Italy addresses double taxation arising from foreign TP adjustments

During the last few years, Italy's transfer pricing (TP) framework has been complimented by a new set of rules aimed at aligning Italian domestic law with OECD developments following the BEPS project and the Multilateral Convention (MLI).

In particular, Article 59, Paragraph 2 of Italian Law Decree No. 50 of April 24 2017 amended the domestic provisions on corresponding adjustments (previously allowed only in the context of a mutual agreement procedure, or MAP), by introducing Article 31-quater of Presidential Decree No. 600 of September 22 1973 (Decree 600/1973).

Accordingly, it is now provided that the taxpayer may be granted the right to benefit from a corresponding adjustment:

i) In execution of agreements concluded between the Italian Revenue Agency (IRA) and the relevant foreign competent authority (CA) in the context of a MAP under any applicable double tax treaty (hereinafter, the treaty), or the Convention 90/436/EEC of July 23 1990 (the Arbitration Convention); or

ii) As a result of an administrative tax assessment carried out through international cooperation activities, if the outcome of the tax audit has been accepted by the participating states; or

iii) Through the filing of a specific written request, in respect of a final primary adjustment at arm's-length performed by a state which entered into a treaty with Italy and allows an adequate exchange of information (EOI).

After a public consultation started on February 22 2018, the implementing provisions have been issued through the act of the IRA Director No. 108954 of May 30 2018 (the Act), which put into effect the procedure under indent (iii) above (the procedure).

The procedure can be started by a company that is a resident in Italy and carries out an intercompany transaction with a related foreign entity. This is all subject to TP rules under Article 110, Paragraph 7 of the Italian Tax Code Act (ITCA), which lays down the arm's-length principle under Italian tax law.

The Act clarifies that the procedure also concerns intra-group relations between the Italian parent company and a permanent establishment (PE) located abroad, and vice versa.

The procedure aims at obtaining recognition in Italy of a corresponding adjustment of the taxable income of an Italian company, with respect to a final primary adjustment at arm's-length performed by a foreign treaty state.

According to the plain wording of Article 31-quater and the Act, the primary adjustment should be performed by the relevant tax authorities of a foreign state. In this respect, it is arguable whether primary self-adjustments performed by the foreign related party (but technically not the result of a formal tax assessment) can also be viewed as primary adjustments for the purposes of the procedure. This would, for instance, be the case in certain self-assessments allowed under German law.

In this respect, the commentary on Article 25 of the OECD model points out that access to a MAP should be granted also in cases of:

Bona fide taxpayer-initiated adjustments which are authorised under the domestic laws of some countries and which permit a taxpayer, under appropriate circumstances, to amend a previously filed tax return in order to report a price in a controlled transaction, or an attribution of profit to a PE, that is, in the taxpayer's opinion, in accordance with the arm's-length principle.

Considering that the procedure determines the activation of a MAP according to point 6.1 of the Act, and represents the initial phase of the latter, self-adjustments performed abroad may fall in principle within the scope of the procedure (where a MAP can be started).

With regard to the definition of "final" primary adjustment, the Act does not clarify under which conditions an adjustment should be qualified as "final".

Previously, IRA Circular Letter No. 9/E of March 5 2015 provided some clarification on the foreign tax credit mechanism, maintaining that the notion of "final" is linked to the concept of un-repeatability in the taxes paid in the foreign state (i.e., the impossibility of giving rise to a quantitative or qualitative change in favour of the taxpayer).

It is also worth stressing that the procedure is limited exclusively to primary adjustments carried out in compliance with the arm's-length principle, in the hands of the non-resident group company. On this point, the Act does not contain a precise qualification of the power of scrutiny granted to the IRA. This being said, in order to ensure the effectiveness of the procedure from a practical standpoint, a more detailed clarification would have reduced IRA's discretion with regard to the analysis of the foreign dispute.

The Act provides the mandatory elements which must be included in the application for a corresponding adjustment, as follows:

i) The legal instrument for the resolution of international disputes whose activation is required under the Procedure. In this respect, the application directly activates the procedure for the resolution of international disputes provided for by said legal instrument (e.g. MAP under the Treaty);

ii) The documents and information required to gain access to the underlying legal instrument;

The Italian Tax Code Act does not clarify under which conditions an adjustment should be qualified as “final”

iii) The request for the elimination of double taxation generated by a primary adjustment. For simplification purposes, the taxpayer can apply even if the primary adjustment made by the foreign state has not yet become final, provided that the taxpayer gives evidence of the stage of the primary adjustment and of the potential circumstances under which the primary adjustment will become final;

iv) The tax assessment deeds and the documents issued by the foreign CA from which the primary adjustment is derived; and

v) All the relevant factual elements and legal aspects to show that the primary adjustment was made in accordance with the arm's-length principle.

The request must be submitted within the terms provided for by the specific legal instrument, whose activation is requested under the procedure and must be signed by the legal representative of the company, or by another person with powers of representation.

Pursuant to point 3.1 of the Act, the application must be examined by the IRA and declared admissible within 30-days from its receipt, if all the requirements are met.

If the application is declared inadmissible due to the lack of one or more fundamental element, it is possible to supplement the application within 30 days. In this case, the 30-day term for the admission of the request starts from the date of receipt of the supplementary documentation.

The inadmissibility of the application occurs when the taxpayer does not supplement the uncomplete application within 30-days, or when the supplementary documentation is insufficient for the purposes of the procedure.

In any case, the procedure will terminate if:

i) The taxpayer fails to provide, without any justification, the documentation and/or clarifications asked by the IRA within the deadline agreed with the CA; or

ii) The tax authorities are aware of elements and information relating to facts and circumstances according to which it is established that the taxpayer is liable to "serious penalties" related to the subject matter of the procedure.

According to the Act, the procedure is concluded within 180-days from the submission of the application, but it is unclear whether this deadline is mandatory or not.

The IRA may ask the applicant additional documentation during the discussion with the aim of verifying the completeness of the application.

The procedure ends with the issuance by the IRA of a reasoned act of recognition (or non-recognition) of the corresponding adjustment requested by the taxpayer.

In case of recognition of the corresponding adjustment, the IRA will liaise with the foreign CA to communicate the adjustment. In addition, the 'underlying' procedure of resolution of international disputes is interrupted, since the double taxation deriving from the primary adjustment has been eliminated.

In order to finalise the procedure with the recognition of the corresponding adjustment, the Act requires that a certificate issued by the foreign tax authority (or equivalent appropriate documentation) shall be provided in order to certify that the primary adjustment is final.

Conversely, if the procedure ends with the non-recognition of the corresponding adjustment, the procedure is automatically converted into the legal instrument for the resolution of international disputes indicated in the application (e.g. MAP under the Arbitration Convention), thus granting the taxpayer the possibility of mitigating or eliminating double taxation, even if the request for a corresponding adjustment has been unilaterally rejected by the IRA.

In this regard, it is doubtful whether it is possible to challenge before the Tax Court the act of non-recognition issued by the IRA director. However, since the taxpayer is anyhow granted the opportunity of eliminating or reducing double taxation by means of the underlying legal instrument set forth in the application, it could be argued that the appeal against the act of non-recognition should be prevented.

In any case, if the taxpayer does not aim to request the unilateral corresponding adjustment through the submission of the request for the procedure, it may directly initiate the MAP under a treaty or the Arbitration Convention. The taxpayer has therefore been given a wide variety of choices regarding the strategy to be adopted, in order to reduce or eliminate the double taxation arising from a primary adjustment.

The law provisions introducing the procedure do not contain any specific details on the foreign primary adjustments that can be subject to the procedure. However, the Act specifies that the procedure can be started with reference to primary adjustments made abroad, for which at the date of publication of the Act (i.e., May 31 2018), no request for the activation of a MAP has been submitted yet.

Therefore, for instance, primary adjustments made by a certain state, even if not final, may fall within the scope of application of the procedure, provided that the application is submitted within three years from the receipt of the first tax assessment deed, in case the procedure is initiated according to the MAP governed by the Arbitration Convention.

The procedure has been welcomed as it represents an additional tool available to taxpayers, which given its preventive nature, will hopefully result in a reduction of the number of MAPs concerning the resolution of TP disputes. Time will tell.

Raul-Angelo Papotti

Partner Tax and tax planning / private wealth Chiomenti T: +39 02 7215 7855 raul.papotti@chiomenti.net Head of tax and tax planning department, Raul-Angelo Papotti advises Italian and international clients on tax law and tax planning, cross-border taxation and transfer pricing, M&A transactions, private wealth management, trusts and estate planning matters. Raul-Angelo has routinely advised and advises corporate and private clients in pre-litigation and litigation concerning cross-border tax and transfer pricing matters. His clients include leading global investment banks, Italian and foreign multinationals, and prominent HNWIs, families and family offices. He is author of many publications on international tax matters and is frequent speaker at domestic and international congresses. He is also co-author of a book on the Italian patent box regime, edited by EGEA. Raul-Angelo previously worked at the London office for six years and has gained a wealth of experience in advising American and English banks, multinationals and investment funds operating in Italy. Raul-Angelo is ranked as a leading expert in international tax law in the foremost international legal guides such as Chambers, Legal 500 and Who's Who Legal.

Paolo Giacometti

PartnerInsolvency and restructuring / tax and tax planning / private wealth Chiomenti T: +39 02 7215 7651 paolo.giacometti@chiomenti.net Paolo Giacometti joined Chiomenti in 1998 and became a partner in 2006. Paolo advises Italian and international clients on tax law and tax planning matters with a focus on extraordinary corporate transactions, mergers and acquisitions, private equity, international taxation, transfer pricing, taxation of investment funds and financial products. In addition, he assists individuals, families, and family offices with family wealth restructuring, trusts, and estate planning. Paolo worked at Chiomenti's New York office from 2003 to 2006 and assisted a wealth of US multinational companies, private equity funds, and financial institutions on matters concerning tax planning and investment in Italy. Paolo has been ranked as a leading tax adviser by international legal guides such as Chambers and Partners and Legal 500. Paolo graduated in economics from Bocconi University, Milan in 1995. He also has executive education in leadership in law firms from Harvard Law School (2017). He is admitted to practice before the taxation courts in Italy and speaks Italian, English and French.

Andrea Alcara

AssociateCorporate – M&A / Tax and Tax Planning Chiomenti T: +39 02 7215 7861 andrea.alcara@chiomenti.net Andrea Alcara is registered with the Association of Chartered Accountants of Milan. He is a member of the international tax committee of the Chartered Accountants of Milan. He has been an associate at Chiomenti since June 2016. He advises Italian and foreign multinational groups on international taxation, transfer pricing, tax litigation, and extraordinary business transactions matters. He attended Bocconi University in Milan and has a master's degree in tax and business law (2015).