A robust new legislative initiative in Italy is expected to help international companies limit tax compliance risks by boosting cooperation with the Italian authorities.
With the Provision of the Italian Revenue Agency dated 21 March 2016, protocol. 2016/42295, the guidelines for advance agreements for companies operating internationally, newly introduced by Art. 31-ter of Presidential Decree No. 600 of 29 September 1973, were definitively implemented.
Article 1, paragraph 1 of Legislative Decree no. 147 of 14 September 2015 (the so-called Internationalisation Decree) rescinded the previous legislation introducing Art. 31-ter of Presidential Decree no. 600 of 29 September 1973 with "Advance agreements for companies operating internationally" and defines the methodology for the identification of the fiscal position of the taxpayer. The new procedure enables the taxpayer to make an agreement with the Italian Revenue Agency, in its dedicated division – the Office of Advance Agreements and International Disputes –on submission of the relevant application, in order to regulate its operational and fiscal profile in compliance with the current legislation.
Commenting on the Provision in its circular dated 1 April 2016, Assonime (the association of the Italian joint stock companies) identifies an objective profile subdivided into four cases which may become the subject of an advance agreement:
1. the prior adversarial identification of the calculation methods of the so-called normal pricing of infragroup transactions in the context of the transfer pricing guidelines (Art. 110, paragraph 7 of Presidential Decree no. 917/1986 of TUIR) as well as the exit/entry prices in the case of a transfer of residence from or to Italy (Art. 166 exit tax, 166-bis entry tax [newly introduced by the Internationalisation Decree], Presidential Decree no. 917/1986 of TUIR)
2. the application, in the context of a specific case, of measures regarding the allocation of profit and loss to a permanent establishment in another country or to a permanent establishment within Italy by a non-resident party
3. the prior evaluation of the existence or otherwise of the prerequisites that identify a permanent establishment in Italy (Art. 162 of Presidential Decree no. 917/1986 of TUIR)
4. the application, to a specific case, of the regulations governing the payment/receipt of dividends, interest, royalties or other income.
In subjective terms however, the party entitled to the application of this procedure is identified within the company operating internationally, forming a category subdivided into two cases:
1. a company resident in Italy, in accordance with TUIR, which alternately or simultaneously meets the following prerequisites:
- the company exists in the context of an international group of companies, with respect to non-resident companies, in accordance with one of more of the conditions indicated by Art. 110, paragraph 7 of TUIR, and therefore engages in transactions with non-resident companies, which directly or indirectly control the business, are controlled by the business or are controlled by the parent company of the business
- the company has a holding, fund or share capital held by non-resident parties or participated in by non-resident parties
- the company has paid or received dividends, interest, royalties or other income components to or from non-residents
- the company carries out its business through a permanent establishment in another country.
2. a non-resident business which carries out its activity in Italy through a permanent establishment.
The new procedure has the following well-defined phases:
1. pre-application phase: the taxpayer makes an informal request for a meeting with Office of Advance Agreements representatives (an internal division of the Revenue Office) in order to obtain clarifications and/or indications regarding the procedure prior to the submission of the application itself. These can also be obtained by way of prosecutors
2. written application: a draft containing the details of the business is written on plain paper and submitted by recorded mail or certified email to the Office of Advance Agreements and International Disputes in Rome or Milan. The investigation is concluded once a statement of the eligibility, ineligibility or inadmissibility of the application in question has been issued. An application is inadmissible if the Revenue Agency is unable to confirm the existence of the essential prerequisites
3. the adversary procedure between the Office and the taxpayer may take place over a number of meetings, including meetings held at the company's head offices, according to agreed methods and time frames. The procedure must be completed within 180 days by way of an agreement between the parties, identifying the terms of the agreed arrangement, or the production of a written report stating the failure to reach an agreement. This is binding for both parties and remains in force for the duration of the relevant financial year and for four successive years. (Art. 31-ter of Presidential Decree 600/1973). Another important introduction is the retroactive effectiveness of the agreement, as such applying the agreement to previous tax years, in the specific cases where:
- other agreements are concluded with foreign authorities following a "mutual procedure against double taxation"
- the factual and legal circumstances apply to one or more taxation periods prior to the agreement (Art. 31-ter, paragraph 3 of Presidential Decree no. 600/1973)
The taxpayer may then rectify past conduct through the voluntary tax correction measure or by submission of a supplementary statement, in both cases avoiding the application of any relative sanction (final section of Art. 31-ter, paragraph 3 of Presidential Decree no. 322/98
4. the assessment procedure: the Office may exercise the right to verify compliance with the terms of the agreement or to investigate any change in the factual and legal circumstances forming the basis of said agreement by requesting documentation, clarifications or access to other information as agreed in the terms
5. amendments to the agreement: the taxpayer may amend the agreed terms on submission of a detailed and justified application by the correct procedure, in turn beginning a new adversary procedure
6. the agreement renewal: the company must submit a renewal application no later than 90 days before the expiry date of the agreement, after which time the agreement shall become void. The Office will respond no later than 15 days before the expiry date, giving notification of the acceptance or refusal of the application.
The new procedure clearly demonstrates a robust legislative initiative to open the domestic system to dialogue with external parties which, in implementing medium and long term investment plans, have a strong interest in allocating time and resources to the implementation of an standardised organisational and fiscal system which conforms to the law. In doing so they limit the risk of exposure to investigations and tax charges resulting from the non-conformity of profiles adopted by foreign companies through local business units or better, through the means designed for the project. The taxpayer now has the right, specifically in the context of the first phase mentioned above, to obtain a direct meeting with (Revenue Office's representatives) in order to find out and discuss their own preventative decisions for the implementation of a domestic organisational structure.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.