Base erosion and profit shifting
In recent years, transfer pricing has been very high on the agenda of both taxpayers and the tax administration in Italy, with transfer pricing audits and challenges becoming increasingly common. The OECD project on Base Erosion and Profit Shifting (BEPS) has generated further interest in the correct treatment of intra-group transactions and many companies have decided to review their transfer pricing policies.
A recent survey conducted by KPMG among CFOs, tax directors and TP managers of large multinational companies operating in Italy has confirmed the growing attention of taxpayers to the work of the OECD on BEPS.
The survey revealed that multinationals in Italy are highly sensitive to certain issues addressed by BEPS, especially the tax treatment of intangibles, risks, recharacterizations and profit splits. A large number of multinationals are monitoring the OECD's work and some are already introducing changes to their intra-group transactions to align them with the new guidance emerging from the BEPS project.
More than 75% of the respondents indicated that their company has already started, or will shortly start, to analyze and evaluate the implications of the BEPS project for their current transfer pricing policy. Almost 80% of the companies participating in the survey indicated that the BEPS project will result in increased complexity in managing relations with the tax administration, as well as higher compliance costs, with an increasing risk of double taxation and disputes.
Recent developments in the law
The Italian government is introducing changes in legislation to facilitate growth and internationalization of Italian companies and to attract foreign investment into Italy. The main thrust of a Legislative Decree (the "Decree"), which is still subject to final approval and official publication, is to increase certainty and transparency in tax matters, thereby boosting foreign economic investment. By extending the possibility of proactive dialogue between taxpayers and tax administrations, there will be greater certainty for Italian taxpayers and less risk of lengthy tax audits and litigation.
The Decree, in addition to the extension of the validity of APAs, which was already recently introduced, from three to five years, modifies certain aspects of the current Advance Pricing Agreement ("APA") procedure. In particular, it provides the taxpayers with the possibility of rolling back the effect of an APA to fiscal years prior to the year of the APA itself. An APA can now be effective from the date the taxpayer requests it rather than from the date it is signed, which may be two or three years later. APAs have been found to be a very useful and efficient tool for managing transfer pricing risks in Italy and the expected changes would certainly generate additional interest from multinational companies.
Another major component of the Decree regards companies that intend to make new investments in Italy. It introduces a specific tax ruling procedure for companies that are planning new investments of €30 million or more in Italy. This ruling procedure would introduce certainty for taxpayers.
The Patent Box regime has been recently introduced in Italy through the "Legge di Stabilità 2015" (the related Decree implementing the law is currently awaiting publication in the Official Gazette), a new law inspired by the main principles of the "Nexus approach" stated by the OECD.
The Patent Box regime provides taxpayers with a significant level of tax relief on income directly or indirectly derived from the exploitation of intellectual properties such as registered patents, industrial designs, original software and trademarks.
The initial tax relief for the eligible portion of income will be equal to the 30% of the income derived from the IP utilization and will increase to 50% in 2017. Taxpayers who opt for the Patent Box cannot revoke it for five years. They can opt for it again at the end of this period.
The Patent Box also provides taxpayers with additional tax relief for capital gains earned through the one-off sale of intellectual properties, in case the seller plans to invest the money earned (at least 90% of the capital gain) in R&D aiming at developing, maintaining or increasing other intellectual properties.
The Patent Box is available to owners who directly or indirectly exploit their own intellectual property. In the first case, the Decree establishes that the taxpayer must apply for a tax ruling and negotiate with the tax administration to determine the proper method for calculating the income eligible for Patent Box relief. In the second case, the application for a ruling is optional, due to the simplified calculation method.