International Tax Planning and Transfer Pricing Planning: Italy from a US perspective

• Author: Professor Dr. Rainer Zielke
• Profession: Professor in business economics at Østfold University College, Halden, Norway
• Updated at: April 2017

Contenido 1 Abstract tax planning 2 Abstract transfer pricing planning 2.1 Introduction 2.2 The high tax country Italy in the OECD context 2.3 Transfer pricing rules of Italy 2.3.1 Laws and rules 2.3.2 Arm's length principle 2.3.3 Transfer pricing methods 2.3.4 Definition of related companies 2.3.5 Reporting requirements 2.3.6 Documentation requirements 2.3.7 Cost sharing 2.3.8 Interaction between customs valuation and transfer pricing 2.3.9 Dispute resolution 2.4 Calculation of the case studies in international tax planning between Italy and the USA 2.4.1 Design of the tables 2.4.2 The treaty Italy-USA in brief 2.4.3 BEPS Project progress 2.4.4 Italy in brief 2.4.5 The USA in brief 2.4.6 Design of case studies 2.4.7 Case study 1: Dividends from Italy to the US 2.4.8 Case study 2: Interests from Italy to the US 2.4.9 Case study 3: Royalties from Italy to the US 2.4.10 Case study 4: Management and technical service fees from Italy to the US 2.4.11 Case study 5: Capital gains with Italy as asset country to the US as seller country 2.4.12 Case study 6: Dividends from the US to Italy 2.4.13 Case study 7: Interests from the US to Italy 2.4.14 Case study 8: Royalties from the US to Italy 2.4.15 Case study 9: Management and technical service fees from the US to Italy 2.4.16 Case study 10: Capital gains with the US as asset country and Italy as seller country 2.5 Concluding remarks 3 Notes

Abstract tax planning

According to the International Monetary Fund, Italy confirms in 2016 with a gross domestic product (GDP) of US$ 1,852,500 million the fourth-highest GDP of Europe. In Italy, the ordinary rate of corporate income tax (Imposta sul reddito delle società, IRES) is 27.50%.The regional tax on productive activities (Imposta regionale sulle attività produttive, IRAP) is levied at the general rate of 3.90%. The tax is levied on the net value of the production derived in each Italian region and the way the taxable base is computed changes depending on the type of taxpayer and on the type of activity carried out. Thus, a combined corporate income tax rate of 31.40% (distributed) results. Because of the classical income tax system the income tax of individuals (imposta sui reddit) is also to be taken into consideration. Thus, Italy is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in lower taxing countries by means of tax planning measures. Italy has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, the Italian economy will grow by 0.9% in 2017 and 1% in 2018. Despite stronger job gains, private consumption growth has weakened following rising uncertainty and declining consumer confidence. The large stock of non-performing loans and the uncertain recovery keep hampering banks' loan disbursements, hindering the recovery of investment. Low growth in Italy’s export markets and geopolitical tensions are restraining exports. Accommodative euro-area monetary conditions are supporting the moderate recovery. The 2017 budget will appropriately support growth, and a further fiscal easing is assumed in 2018. This chapter provides a survey on the actual tax law frame conditions in Italy and practical support in international tax planning and transfer pricing planning between Italy and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Italy applies the arm’s length principle and the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price method (CUP), the resale method, the cost plus method, the transactional net margin method, the profit split method, and other methods. The tax authority prefers the CUP. However, the most appropriate method for each transaction must be used. The definition of control covers all hypothesis of potential or actual economic influence. For example, when a company has exclusive agreements with another company, or economic influence on its business decisions, they are regarded as related. There are reporting requirements and documentation requirements. Cost sharing is allowed, with respect to business restructuring special rules apply, there is a connection between customs valuation and transfer pricing and with respect to dispute resolution advance pricing agreements are available. There are rules for dispute resolution and advance pricing agreements are available.

Introduction

International tax planning and transfer pricing planning between Italy, a capitalist mixed economy, ranking as the third-largest in the Eurozone and the eighth-largest in the world, founding member of the G7, G8, the Eurozone and the OECD, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2016 3rd place of the most populous countries in the world (4.40% of the world population). ^[1] Further, Italy is one of the most populous countries in Europe.

According to the International Monetary Fund, ^[2] Italy confirms in 2016 with a gross domestic product (GDP) of US$ 1,852,500 million the fourth-highest GDP of Europe. In Italy, the ordinary rate of corporate income tax (Imposta sul reddito delle società, IRES) is 27.50%.The regional tax on productive activities (Imposta regionale sulle attività produttive, IRAP) is levied at the general rate of 3.90%. The tax is levied on the net value of the production derived in each Italian region and the way the taxable base is computed changes depending on the type of taxpayer and on the type of activity carried out. Thus, a combined corporate income tax rate of 31.40% (distributed) results. Because of the classical income tax system the income tax of individuals (imposta sui reddit) is also to be taken into consideration. Thus, Italy is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in lower taxing countries by means of tax planning measures. Italy has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, ^[3] the Italian economy will grow by 0.9% in 2017 and 1% in 2018. Despite stronger job gains, private consumption growth has weakened following rising uncertainty and declining consumer confidence. The large stock of non-performing loans and the uncertain recovery keep hampering banks' loan disbursements, hindering the recovery of investment. Low growth in Italy’s export markets and geopolitical tensions are restraining exports. Accommodative euro-area monetary conditions are supporting the moderate recovery. The 2017 budget will appropriately support growth, and a further fiscal easing is assumed in 2018. Nonetheless, lower interest payments will help keep the budget deficit stable. The government is making progress on structural reforms, including active labor market policies, the public administration and the school system. The planned constitutional reform, subject to a referendum in December, would be a further step forward in the reform process and would enhance political and economic governance. Since 2012, yearly interest payments have declined by more than EUR 15 billion (nearly 1% of GDP), generating fiscal space. The authorities need to use it to raise public investment, enhance targeted programs to fight poverty and raise labor market participation, especially among women and the young, and encourage innovation.

According to Orbitax, ^[4] (Daily Tax News Digest of 13 December 2016), the Italian Ministry of Economy and Finance (MEF) has announced the approval of the 2017 Budget measures by parliament (Bill No. 2611). Key measures include:

• A reduction in the corporate tax (IRES) rate from 27.5% to 24% (previously scheduled);

• The introduction of a business profits tax (IRI) at a rate of 24% for non-corporate businesses, such as partnerships and sole traders;

• An extension of the depreciation allowance of 140% for new plant and machinery through 31 December 2017 (30 June 2018 if ordered by 31 December 2017 and with at least a 20% payment);

• The introduction of a 250% depreciation allowance for investments in digital technology;

• An increase in the tax credit for additional research and development expenditure from 25% to 50% and an increase in the credit cap from EUR 5 million to EUR 20 million; and

• The allocation of funds in order to not trigger safeguard clauses that would have increased the value added tax and excise tax rates if fiscal targets were not met.

The budget will enter into force after the budget legislation is published and will generally apply from 1 January 2017. ^[5]

According to Orbitax, ^[6] (Daily Tax News Digest of 25 May 2016) on 12 May 2016, Italy published the implementing decree for advance tax rulings for qualifying new investments as introduced in Legislative Decree No. 147 in September 2015. The new tax rulings cover the tax treatment of Italian investment plans for both resident and non-resident companies, provided the investment is at least EUR 30 million and will have a long-term positive impact on employment in Italy. In order to obtain an investment tax ruling, the company must submit an application to the Central Directorate of Legislation, New Investments Rulings Office that includes:

• The identification and contact details of the company;

• A detailed description of the investment plan;

• An indication of the relevant tax provisions to be evaluated; and

• A description of the tax treatment the company expects will apply for the investment.

If any required information is missing from the application, the company will have 30 days to submit, after which the application will be automatically rejected. When the application is properly submitted, a tax ruling is to be issued within 120 days with a...