Italian Revenue Agency issues clarifications regarding TP adjustments and DAC6

On December 31 2021, the Revenue Agency published Resolution No. 78/E (the resolution) by way of which clarifications were supplied with regard to the cross-border mechanisms subject to the reporting obligation pursuing the implementation of the DAC6 Directive in Italy (Legislative Decree 100/2020).

Tax authorities have furnished clarifications with reference to the need to have to connect the year-conclude transfer pricing (TP) adjustments carried out in favour of non-resident subsidiaries (so-named TP adjustments) and positioned in jurisdictions which:

• Do not impose any cash flow tax or impose a tax shut to zero or
• Are thought of by the EU or the OECD to be non-cooperative. 

These would be transactions obtaining specific exclusive things (Hallmark) C.1.b.1 and C.1.b.2 incorporated in Annex 1 of the Italian legislation that applied the DAC6. 

In the alternative envisaged by the taxpayers that used for this certain clarification to Italian Tax Profits Company, the preparing of TP adjustments need to not be pertinent, for the uses of disclosure obligations below DAC6, even if they are produced in favour of subsidiaries resident in jurisdictions owning the attributes indicated in the aforementioned ‘distinctive element’. 

The latter since the implementation of TP changes usually takes location via the adjustment of the prices initially applied to the products, with the precise reason of enabling the subsidiaries to attain a marginality in line with the arm’s-length theory. For this explanation the adjustments really should not be competent as “deductible cross-border payments produced in between two or much more connected businesses” inside the which means of Annex 1, letter C, of Legislative Decree No. 100/2020. 

On the other hand, the Italian Tax Revenue Agency, recalling the provisions of Round No. 2 of February 10 2021, factors out that in buy for a system to qualify as topic to the reporting necessity, two requirements need to be satisfied:

• Transnationality i.e. the transnational character of the system and

• Exclusive aspects, i.e. the existence of at the very least one of the hallmarks labeled in five classes identified with letters from A) to E), delivered for in Annex 1 to Legislative Decree 100/2020. 

There are two other criteria referred to in just the round whose application is only essential in the existence of specified types of mechanisms. These are: 

• (Prospective) reduction of the tax because of in an EU state or in a third place with which a distinct agreement for the trade of details is in power concerning cross-border mechanisms subject to the notification obligation and
• Presence of a principal tax advantage realised by 1 or additional taxpayers in Italy.

In accordance to the circular in buy to assess:

• Irrespective of whether there was a principal gain, it is needed to validate if the tax gain deriving from the implementation of just one or additional cross-border mechanisms prevail with regard to the non-tax similar rewards and
• Regardless of whether there was a potential tax reduction, it is necessary to carry out a hypothetical comparison of the tax consequences in check out of the mechanism, which include individuals deriving from the application of favourable restrictions, with the consequences that would happen in its absence 

Additionally, Circular No. 2 of February 10 2021, referred to in the resolution, clarifies that with reference to the:

• Mechanisms characterised by the distinct components referred to in letters A, B, C.1, b) sub 1), c) and d), both of those the criterion of tax reduction and that of the most important benefit should be met and
• Mechanisms characterised by distinctive aspects pursuant to letters E and C other than those people indicated in the previous place, only the tax reduction standards need to be confirmed. 

As a result, the resolution clarified that for the obligation to talk TP adjustment occur, all the things belonging to class C of Annex 1 must involve:

• Equally the criterion of the probable tax reduction and the criterion of the most important benefit if the cross-border transactions are carried out with linked providers positioned in jurisdictions in which no company revenue tax is imposed or the corporate money tax fee is zero or close to zero and
• Only the criterion of the prospective tax reduction if the cross-border transactions are carried out with associated undertakings resident in a jurisdiction regarded by the EU or the OECD as non-cooperative.

With reference to the timeline, the resolution highlights that the reporting obligations will have to be carried out:

• For the 1st conversation, in 30 times of the working day next the working day on which the cross-border system was manufactured offered to it for the functions of implementation, or the day on which implementation commenced and
• For the following communications, the 30 times deadline start out from the date of acceptance of the economical statements of the dad or mum company which is creating the adjustment.

For that reason, only if and when the higher than ailments are fulfilled, the obligation to communicate cross-border mechanisms for DAC6 reasons would arise in situation of a TP adjustment.

Federico Vincenti

Partner, Valente Associati GEB Partners/Crowe Valente

Alessandro Valente

Associate, Valente Associati GEB Partners/Crowe Valente

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