The international standard ruling procedure
By Dr. Sergio Finulli, Comma 10
The Italian tax agency's report of 19 March 2013 dealt at length with the international standard ruling procedure aimed at international companies which proposed to reach a preliminary agreement with the Italian tax authorities on
- Determining fair market value in view of the transfer price rules (Article 110 para. 7 of Presidial decree 917/86)
- The application proposed of rules also agreed for contracts in specific individual cases concerning paying or drawing dividends, interest, royalties and other elements of profits to or from non-resident rights holders;
- The application proposed for specific individual cases of rules on attributing profits or losses to the stable organisational structure of a company domiciled in the territory of another state.
The transfer price issue is particularly suited to the ruling, as the single test on income tax (Presidial decree 917/86) lays down that international inter-group transactions based on fair market value (free market price) of purchases or sales concluded with the foreign partner contribute towards earnings from business. This applies, in particular, when transferring tangible assets, semi-finished products, finished products, intangible assets in connection with research and development (trademarks, intellectual creations, inventions, knowhow etc.) or when performing services with particular reference to services of an administrative, commercial or HR nature.
Determining whether the transfer prices as used are reasonable may give rise to disputes between companies and the tax authorities. Seen in this context, the ruling procedure may help pre-empt the risk of potential disputes by concluding an agreement, in this case, the A.P.A. (Advance Pricing Agreement) with the Italian tax authorities to settle the method to be used in calculating transfer prices to determine the fair market value in advance for a limited period of time for the business transactions to which the agreement relates.
The report indicates that a majority (75%) of the APAs concluded to date involve transfer prices.
An APA is a unilaterally binding agreement which is binding only on the Italian tax authorities and not on those of the other states involved.
To offer multinational groups more certainty, however, the Italian tax authorities have allowed taxpayers who have an interest in concluding bi- or multilateral agreements to include the tax authorities of the other states involved in the agreement and hence eliminate the risk of disputes.
Applications may also be made for guidance (prior to submission), which advisers may submit anonymously, without disclosing the taxpayer's name and which may extend to instigating or waiving proceedings. To instigate proceedings formally, application must be made to the tax collection agency's ruling office on stamp-duty-free paper.
The procedure will result, within 180 days of submitting the application, in an agreement which is binding on the parties for three years and prevents the Italian tax authorities from exercising their discretionary powers on the circumstances to which the agreement refers. Application may be made to extend the term of the agreement at least 90 days before it runs out.
Dr. Sergio Finulli
Comma 10 - Chartered Accountants & Lawyers, Milan, Italy
published: March 2014