In Italy, the Transfer Pricing adjustments are fundamental to ensure that associated company transactions are under the Arm’s Lenght Principle. These adjustments intend to correct the results of intra-group transactions to reflect the conditions agreed upon in comparable independent-party transactions, according to the guidelines adopted by the Italian regulations and international recommendations.
Rationale and Application of the Transfer Pricing Adjustments
The adjustments mainly apply to modify the profitability of entities performing activities on behalf of companies of the same multinational group, particularly when the results deviate from a range of values considered compliant with the Arm’s Length Principle, usually determined by benchmarking analysis.
Italy applies these adjustments as a well-established and recognized practice, particularly in routine activity transactions. This approach is shared by several international jurisdictions.
The OECD’s “Pillar One Amount B” report, published in February 2024, reinforces the need for these adjustments. According thereto, if the profitability derived from certain associated company transactions related to core marketing and distribution activities deviates from the value calculated using the simplified approach reported, an adjustment will be necessary to align the results.
Accounting Considerations for Adjustments
From an accounting perspective, the OIC (Organismo Italiano di Contabilità – Italian Accounting Committee) does not directly regulate the Transfer Pricing adjustments. Their treatment varies depending on whether they are related to sales revenues, costs incurred, or corporate profitability adjustments.
- Adjustments related to revenues or costs involve direct variations in the value of the related costs or revenues and should be classified as “variable consideration” as defined by OIC 34.
- Adjustments related to profitability require corrections from companies performing routine functions and have profitability outside of the established range. In this case, the adjustments cannot be directly allocated to specific cost and revenue values and should, therefore, be classified under “A.5 – Other income and profit” and “B.14 – Other management expenses.”
VAT Implications
Regarding the IVA (Impuesto al Valor Agregado – Value Added Tax/VAT), the treatment of the 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 affect the VAT taxable base.
- Adjustments not directly modifying the consideration: If the adjustment does not directly affect the value of the transaction, it may not have VAT implications.
Each case must be specifically analyzed to determine the corresponding tax implications.
Conclusion
The Transfer Pricing adjustments are essential to ensure compliance with the Arm’s Length Principle in intra-group transactions. Their correct application requires a detailed understanding of accounting and tax considerations, particularly regarding VAT. Companies must carefully assess each situation to ensure 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: NTPlus Diritto