The Italian Revenue Agency and the Supreme Court endorse the full range as an arm’s length range

Publication of Circular No. 16/E

On May 24, 2022, the Italian Revenue Agency published Circular No. 16/E in order to establish new instructions on the correct interpretation of the concept of “arm’s length range”. This interpretation is key for the application of Article 110 of the Consolidated Law on Income Tax (Presidential Decree No. 917 of December 22, 1986) and the provisions set out in the Double Tax Treaties signed by Italy.

Previous regulatory framework: May 2018 Decree

Following the regulatory changes introduced in May 2018, the Ministry of Economy and Finance issued a Decree which stated:

• The range of values resulting from the most appropriate transfer pricing method must be considered in line with the arm’s length principle, provided that these values correspond to transactions between independent parties.

This Decree was based on the OECD Guidelines, which allow the arm’s length principle to be determined through a range of equally reliable values.

New guidance from the Revenue Agency

In line with the above, the Italian Revenue Agency has issued official guidance on the proper identification of the arm’s length range, reaffirming that:

• The range of values that complies with the arm’s length principle must be determined in accordance with the OECD Guidelines.
• If the analysis is reliable and the comparables have a homogeneous degree of comparability, the entire range of values is valid.

Supreme Court ruling

The Italian Supreme Court, in its Ruling No. 15668 of May 17, 2022, ruled in the same direction. In this ruling, the Court:

• Issued clarifications on the reliability of transfer pricing methods.
• Reinforced the validity of using the arm’s length range as a technical criterion in related-party transactions.

Key conclusions from Circular No. 16/E

The Revenue Agency concludes the following:

• The correct application of the most appropriate transfer pricing method can generate a set of values that align with the arm’s length principle.
• If the identified transactions are comparable, it is valid to apply the full market value range.
• If a sufficient degree of comparability cannot be ensured, the following should be used:
  1. Statistical methods to narrow the range (e.g., interquartile range).
  2. The application of more than one method to ensure the reliability of the result.

Practical impact for tax authorities

This new circular clarifies the concept of “arm’s length range”, recognizing the validity of all results within the market value range.

Therefore:

• Tax authorities must consider both the lower and upper bounds of the range in comparison to the profit indicator determined by the taxpayer.
• Reference may only be made to a central value of the range (median) if it is expressly justified and in those cases where the range does not include sufficiently comparable values.