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On May 24, 2022, the Italian Tax Agency published Circular No. 16/E to establish new guidelines on the proper interpretation of the concept of the "arm’s length range" for the applicability of the regulations set forth in Article 110 of the Consolidated Text of the Income Tax Law, approved by Presidential Decree No. 917 of December 22, 1986, and the provisions included in the Double Taxation Treaties signed by Italy.
Following the latest amendments to Italian legislation in May 2018, the Ministry of Economy and Finance issued a Decree stating that the range of values resulting from the application of the most appropriate transfer pricing method should be considered in line with the arm’s length principle, provided that these values correspond to transactions carried out between independent parties.
This Decree was based on the recommendations of the OECD Guidelines, which specify that the application of the arm’s length principle can be determined using a range of values, all of which are equally reliable.
Based on the above, the Italian Tax Agency has issued guidance on the correct identification of the arm’s length range, reaffirming that the range of values aligned with the arm’s length principle must be determined in accordance with the OECD Guidelines. Therefore, if the analysis is reliable and the identified comparables exhibit the same degree of comparability, the entire range of values resulting from the application of the selected profit indicator must be considered.
The Italian Supreme Court has ruled along the same lines in Judgment No. 15668 of May 17, 2022, providing clarifications on the reliability of transfer pricing methods and the arm’s length range.
In light of these considerations, the Tax Agency concludes the following:
The correct application of the most appropriate transfer pricing method may result in a series of values that comply with the arm’s length principle.
In such cases, the entirety of the results obtained within the market value range must be applied if the identified transactions are considered comparable.
Conversely, if the degree of comparability in the identified transactions cannot be guaranteed, it is preferable to use: (i) "statistical methods" to determine a narrower range (e.g., the interquartile range); (ii) the application of more than one method.
This new circular aims to clarify the concept of the "arm’s length range," recognizing the validity of all results obtained within the market value range. Therefore, tax authorities must consider the “lower” or “upper” arm’s length range in comparison to the profit indicator determined by the taxpayer. On the other hand, referencing a central value within the range must be expressly justified and limited to cases where the range does not include sufficiently comparable values.
