Article 110, par. 7 of the Consolidated Law on Income Taxes (also referred to as Income Tax Code) incorporates into the law the arm’s length principle set forth by Article 9 of the OECD Model Tax Convention as follows: “Items of income arising from transactions with non-resident companies which directly or indirectly control the enterprise, are controlled by it or are controlled by the same company controlling the enterprise, are determined based on the conditions and prices which would have been agreed between independent parties operating on an arm’s length basis and in comparable circumstances…”
Ministerial Decree of 14 May 2018, Article 1: “This decree, taking into account international best practices, provides guidelines for the application of the provisions included in Article 110, para. 7, of the Consolidated Law on Income Taxes, referred to in Presidential decree No. 917 of 22 December 1986 (hereafter “TUIR”), for the sake of compliance with the arm’s length principle contained therein.” See also the other Articles of the Ministerial Decree.
The Ministerial Decree dated 14 May 2018, in setting out the general guidance for the proper application of the arm’s length principle established by law in Article 110, paragraph 7, of the Income Tax Code, makes explicit reference to the OECD Transfer Pricing Guidelines and to the OECD Final Report on BEPS Actions 8-10 as well. See Preamble of the Ministerial Decree. Also, the OECD TPG are mentioned as best practices in the implementation of the law provision regarding TP documentation requirements, as well as in the implementation of the law provision endorsing the APA program.
Art. 110 par. 7 of Income Tax Code, as amended in June 2017, refers to transactions occurred between an Italian enterprise and non-resident companies that: “directly or indirectly control the Italian enterprise, or are controlled by it, or are controlled by the same company controlling the Italian enterprise”.
The Decree of the Minister of Economy and Finance dated 14 May 2018 provides for the following details:
1. (a) “associated enterprises” means an enterprise resident in the Italian territory as well as non-resident companies where:
1. one of them participates directly or indirectly in the management,
control or capital of the other, or
2. the same person participates directly or indirectly in the management, control or capital of both enterprises;
2. (b) “participation in the management, control or capital” means:
a. a participation of more than 50% in the capital, voting rights or profits of another enterprise; or
b. the dominant influence over the management of another enterprise, based on equity or contractual constraints;
TP methods, specifically the methods recognized by OECD, are described in Article 4 of the Ministerial Decree of May 14, 2018. According to para. 5, taxpayers may apply a method other than CUP, Resale Price, Cost Plus, TNMM and Profit Split only if they can demonstrate that: i) none of those methods could be applied with reliable results to determine the pricing of a controlled transaction on the basis of the arm’s length principle; and ii) such different method produces a result consistent with what independent enterprises would be expected to obtain in carrying out comparable uncontrolled transactions.