Strategizing International Tax Best Practices – by Keith Brockman

The Italian Revenue Agency issued Circular No. 16/E on May 24th, resulting in audit practices that should be more closely aligned to the OECD transfer pricing principles on comparables and the arm’s-length principle (ALP).

The Circular acknowledges the OECD principles for the arm’s-length range and loss-making transactions, thereby allowing taxpayers following OECD principles to also be aligned with Italian transfer pricing practices.

Italy’s audit premise has generally focused on the median of the range as equating to the ALP, with little or no deviation. However, the relevant OECD principles for ALP and comparables of loss companies are found in Chapter III, Section A.7, commencing with par. 3.55. The ALP focus by the OECD is based on the fact that transfer pricing is not an exact science, and there will be many occasions when the application of the most appropriate method(s) produces a range of figures all of which are relatively equally reliable. Par. 3.60 states “If the relevant condition of the controlled transaction (e.g. price or margin) is within the arm’s-length range, no adjustment should be made.”

Italy has also generally not accepted loss-making companies from the chosen comparables. OECD par. 3.64 is very clear in ascertaining that loss-making transactions can be comparable, with no overriding rule on the inclusion or exclusion of such comparables.

The OECD section is worth reading again, especially if transfer pricing results are not always at the median and/or loss-making transactions are included as comparables, especially with prior COVID-affected years. Italy now seems to be more acceptable to such principles, and taxpayers should assert OECD principles more explicitly in the transfer pricing reports with related justification. This assertion should apply in Italy, and other countries which state that OECD transfer pricing principles are followed.

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