Transfer Pricing adjustments: the impact of the amendments to Art. 9 of the Commentary

by Verbena Caravella | Apr 14, 2021 | Blog

Do you know what a transfer pricing adjustments is?

Art. 9 of the OECD Model Convention represents the pillar of the transfer pricing best practice, as it states the arm’s length principle, according to which the commercial or financial relations between companies belonging to the same multinational group must reflect the same market conditions that would have been agreed between independent companies. Where the arm’s length principle is not respected, art. 9 authorizes the Tax Authorities States to make adjustments to the profits included by the associated company in their tax base for taxation purposes.

In the context of art. 9, paragraph 1, an issue of double taxation could derive either from a tax act of the tax authority (so-called primary adjustment) or from a voluntary initiative of the taxpayer (so-called taxpayer adjustment), in those cases in which, for example, the associated company makes end-of-year adjustments by the end of the financial year, resulting in an increase or reduction in the tax base.

 

Taxpayer adjustments within the Covid-19 context

The impact of the Coronavirus epidemic on global economies has led multinational groups to adopt measures to counteract the negative effects of the crisis and the reduction in turnover. Among the measures adopted by companies the transfer pricing adjustments are aimed at ensuring that group companies performing routine functions obtain a marginality consistent with the arm’s lenght principle.

From a practical point of view, the application of an “end-of-year adjustment” allows the alignment of the margins (operating or net margin) obtained through the application of the prices defined in the budget. In such cases, the adjustment may involve an upward adjustment to the taxable base of the foreign associated company.

 

Critical aspects of Italian legislation regarding “compensatory” adjustments

According to the Italian legislation set out in Article 31-quater of Presidential Decree no. 600 of 1973, the taxpayer would have access to unilateral adjustments only in the event of a primary adjustment, i.e. an adjustment resulting from a final tax act issued by the foreign country and compliant with the arm’s length principle. The Italian taxpayer would therefore be precluded from making any adjustments to the tax base deriving from a “compensatory” adjustment of transfer prices.

The Italian Supreme Court , adopting a restrictive approach, stated  that the assessment of the conformity of prices with the arm’s length principle must be carried out “ex ante”, excluding the possibility of making “final” adjustments to the marginality of the Italian company.

 

What are the objectives of the proposed amendments to Art. 9 of the Commentary?

On March 29, 2021, the OECD launched a public consultation on proposed amendments to the OECD Commentary on Article 9 and related articles.

The revision of Art. 9 stems from the need for tax certainty for multinational companies as a key component of investment decisions in different countries, with significant impacts on economic growth. In Europe, the questionnaire of the Joint Transfer Pricing Forum of December 2011 showed that no country excludes in principle the possibility of “compensatory adjustments” at the end of the financial year. Italy, however, did not provide any information on the various points of the questionnaire.

It is hoped that during the consultation process the Italian government will adopt a pro-taxpayer stance, promoting a collaborative relationship between companies and the tax authorities aimed at encouraging foreign investment in our country and facilitating economic recovery.

In this sense, the proposed amendments to art. 9 of the OECD Commentary could have a significant impact on the system of adjustments made by national tax authorities following an audit regarding transfer pricing and, in particular, on the management of controls carried out as part of international cooperation activities whose results are shared by the participating countries.

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