Italy: Joint Audits and Corresponding Adjustments

Published on February 15. 2018

As in recent years, for tax audits in the area of international taxes also for 2018 the Italian financial police (”Circolare N. 1/2018”) put the focus on transfer pricing (next to CFC regulations, the taxation of permanent establishments and the effective place of management).

Experience has shown that transfer pricing audits often lead to double taxation. Instruments already known to avoid double taxation are, amongst others, mutual agreement procedures or arbitration conventions which can be initiated after the conclusion of a tax audit. As an alternative in order to avoid double taxation, an Advance Pricing Agreement can be requested at the Competent Authority before a tax audit is started. However, as has been shown in practice, the weaknesses of these instruments often lie in the fact that they either do not lead to a conclusion and often prove to be very time consuming and cost intensive.

In order to counteract the disadvantages of these procedures, Joint Audits have been increasingly used in recent years. This is a cooperation between the financial administrations of two different countries in the context of tax audits. Cooperation between the tax authorities is intended to eliminate transfer pricing disputes already during the tax audit. Joint Audits are carried out exclusively on the initiative of the tax authorities. The taxpayer is not entitled to a Joint Audit procedure. In Italy, currently a cooperation between the financial administrations of Veneto, Lombardy and Bozen on the one hand and Bavaria on the other exists.

If the agreement reached by the tax authorities in a Joint Audit led to an increase of the tax base abroad, until now the legal instrument for a corresponding adjustment to avoid double taxation in Italy was missing. In order to make this possible, the Italian legislator has recently published a decree (”Manovrina”; DL 50/2017) which allows the tax base to be adjusted not only in case of an increase but also in case of a reduction of the tax base in Italy. Information on the prerequisites and the concrete procedure of the corresponding adjustments are supposed to be published soon in a regulation.