In Italy, transfer pricing adjustments are essential tools for ensuring that transactions between associated companies are carried out in accordance with the arm’s length principle. These adjustments seek to correct the results of intra-group transactions to reflect the conditions that would have been agreed between independent parties in comparable transactions, in accordance with the guidelines adopted by Italian regulations and international recommendations.
Basis and Application of Transfer Pricing Adjustments
In practice, these adjustments are mainly applied to modify the profitability of entities that carry out activities on behalf of companies in the same multinational group, especially when the results deviate from a range of values considered to be in accordance with the arm’s length principle, usually determined through benchmarking.
In Italy, the application of these adjustments is a well-established and recognized practice, especially in transactions involving routine activities. This approach is shared by various international jurisdictions.
The OECD’s “Pillar One Amount B” report, published in February 2024, reinforces the need for these adjustments. According to the report, if the profitability derived from certain transactions between associated companies, related to basic marketing and distribution activities, deviates from the value calculated using the simplified approach presented in the aforementioned report, an adjustment will be necessary to align the results.
Accounting Considerations for Adjustments
From an accounting perspective, transfer pricing adjustments are not directly regulated by Italian national accounting standards (OIC). Their treatment varies depending on whether they relate to sales revenue, costs incurred, or adjustments to a company’s profitability.
- Adjustments related to income or costs: These would involve direct variations in the value of the corresponding costs or income and should be classified as “variable considerations,” as defined by OIC 34.
- Adjustments related to profitability: When a company performing routine functions reports profitability outside the established range, corrections are required. In this case, the adjustments cannot be directly attributed to specific cost and income values and must therefore be classified under items “A.5 – Other income and gains” and “B.14 – Other operating expenses.”
VAT implications
With regard to Value Added Tax (VAT), the treatment of transfer pricing adjustments depends on the specific circumstances:
- Adjustments that directly modify the value of the consideration: If the adjustment directly affects the value of a good or service, it could have implications for the VAT tax base.
- Adjustments that do not directly modify the consideration: If the adjustment does not directly affect the value of the transaction, it may not have any VAT implications.
It is essential to analyze each specific case to determine the corresponding tax implications.
Conclusion
Transfer pricing adjustments are essential tools for ensuring compliance with the arm’s length principle in intra-group transactions. Their correct application requires a detailed understanding of accounting and tax considerations, especially with regard to VAT. Companies should carefully assess each situation to ensure regulatory compliance and avoid potential tax contingencies.
TPC Group Advice
At TPC Group, we have an experienced Transfer Pricing and International Taxation team at your disposal to advise you on corporate restructuring processes, ensuring regulatory compliance, and optimizing your tax position. Contact us for a customized consultation.
Source: https://ntplusdiritto.ilsole24ore.com/art/AH1DkIs?refresh_ce=1