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Transfer Pricing: clarifications in Circular 15/E on marginal transactions

by Verbena Caravella | Dec 14, 2021 | Blog

Do you know what is meant by “marginal transactions” for the purposes of transfer pricing?

The Provision of the Director of the Italian Tax Authority of last November 23, 2020 provides that in the preparation of the documentation relating to transfer pricing and, in particular, in Chapter 2 of the Country File, the taxpayer must proceed to the description of “non-marginal” transactions, preparing with respect to each transaction a detailed analysis aimed at identifying: amount of payments made/received, nature, counterparties, independent comparable transactions, functions-risks-assets involvedby the entities, changes – if any – in comparability with respect to previous tax periods, method applied to determine transfer prices and results achieved.

The definition of “non-marginal” transactions was provided by the Italian Tax Authority in the draft Circular published on September 20, 2021, in which it was established that “non-marginal” transactions should be understood as all transactions (assets or liabilities) amounting to more than 5% of the total components (positive or negative in the case, respectively, of assets or liabilities) indicated in the statement of the annual tax return called “Transfer Pricing”. Consequently, transactions below this threshold are qualified as “marginal transactions”; in relation to these the taxpayer has the option of not preparing a specific analysis, limiting himself to a mere description of non-marginal transactions.


Clarifications provided by Circular 15/E 2021

On November 26, 2021, the Tax Authority published the final version of Circular 15/E 2021, which provides clarifications with respect to what was contained in the previous draft of September 20.

With reference to the materiality threshold of intercompany transactions, the Circular, while keeping the 5% percentage unchanged, has adjusted the calculation criterion, establishing that the amount of the individual transaction, for the purposes of verifying that the threshold has been exceeded, must be weighted on the total in absolute value of the positive and negative income components indicated in the statement of the annual income tax return called “Transfer Pricing”.

In operational terms, this innovation has a considerable impact, since the criterion previously identified, which distinguished between asset and liability items by calculating their respective incidence on total costs and total revenues within the Group, could have led to misleading results in identifying “non-material” transactions. For example, in the case of companies with a high volume of intercompany revenues and a small amount of costs, the taxpayer would have been forced to analyze even transactions relating to chargebacks of limited amounts compared with the overall total of intercompany items.




Exclusion of marginal transactions among “partial omissions”

Circular 15/E, confirming what had already been foreseen in the draft, states that any “omissions or partial inaccuracies” that are not likely to compromise the analysis of the control bodies, do not prejudice the application of the penalty protection.

However, unlike the draft of last September 20, the final version of the Circular excludes marginal transactions from the scope of application of the provision relating to partial omissions, establishing that “the possible correction of marginal transactions does not benefit from penalty protection, even though this circumstance in itself is not likely to invalidate any judgement of suitability made by the control bodies in relation to the documentation as a whole“.


Concluding remarks

Even though the final version of Circular 15/E has shown an openness in terms of the choice of method of calculating the materiality threshold of intra-group transactions to be subjected to specific documentary analysis, on the other hand, a clear closure emerges with regard to the sanctioning profile deriving from the risk for the taxpayer of having to pay sanctions in the event of transfer pricing adjustments having as their object non-marginal transactions.



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