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Transfer Pricing Documentation and Country-by-Country Reporting
The Base Erosion and Profit Shifting (BEPS) Action Plan adopted by the OECD and G20 countries in 2013 recognised that enhancing transparency for tax administrations by providing them with adequate information to assess high-level transfer pricing and other BEPS-related risks is a crucial aspect for tackling the BEPS problem.
Against that background, the September 2014 Report on Action 13 (the “September 2014 Report”) provides a template for Multinational Enterprises (MNEs) to report annually and for each tax jurisdiction in which they do business the information set out therein. This report is called the Country-by-Country (CbC) Report.
The September Report described a three-tiered standardised approach to transfer pricing documentation. This standard consists of:
- (i) a master file containing standardised information relevant for all MNE group members;
- (ii) a local file (so called Country File) referring specifically to material transactions of the local taxpayer;
- and (iii) a Country-by-Country Report containing certain information relating to the global allocation of the MNE group’s income and taxes paid together with certain indicators of the location of economic activity within the MNE group (the “CbC Report”).
In Italy the translation of the first two above mentioned standardised approach to transfer pricing documentation (master file and country file) into operating guidelines was effected with Law Decree 78 of 31 May 2010 which introduced the so called “penalty protection” documentation rules. This law provides a penalty protection regime for companies which comply with the documentation requirements and who notify possession of documentation when they file their tax returns. In particular, Italian-based groups which include non-Italian subsidiaries must produce both a master file and a country file; Italian subsidiaries/branches need produce only a country file.
While documentation is not mandatory, the regulation indicates that whether or not a company has communicated the existence of such documentation will influence the tax authorities in their risk assessment and as an indication of taxpayer transparency and willingness to cooperate. Documentation which is considered to meet the requirements of the regulation will protect taxpayers from tax-geared penalties on any transfer pricing adjustments.
The Country-by-Country Reporting (CbCR) has been introduced in Italy by Law December 28, 2015 n. 208, effective from January 1, 2016, but the specific operating regulation have just been approved by Ministerial Decree dated February 23, 2017.
Please find hereinafter a summary of the above mentioned Italian rules which clarify who, when and how the CbCR is required.
Who must provide the Country-by-Country Reporting
In general, the CbCR must be provided by the Ultimate parent company:
- domiciled in Italy
- required to prepare the Consolidated Financial Statements;
- having total consolidated group revenue equal or higher than Eur 750.000.000 (or an amount in local currency approximately equivalent) during the Fiscal Year immediately preceding the Reporting Fiscal Year;
- which is not controlled by other companies/entities
The controlled company domiciled in Italy (i.e. local subsidiary) shall provide the CbCR if one of the following criteria are satisfied:
- the Ultimate Parent Company of the MNE Group, which is required to prepare the Consolidated Financial Statements, is not obligated to file a Country-by-Country Report in its jurisdiction of tax residence (*)
- the Ultimate Parent Company of the MNE Group, which is required to prepare the Consolidated Financial Statements, is resident in a Country without any agreement with Italy which permits the exchange of tax information related to Country-by-Country Report;
- the Ultimate Parent Company of the MNE Group, which is required to prepare the Consolidated Financial Statements, is resident in a Country which is in default with reference to exchange of tax information related to Country-by-Country Report with Italy (the non compliance shall be communicated by the Italian Authority to the controlled company resident in Italy)
(*) According to art. 7, paragraph 2 of the Italian Decree dated February 23, 2017, with reference to the FY 2016 (first application), the above mentioned rules do not apply when the Ultimate Parent Company of the MNE Group, which is required to prepare the Consolidated Financial Statements, even if is not obligated to file a Country-by-Country Report in its jurisdiction of tax residence, voluntarily provides the Country-by-Country Report in its jurisdiction of tax residence.
In this case, the controlled company domiciled in Italy shall be exempted to provide the CbCR when the following conditions are met:
- the CbCR is provided by the Ultimate Parent Company in its jurisdiction of tax residence within twelves moths following the last day of the Reporting FY of MNE Group;
- the jurisdiction of tax residence of the Ultimate Parent Company introduces the obligation to file the CbCR within the deadline of the first Reporting FY even if not related to FY 2016;
- at the first Reporting FY deadline shall be in effect a Qualifying Competent Authority Agreement, between Italy and the jurisdiction of tax residence of the Ultimate Parent Company;
- the jurisdiction of tax residence of the Ultimate Parent Company does not communicate to the Italian tax Authorities a situation of “Systemic Failure”;
- the controlled company domiciled in Italy notifies the Italian tax Authorities the data of the entity required to provide to the CbCR, specifying not to be Ultimate Parent Company nor the Surrogate Parent Entity nor Constituent Entity designed within the Group.
By derogation from previous point, when one or more of the above mentioned conditions apply, the controlled companies domiciled in Italy shall not be required to file the Country-by-Country Reporting if the Multinational Group (MNE Group) of which it is a Constituent Entity has made available a country-by-country report in accordance with the Italian law with respect to such Fiscal Year through a Surrogate Parent Entity that files that country-by-country report with the tax authority of its jurisdiction of tax residence.
In case the Surrogate Parent Entity is tax resident in a jurisdiction outside the Union, must satisfy the following conditions:
When and how the Country-by-Country Reporting must be provided
The CbCR shall be provided with reference to the Fiscal Year starting January 1, 2016 or after (for example, for companies with a fiscal year different from the yearly fiscal year)
By the deadline for fill in the Italian tax return related to the Reporting Fiscal Year:
- the entity of MNE Group, resident in Italy, required to provide the CbCR, as Ultimate Parent Company or the Surrogate Parent Entity or Constituent Entity designed within the Group, shall inform the Italian tax Authorities;
- any entity of MNE Group, resident in Italy, different from the above mentioned entities, notifies the Italian tax Authorities the data of the entity required to provide the CbCR.
The CbCR shall be provided to the Italian tax Authorities within 12 months following the last day of the Reporting FY (a specific Decree will clarify the formalities required to provide the CbCR). Where the CbCR is not provided or does not contain the correct/real data an administrative penalty from Eur 10.000 to Eur 50.000 shall apply.
The Country by Country Reporting legislation requires a deep analysis of the Group in order to individuate the entity of the Group required to provide the CbCR, also for Italian tax purposes. After that, it will be important to analyse the result of the Country by Country Reporting in terms of fiscal risks and verify the consistency of this Report with the other available TP documentation (i.e. Master and Country File) with evidence of potential risk areas.
Maurizio Bottoni is the senior partner of Interconsulting. As a consultant in one of the Big Four he has developed a deep knowledge of the Italian and International tax law, through the involvement in operations and reorganization of multinationals. Extraordinary transactions and international issues are his daily business.