Italian transfer pricing rules: Italian Revenue Agency clarifies the Country File formal requirements

The Italian Revenue Agency issued a Provision on 23 November 2020 that has established the formal and substantial requirements to be met in transfer pricing documentation prepared by taxpayers to enable them to have access to the "penalty protection regime" for adjustments to transfer prices of intercompany transactions. 

The transfer pricing documentation is not mandatory, but if the taxpayer decides to adopt the compliance regime, two documents must be provided: the Masterfile, which offers a general overview of the group as a whole and of the main transfer pricing policies and agreements; and the Country File, which reports on the single local Italian entity and which includes a detailed mapping of the intragroup transactions that have occurred during the fiscal year under analysis.

Paragraph 5.1.1 of the Provision expressly states that the taxpayer is allowed to prepare the Masterfile in English as well as the relevant annexes (that is, inter-company agreements, existing unilateral and bilateral/multilateral advance pricing agreements, and other tax rulings to which the local tax jurisdiction is not a party and which are related to controlled transactions described in the Country File). However, the Country File has to be drafted in Italian. The underlying reason is to offer an immediate understanding to the tax authorities of the contents related to the Italian entity's business – especially referring to high technical aspects of the intercompany transaction as well as the analysis performed, that justifies the transfer pricing policy being applied and confirms compliance with the arm's length principle.

Tax ruling

Tax ruling no. 174/2024 issued by the Italian Revenue Agency has clarified that the use of the Italian language represents a fundamental requirement in order to guarantee the compliance of the transfer pricing documentation under the Italian legislation and therefore to ensure the penalty protection.

In the case addressed by the Tax Ruling, the applicant asked for an opinion on the possibility of also producing the Country File in English, since the transfer pricing documentation was managed centrally by the tax department of the holding company, with the support of external consultants, for the benefit of all the local subsidiaries located worldwide.

The applicant company justified its request on the basis that the translation costs or the engagement of local consultants for the provision of a Country File for each jurisdiction would generate a duplication of costs, which would be uneconomical and unreasonable for the group to incur.

The applicant referred to Article 1, § 1 of Decree 128/2015 which establishes the principle of mutual collaboration between the tax authorities and the taxpayer in the common interest of preventing and avoiding tax disputes. Furthermore, the company referred to principles expressed in the OECD Guidelines according to which the preparation of transfer pricing documentation should not entail excessive costs for the taxpayer.

The conclusions by the Italian Revenue Agency

On this point, the Italian Revenue Agency replied that OECD Guidelines themselves (§ 5.39) provide that "The language in which transfer pricing documentation should be submitted should be established under local laws." Furthermore, it explained that the preparation of transfer pricing documentation represents an option and not an obligation for the taxpayer.

Therefore, if the taxpayer would like access to the compliance transfer pricing regime, it must comply with the rules and requirements set forth by the Provision, including the obligation to prepare the Country File in Italian.