The indications of Circular 15/E for the communication beyond the ordinary deadline
The Circular 15/E of September 26, 2021 of the Italian Revenue Agency has provided clarifications on the transfer pricing documentation, aimed at achieving the so-called “penalty protection“. The Circular has identified the formal and substantive limits to communicate the possession of the documentation, when when the taxpayer has not complied within the ordinary deadline for submitting the annual tax return..
In particular, paragraph 9 specifies that, after the deadline for the submission of the tax return (to be made at least within ninety days of the expiry of the ordinary deadline) the taxpayer is allowed to communicate the possession of the documentation through the self-amendment procedure (i.e., “remissione in bonis), paying a fixed penalty of 250 Euros.
Operational profiles: substantial and formal limits for the self-amendment procedure
The late communication of the possession of the transfer pricing documentation, prepared in accordance with the requirements established by the Provision of 23 November 2020, is allowed if:
- No administrative assessment activities have been started by the Tax Authority;
- The taxpayer has prepared the appropriate documentation by affixing the electronic signature of the legal representative and time stamp at least within ninety days from the ordinary deadline for the submittion of the annual tax return.
- The communication is made through a supplementary declaration to be submitted within the deadline for the tax return referring to the fiscal year following the one to which the transfer pricing documentation refers.
Regarding the first limit, the Circular clarifies that the self-amendment procedure is not precluded by the exchange of information and communications with the tax authorities if the taxpayer has opted for the collaborative compliance regime.
From a substantial point of view the Revenue Agency has shown a collaborative approach, in application of the principle of loyal cooperation with taxpayer. From a formal point of view the possibility to communicate later the possession of transfer pricing documentation is considerably limited, insofar the “appropriate documentation” (made by affixing the signature and the time stamp) must be completed within ninenty days following the ordinary deadline.
The “limit” represented by the preparation of the “appropriate documentation” within the 90 days from the ordinary deadline also operates as a condition for the subsequent “reopening” of the transfer pricing set of documents.
In this sense, the Circular allows for amendments and additions to the Masterfile and the Country File in order to “correct errors or omissions deriving from non-compliance with the arm’s length principle“: the documentation as amended or supplemented must be signed again by the legal representative with a time stamp by the date of the supplementary declaration to be submitted to communicate possession.
The text of the Circular refers exclusively to the event of “unfavorable” supplementary tax returns, i.e. those cases in which the taxpayer intends to rectify the information relating to transfer prices that have determined a lower taxable income, a lower tax liability or a higher credit.
Therefore, it seems that the taxpayer would be precluded from adjusting within the Masterfile or the Country File further information, not directly related to the determination of the tax base, which however could be decisive for the purposes of a correct analysis of the Tax Administration.
Prospects for opening to the “favorable” supplementary declaration
Paragraph 7 of the Circular specifies that the documentation must be considered “appropriate” regardless of whether the transfer pricing method or the selection of comparable transactions or parties adopted by the taxpayer differ from those identified by the tax authorities.
In this sense, it would be expected that the Tax authorities would be open to accept additional documentation relating to data and information not available at the time the Masterfile and the Country File were drafted, and which can be used for the purpose of a more accurate analysis of the conditions and transfer prices applied.
In particular, accordingly with the underlying rationale of the aforementioned paragraph 7, the taxpayer should be allowed to amend the information relating to the economic analyzes carried out (i.e., benchmark analysis) or the selection of the profit level indicators used to perform the arm’s length test, in order to provide a more reliable comparative framework, also taking into account further considerations which may arose after the preparation of the original documents. In this sense, with reference to the adverse conditions experienced by many business industries during 2020, due to the Covid-19 health emergency, the financial data used to calculate the marginality of independent comparables may require adjustments aimed at considering the negative impact suffered during the year and not yet inferable within the benchamrk analyzes performed on the three-years period considered (2017-2019).