In a nutshell: On 16 April 2019, the Italian Revenue Agency issued the Regulations on the permanent establishment ("PE") voluntary disclosure. Such regulations have been expected since 2017 when the Italian Parliament issued provisions named "Procedure of cooperation and enhanced relationship between non- resident companies and the Italian tax administration" aimed at improving the relationship with taxpayers in the case of a possible presence of a hidden PE. If a foreign entity deems that there is a risk that a PE may be detected in Italy, it may start a procedure with the Revenue Agency designed to mutually assess the presence of a PE and to enter into a cooperative compliance program if the PE is ascertained. Benefits on the criminal side may also be obtained in the case of a PE presence.
Back in 2017, the Italian Parliament introduced a new provision (art. 1 bis of Law Decree no. 50/2017, converted in Law no. 96/2017 "Law Decree") which identified a specific procedure aimed at assessing, on a voluntary basis, whether a PE of a foreign entity in Italy could be deemed to be present. In particular, if a foreign entity is concerned of possible risks of being subject to a PE claim in the case of an audit, it is entitled to approach the Italian tax administration to request the mutual evaluation of the existence of a PE for previous years, based on a procedure of cooperation and enhanced relationship (hereinafter — "Procedure").
In practice, such provision remained ineffective since nowadays, in absence of the specific guidelines regulating the procedure.
The Italian Revenue Agency finally issued the regulations on 16 April 2019 and provided the expected indications on the procedure and related timing, identified the competent tax office of the Revenue Agency in charge of the procedure and the coordination function with other tax offices in charge for assessment activity, and clarified the obligations and opportunities depicted in the case of a positive assessment of the foreign entity's PE.
The above opportunity may be welcomed by multinational groups, following the BEPS program and the position taken by the Italian tax authorities in the interpretation of the PE notion.
At whom is the PE voluntary disclosure aimed?
The provision is aimed at those foreign entities belonging to multinational groups which may be concerned that the activity performed in Italy might give rise to a hidden PE, taking into account the activity performed in the country by other affiliate Italian companies belonging to the same multinational group. Indeed, the analysis of the Group's business model shall have to be examined based on a holistic approach.
The quantitative requirements to opt for the Procedure were already indicated in the Law Decree and correspond to: (i) 1 billion Eur of revenues reported in the consolidated financial statement of the multinational group; and (ii) 50 million Eur of revenues in Italy arising from the sale of goods and/or the provision of services realized through the support of affiliate companies in Italy providing affiliate services as well. These thresholds should be verified over the three financial years prior to the one in which the application for the Procedure was made.
The Procedure cannot be pursued, however, if the foreign entity is aware of ongoing audits, inspections and criminal investigations aimed at assessing a PE of the same foreign entity in Italy, even if the notification of the audit has been served to the affiliate Italian company carrying out the ancillary service. In contrast, the initiation of other kinds of audits, for instance, a general audit for corporate income taxes purposes, does not prevent the application of the Procedure, and the Cooperative Compliance Office, in charge of the Procedure, will coordinate its activity carried out in the context of the Procedure with the other tax offices to ensure a consistent behavior.
How does the PE voluntary disclosure work?
The regulations contain a detailed description of the information that the application request should contain and how it should be set out. In particular, foreign entities have to file a specific form to start the Procedure, including all of the legal and factual reasons that may raise concerns regarding the possible deemed presence of a PE in Italy, as well as all of the documentation necessary to explain the activity performed and the transfer pricing method applied (e.g., transfer pricing master file, country file of the Italian affiliate companies, description of the business model, etc.).
The request is addressed to the Cooperative Compliance Tax Office, which is in charge of the entire PE assessment procedure, including in relation to the identification and attribution of the arm's length profit to the PE if the Procedure concludes the presence of a PE in Italy for corporate income taxes and VAT purposes.
The open confrontation with the taxpayer begins once the preliminary review of the documentation by the Cooperative Compliance Tax Office is complete. The dialog and the open discussion with the foreign entity may imply that the Cooperative Compliance Office accesses the affiliate companies' employees and other information deemed relevant for the execution of the Procedure.
Taxpayers are already familiar with this methodology since it is adopted in the context of the advance pricing agreement procedure (APA). However, in contrast to the APA, which entitles the taxpayers not only to agree on the transfer pricing methods applied between affiliate entities, but also to request a preventive assessment of the existence of a PE in Italian territory only on the condition that no activity is actually initiated on the Italian territory, the Procedure at hand is aimed at assessing the possible presence of a PE in Italy based on activities already performed by the relevant multinational group over previous years. Only in the case of a positive conclusion of a PE presence will the Revenue Agency and the foreign entity discuss the taxable basis to be attributed to the PE for fiscal years for which the term to file the tax return has been already expired.
The Procedure is completed and the benefits are granted to the foreign entity only in the case of full payment of taxes and penalties due by the deemed PE.
Risks and benefits of the Procedure
The Procedure represents an opportunity for multinational companies with a presence in Italy to remove uncertainty relating to their business models and the risk of audits aimed at assessing the presence of a deemed PE, as Italy has always maintained a strict interpretation of the PE notion, based on the landmark Philip Morris case, recently reinforced by the BEPS work and the introduction of a new domestic definition of PE. The Procedure will reduce penalties by one-sixth and provide criminal relief. Once the payment of taxes due is performed, the foreign entity's PE may autonomously decide to access the cooperative compliance regime implemented in Italy by Legislative Decree no. 128/2015, irrespective of the thresholds currently provided by the abovementioned legislation. The cooperative compliance regime is aimed at promoting reinforced forms of dialog and cooperation between the tax authorities and taxpayers having already put in place a tax control framework, i.e., a mechanism of detection, measurement, management and control of 'tax risk', where 'tax risk' is defined as the risk of managing an undertaking in violation of tax rules or diverging from the aims and principles of the tax system. A new relationship with the Italian tax administration will continue based on the principle of dialog, transparency and cooperation.
On the other hand, the decision to explore the Procedure implies the possibility for the multinational group to revise the business model and the functions performed in Italy, and eventually, the "supporting activities" performed by the affiliate company.
The exercise will not be straightforward and attention should be paid to the functions actually attributable to the hidden PE. Moreover, the Procedure can lead to a determination of a taxable basis attributable to the PE for both corporate income taxes and VAT, even though the concept of a permanent establishment from a VAT perspective shall have to be accurately evaluated, since not necessarily a PE for corporate income taxes shall imply a PE for VAT purposes.