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by Elenia De Feo | Jun 17, 2022 | infoflash

Circular No. 16/E issued in May 24, 2022 indicates the need for appropriate documentation if the financial indicator falls outside the range


The Internal Revenue Service, in Circular No. 16/E dated May 24, 2022, provided operational guidance for the correct interpretation of the notion of “arm’s length interval,” enshrined in Article 6 of the May 14, 2018 Ministerial Decree, implementing the transfer pricing regulations set forth in Article 110 paragraph 7 of the TUIR, in accordance with the principle of arm’s length, “applying the method most appropriate to the circumstances of the case,” according to Article 4 of the aforementioned Ministerial Decree.

This method should be adopted taking into account the following criteria:

  • strengths and weaknesses, as well as nature and economic characteristics of the controlled operation;
  • availability of reliable information, especially in relation to comparable non-controlled transactions;
  • degree of comparability between the “controlled” transaction and the “non-controlled” transaction, also taking into account the reliability of any comparability adjustments necessary to eliminate the effects of differences between the aforementioned transactions.


With equal “reliability” between one of the traditional methods – price comparison, resale price and cost-plus method – and one of the income methods – net transaction margin and transactional profit-sharing method – the DM of May 14, 2018 sanctions the preference for the traditional methods, preferring the price comparison method, thus abandoning the concept of compulsoriness and hierarchy in the choice of method, as stated in the OECD Guidelines.

Premised on this assessment, Circular No. 16/2022 points out that the range of values formed by the financial indicators in application of the most appropriate method related to each transaction between independent third parties comparable with the controlled transaction, in accordance with Art. 6 of DM May 14, 2018, is considered to be in accordance with the arm’s length principle.

In fact, a controlled transaction, or a set of aggregate controlled transactions, is considered to be carried out in accordance with the arm’s length principle if the relevant financial indicator is within the range.

For this purpose, two distinct processes are identified:

– if the transactions have the same degree of comparability, with the controlled transaction the entire range of values resulting from the application of the selected financial indicator should be considered (so-called full range);

– if, on the other hand, the transactions do not have the same degree of comparability, it is necessary to refer to the “statistical tools” identified by the OECD Guidelines to narrow the range in order to increase its reliability. Statistical tools mean the use of central tendency indicators, i.e., “narrow” interval such as that based on percentiles, implying the elimination of “extreme” values or outliers.

Should the tax administration reasonably claim that the financial indicator falls outside the range of free competition (even if different from that claimed by the taxpayer), the taxpayer will have to present arguments to refute the administration’s claim and demonstrating, that the conditions of the transaction between associated enterprises satisfy the principle of free competition.

In the absence of such a demonstration, the tax administration will determine the value within the range that most respects the arm’s length principle. In such cases, if the range includes results with a homogeneous and high level of reliability, the tax administration may consider that any value within the range meets the arm’s length principle.

If comparability defects persist, the tax authorities may use criteria tending to merge such values in the middle in order to reduce the risk of errors due to residual comparability defects that cannot be identified or reliably adjusted.

Finally, Circular No. 16/2022 recommends that adjustments involving the identification of the point that most satisfies the arm’s length principle within the range should be argued in a timely manner.

In this regard, in fact, a recent Supreme Court ruling No. 15668 of March 9, 2022 stipulated that in a logic of confrontation between the Agency and the taxpayer, it is appropriate to provide documents that point out the procedures.

LDP rimane a disposizione per ulteriore chiarimenti


[1] Comparability analysis: “A comparison of a transaction entered into between associated enterprises, on the one hand, and one or more transactions between independent enterprises, on the other. These two types of transactions are comparable if there are no differences that would materially affect the factors to be taken into account in the methodology (for example, price or margin) or if reasonably accurate adjustments can be made to eliminate the material effects of such differences. “Source: OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

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