and prices charged in similar transaction by independent companies or by one of the companies of the group to an independent company. A difference between the prices could reveal that associated companies' trade and financial relationships do not meet the principle of free competition in the market;
- resale-minus method relating to the price at which a product purchased from a company of the group is resold to an independent company;
- cost-plus method concerning the costs borne by a provider of goods/services in a transaction between associated companies;
- net-margin method;
- distribution of profit method;
It is possible to determine if a transfer of goods/services took place with "normal" value through the following steps:
- identification of all infragroup transactions and the years in which they took place;
- identification of the correct method to determine the appropriate price for infragroup transactions and, according to the chosen method, of the appropriate financial indicator;
- definition of market prices;
- justification of potential differences between charged prices and market prices;
- general analysis of the taxpayer's conditions;
- interpretation of the collected data and identification of the appropriate remuneration according to the principle of free competition in the market.
Transfer pricing in Italy: tax audit and criminal relevance in Italy
In matters of transfer pricing, tax audit and criminal relevance a particularly important issue is that of proving the authenticity of the operation, i.e. whether the burden of proof should fall on taxpayers or on financial authorities.
In Italy, transfer pricing has no penal relevance.
The Italian Court of Cassationwith sentence no. 21410/2017 of established that it is up to taxpayers and subsidiary companies to prove the absence of elusive policies in determining the prices of intergroup transfers, i.e. to prove that said transactions took place with normal market values.
Moreover, with sentence no. 6656/2016, the tax division of the Italian Court of Cassation established that it is up to tax authorities to prove that an uneconomical operation through transactions with subsidiary or parent companies can be put in relation with a higher taxable income.
Recent Italian case-law seems to accept the only principle that it is up to the office carrying out financial corrections to prove potential fiscal elusions and its preconditions.
It is also worth mentioning that since 2019 transfer pricing has no penal relevancein Italy, since the Italian Legislative decree no. 158/2015 has modified the rules applied to false tax declaration.
As a result, a wrong application of technical criteria relating to transfer prices cannot be the subject of a complaint to the Public Prosecutor.
Transfer pricing in Italy: how can we help you?
Recent investigations and international trade exchanges have highlighted the importance of issues relating to transfer pricing in the field of tax law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.