Italy introduces new rules on tax avoidance and compliance

On December 14, 2014, the government approved a major tax reform aimed at giving legal certainty and protecting taxpayers’ fundamental rights.

The tax reform will be effective once it receives the non-binding opinion of the relevant committee of the Italian parliament.

The tax reform covers several topics, with developments of particular interest in the areas of tax avoidance and abuse of law, and a new tax compliance scheme.

Abuse of law and tax avoidance

Unlike other European countries, Italy does not have a general anti-abuse provision but a targeted anti-avoidance rule (TAAR) which applies to specific areas of tax law (Article 37 bis of Law no. 600 of 1973).

However, following the ruling of the ECJ in Halifax, the Italian Supreme Court developed a general anti-avoidance rule (also defined as “abuse of law” in line with the definition provided by the ECJ) which has been endorsed by the Italian tax authorities. In essence, this judicial rule provides for a substance over form approach in combating tax abuses.

Article 1 of the tax reform package introduces for the first time in Italy a general anti-avoidance rule (GAAR) implementing de facto the rule developed by the Italian jurisprudence. Under the new rule, a transaction or structure will be abusive if:

• tax avoidance is a decisive motive with no reasonable commercial underpinning;

• the transaction or structure would be contrary to, or in violation of, the purpose and intention of Italian tax law; and

• the tax benefit is effectively reached.

Article 37 is abrogated.

There is, in principle, no area of Italian taxation that the rule does not apply to, other than customs duties.

The burden of proof is on the Italian tax authorities who must demonstrate the tax advantage derived from the transaction or structure and clearly show that the specific elements proving it is abusive are satisfied. Taxpayers can rebut the reconstruction of the facts made by the tax authorities by providing clear and significant business reasons justifying the transaction.

The legislator envisages the new anti-avoidance rule as a last resort; an additional tool to be used where existing tax rules are insufficient to combat abusive transactions or structures.

If the rule applies, a transaction or structure can be ignored or recharacterised to establish a “taxable event”, resulting in a different tax treatment.

Recharacterisation would, in principle, only be in respect of the relevant taxpayer. It does not fundamentally change the actual events or acts for legal purposes. However, Article 1 of the tax reform package provides that the application of the rule may have an effect on the Italian tax position of other taxpayers. They can claim a refund of any tax paid but not due because of the application of the anti-avoidance rule.

Finally, Article 1 clarifies that the application of the anti-avoidance rule will not trigger criminal sanctions on the assumption that the taxpayer has a tax position which is based on a reasonable interpretation of the law. Should the interpretation not be reasonable a potential crime of tax fraud could arise.

Tax compliance scheme

The tax reform provides for a new and innovative scheme, to be adopted on a voluntary basis, under which large companies operating in Italy will be able to establish a form of strict cooperation and communication with the Italian tax authorities.

Signing up to the scheme will bring certain obligations, one of which is the requirement that the relationship with the Italian tax authorities should be transparent and constructive, based on mutual trust wherever possible. The expectation is that where the taxpayer believes its proposed transaction may carry some tax risks, it will discuss and explain its plans in advance with the tax authorities. The threshold of this requirement is deliberately set low, being based on the taxpayer’s subjective belief that a risk exists.

The second requirement is that the taxpayer should have a documented strategy and governance process for tax matters encompassed within a formal compliance policy, including a documented strategy for complying with tax obligations. The board of directors of the taxpayer should receive, at least annually, a detailed report on the implementation of the policy and on its effectiveness.

The key advantage deriving from the adoption of the scheme is the possibility to receive tax rulings in a much shorter period of time than the ordinary one, and therefore better and faster time-to-market decisions for taxpayers.

RaffaeleRizzi is a partner and co-founder of RDR law firm, based in Milan