The regulation of transfer pricing in Italy is based on a complex legal framework that ensures transactions between companies in a multinational group are conducted at market conditions, in accordance with the arm's length principle. This principle states that transactions between related parties must be treated as if they were carried out between independent entities, to avoid tax distortions.
Companies are therefore required to prepare and maintain adequate documentation that demonstrates the correctness of their transfer pricing policies. Italian regulations, aligned with international OECD standards, establish specific requirements, including those related to language, for the preparation of this documentation.
Specifically,
transfer pricing is regulated by Article 110, paragraph 7 of the TUIR (Consolidated Law on Income Taxes) and various implementing provisions from the Revenue Agency. The Agency Provision No. 360494 of November 23, 2020, sets forth the formal and substantial requirements that taxpayers must comply with to access the "penalty protection" regime during potential tax audits on intergroup transactions. This regime offers protection from penalties, which, in the absence of compliance, can reach up to 70% of the assessed additional tax.
The required documentation for ensuring compliance in transfer pricing is mainly divided into two documents:
- Master File: This document provides a unified overview of the multinational group, detailing the organizational structure, main business activities, and overall strategy for transfer pricing.
- Country File (National Document): This document offers specific details on transactions between group companies, focusing on the entity operating in a single country, in this case, Italy.
Linguistic Requirements
The requirements for drafting transfer pricing documentation are outlined in the implementing regulations of DM May 14, 2018, and Agency Provision No. 360494/2020. According to these provisions, documentation must be prepared in Italian. However, the Master File may be drafted in English, but only for operations of international significance. In the event of audits, the Revenue Agency may request an official translation into Italian.
Specifically:
- The Master File can be in English, but a translation into Italian must be provided within 30 days upon request from Italian authorities.
- The Country File must be prepared exclusively in Italian, with no exceptions.
The primary goal of these linguistic provisions is to allow the Tax Administration to quickly acquire a clear understanding of the information related to the Italian company's activities, particularly concerning intercompany operations and the economic analyses supporting the transfer pricing policies.
Consequences of Non-Compliance with Linguistic Requirements
Failure to comply with linguistic requirements can compromise the validity of transfer pricing documentation. Non-compliant documentation or documentation not drafted in the required language may lead to the disapplication of the penalty protection outlined in Article 1, paragraph 6 of Legislative Decree No. 471/1997. This regulation states that companies providing suitable documentation in a timely manner are not subject to penalties in case of adjustment of transfer prices.
Conclusions
In transfer pricing matters, linguistic requirements are crucial for ensuring the validity of documentation for tax purposes. Properly preparing documentation in Italian, except for the Master File, provides adequate protection for the company against potential audits by the Tax Administration. It is essential for multinational enterprises operating in Italy to fully comply with these linguistic provisions to avoid penalties and disputes with tax authorities.