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Transfer Pricing management in infra-group transactions

transfer pricing
When two or more companies, registered in countries with different taxation rules but part of the same group of companies, realize mutual transactions for the sale of goods or services, the issue is determining the appropriate price (i.e “transfer pricing”) of the goods or services or other intangibles. This has important implications in tax terms.Tax authorities all around the world are attentive to the matter regardless of the level of effective taxation in the countries in which the companies are resident or registered. Tax Authorities, in fact, are only interested in the discrepancy between the sale value of an asset to a company in the group, and the sale value of the same goods on the open market.

In the event that the rules on transfer pricing were not properly applied, and therefore there was an incorrect determination of the sale price, the competent authority will find an additional income and notice an irregularity, which means higher taxes (plus interests). In addition to the above, the national authority will certainly impose sanctions equal to an amount of up to 180% of the additional tax assessed.

This allows national tax authorities to tax sums that corporate groups would have otherwise moved toward more accommodative destinations, particularly from a tax and corporate law perspective.

The main difficulties for companies that deal with the issue of transfer pricing are:

  • provide appropriate accounting records;
  • high risks linked to an incorrect assessment of the transfer price (taxes and penalties);
  • the management of the findings of the tax authority. In some cases, if not properly operated, it may lead to the payment of taxes in multiple jurisdictions on the same tax basis, with obvious phenomena of double taxation.

Regarding the situation in Italy, resident companies that prepare an appropriate documentation regarding transfer prices in transactions with associated companies are entitled to an exemption from the due penalty for an adjustment, when some conditions are met. Santions are not imposed to those entities which have promptly provided with appropriate documentation (according to parameters dictated by the National Tax Authority) in order to allow the finding of compliance to the normal value of transfer prices. The possession of such documents must be notified at the time of declaration

The trasnfer pricing management involves different skills and it is vital that the company is assisted by experienced professionals able to support in the following activities:

– Preparation of accurate documentation in order to prevent authorities findings and be fully prepared in the event that this takes place;
– Due Diligence aimed to ascertain the substantial compliance on the legal, economic and accounting perspective and that an appropriate transfer pricing system has been designed and applied, supported by contracts, invoices and financial statements;
– Prevent and timely identify the risk areas related to transfer pricing;
– Identification of the possible results of the authoritiy findings, and perform an analysis of the financial impact thereof.

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Acquisitions as opportunities for business growth

acquisizioni societarie per la crescita aziendale
Nowadays, the globalization of markets requires companies to increase their size and internationalisation plans. This is necessary to defend the positions reached in the domestic market which is often ripe or even shrinking.

It is crucial to be able to open new markets, which often provide the best opportunities for growth, especially if this is accompanied by a widening of the range of products or services and, moreover, the acquisition of new technologies. Acquisitions can be an important opportunity.

The company’s growth can take place by “internal” or “external” lines.
Internal growth takes place in a balanced, consistent, slow and gradual way and requires:
– a well thought-out (and often costly) investment
– a certain entrepreneurial capacity

The external growth increase the market size externally (rather than internally expanding their corporate structures) and achieve synergies by one or more transactions such as mergers or acquisitions of companies (or parts of them).

Why Acquisitions?

Increasing the size of a company through acquisitions may bring the following benefits:
Acceleration of growth;
• Risk diversification;
• Easier access to the capital market;
• Increase the value of the company making the company easier to be sold.

The external growth is a much simpler and faster solution than the organic growth. However, it remains necessary to consider and preside over some important topics, such as organizational issues related to aggregation across several companies, which if not properly addressed can lead to the crisis of the entire corporate structure.

This type of growth can also clash with the Italian and European antitrust law, due to the risk of “concentration”. These regulations, in fact, explicitly prevent concentrations which have as their object or effect the restriction or prevention of competition on a permanent basis. In these cases, in fact, the act that realizes the concentration (such as merger or acquisition) must be communicated to the competent national autorithies, which may possibly object to that concentration on these grounds.

From the moment of the choice of the target (company to be acquired) untill the moment of execution of the agreement, it is crucial to rely on specialized professionals in order to conduct the most appropriate investigations (so-called due diligence) as well as to negotiate and set the right corporate governance mechanisms to protect the growth prospects.

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February 2021