Transfer Pricing Arm’s length range

• Italy

• General

09-06-2022

Abstract

On May 24, 2022, Italian Tax Authorities issued the Circular Letter no. 16/E containing some clarifications for a proper interpretation of the “arm’s length range” concept. In particular, the Circular Letter provides the following considerations:

(i)          use of the full range if the transactions falling within the range are comparable,

(ii)         use of statistical tools to reduce the range if some of the transactions falling within the range are not comparable,

(iii)        the median is not the most representative figure within the range,

(iv)        loss-making company shall not be preventively excluded,

(v)         financial indicators outside the range can be at arm’s length if there are justified reasons.

Use of the full range

In compliance with the OECD TP Guidelines, Italian Tax Authorities clarified that the application of the most appropriate method and the related financial indicator implies that all the values included in the range shall be considered at arm’s length, provided than all the third-party transactions identified have the same level or degree of comparability compared to the tested transaction.

Within the full range, there may be extreme results that can be excluded only if there are adequately justified reasons.

Application of statistical tools

Where some third-party transactions do not have the same level or degree of comparability, statistical tools should be used.

In particular, the narrow range, i.e. the interquartile range from thw 25^th to the 75^th percentile, should be used when comparability defects are not identifiable or quantifiable in a reliable manner.

The most central figure should be used when the values within the narrow range are not reliable since the third-party transactions do not have a sufficient degree of comparability.

The median

Italian Tax Authorities often made adjustments to the median, considered as the most representative value

The Circular Letter finally states that the median is not the most representative figure within the range. Therefore, adjustments should be made to the figures of the range closest to the tested party’s financial indicator.

Loss-making company

Italian Tax Authorities used to exclude loss-making companies from the set of comparable companies.

In compliance with the OECD Guidelines, the Circular Letter states that such companies shall be included. Vice-versa, the exclusion of companies in loss position should be motivated.

Instructions to Tax Auditors

When the Tax Auditors find comparability defects and, therefore, exclude third-party transactions, the full range can be disregarded in favour of the application of statitical tools.

In any case, as already said, adjustments should be made to the figures of the range closest to that of the tested party and must be motivated.

Conclusions

It has been clarified that depending on the degree of comparability and level of reliability, the following three-tiered approach should be considered at arm’s length:

-      Full range

-      Statistical range

-      Central figures

Any adjustment or deviation from the identified range must be adequately justified.

• Aura Moraglia
• Senior Associate
• +39 02 892 871
• +39 02 892 871

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