Italian Transfer Pricing Adjustments and VAT

Luca Clivati
August 17, 2022

In Italy, the discipline of transfer pricing states that in intra-group transactions between entities from different countries, where one is resident in Italy, transactions must take place on an arm’s length basis. In other words, transactions are based on freely competitive prices and under comparable circumstances.

Companies carefully treat the transfer pricing adjustments from a corporate income tax perspective. However, less attention is paid from a VAT perspective.

It’s worth mentioning that in most cases, the transfer price adjustments are profitability adjustments (rather than price) of the transactions carried out between associated companies.

However, treating the transfer pricing adjustments as outside the scope of VAT might cause problems in case of a tax authority audit and re-qualification of the transactions.

Italian tax authority clarifications

The issue of transfer pricing adjustments for VAT purposes is not expressly regulated by the Italian legislator, other EU Member State legislators or from an EU VAT legislative point of view. In the absence of an ad hoc provision, reference is made to EU and local legislation, and private and public rulings on a case-by-case analysis.

Regarding public rulings, Italian tax authorities published several responses in 2021.

With the last response to ruling no. 884 of 30 December 2021, inspired by EU Commission Working Paper n. 923 and VAT Expert Group document n. 071, Italian tax authorities clarified that to establish whether transfer pricing adjustments represent the consideration for a transaction relevant for VAT:

  • It is first necessary to verify the existence of a legal relationship with reciprocal benefits between the company and its foreign subsidiaries;
  • Then, within this relationship, whether there is a direct link between the transfers made through transfer pricing adjustments and any sale of goods and/or provision of services rendered by the company must be verified.

How will this affect my business?

In the 30 December 2021 ruling (no. 884), Italian tax authorities confirmed the adjustments in question were outside the scope of VAT following the transfer pricing adjustments. It stated for subsidiaries “the recognition of an extra cost aimed at lowering their operating margin“, wasn’t “directly related to the original supplies of finished products“.

The same outcome didn’t apply to ruling no. 529 of August 6, 2021.

In this case, at the time of the sale of the goods, the seller applied a provisional price.

That provisional price was then subject to adjustment on a quarterly basis, through the so-called “Profit True Up“. The result could consist either of a claim by the transferor against the transferee or, conversely, transferor’s debt.

In this specific case, Italian tax authorities found a “direct link between the sums determined in the final balance and the supplies” and concluded by determining the relevance of the transfer price adjustments made by the taxpayer for VAT purposes.

Final comments considering other tax authority approaches

Whether or not your business is operating in Italy, the above shows how important the potential VAT implications of transfer pricing adjustments are and the confusion for businesses on how to proceed in different scenarios.

At Sovos we’ve seen more local tax authority audits focused on clarifying if the treatment is valid from a corporate income tax and a VAT perspective.

After a review of the contracts and agreements between the companies and subsidiaries involved, it’s essential to understand whether the transfer pricing adjustments are:

  • A reallocation of costs or
  • Adjustments to:
    • Consideration for an underlying supply or import or
    • Remuneration for a service provided

Take Action

Speak to our team if you have questions about the latest approach from a VAT perspective on transfer pricing adjustments in Italy, the EU and the UK and the potential solutions to mitigate any risk of audit and penalties.

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Author

Luca Clivati

Luca joined Sovos in 2022 and is a senior manager of the consulting team within Compliance Services. He holds a Master’s degree in International Economics and has 13+ years of experience on cross-border transactions and international VAT and GST. Luca specializes in tax consulting advisory focusing on indirect taxes, diagnosis, solution, development and implementation of clients’ tax requirements, VAT compliance and tax due diligences within the EU and in jurisdictions outside of it (mostly Norway, Switzerland, New Zealand, Australia and Singapore).
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