Following the political crisis of the past year, the Italian government has recently decided to accelerate parliamentary works on revising the Italian tax system in view of enacting a simplified process, granting legal certainty and protecting taxpayers’ fundamental rights.
This innovative tax reform is predominantly characterized by the introduction of general principles of law, as opposed to focusing on amending individual provisions, and represents one of the most radical changes since 1973.
In other words, the reform intends to improve the Italian tax system while at the same time preventing the reduction of gross revenues for the state.
The forthcoming legislation1 (hereinafter “Legge Delega”) was approved by the Chamber of Deputies on 25 September 2013 and is currently under the examination of the Senate of the Republic for the final revision (Senate Act n.1058). The Legge Delega is expected to finally be approved by next March.
Once approved, the Government will have to take action within a twelve-month deadline to adopt the legislative decrees necessary to enforce the reform. At least one legislative decree will have to be adopted within four months from the date of entry into force. However, many legislative decrees have already been materially written and they should rapidly pass the examination of parliamentary commissions (which have a purely consultative role, while only the Government has final power to decide) before final entry into force.
Please note that the Legge Delega covers several relevant topics. Below we examine only those topics that foreign investors should consider within an international framework, benchmark, and perspective: abuse of law and tax avoidance (Article 5), corporate governance and tax risk monitoring (so called “horizontal monitoring”) for large taxpayers (Article 6), reform of the criminal and administrative tax penalties (Article 8), and innovations in the field of tax proceedings (Article 10). Reform of cadastral taxation on real property, taxation of betting, and “green taxes” are also relevant topics but will not be considered in this alert.
II. Abuse of Law and Tax Avoidance (Article 5)
Taking into account the fact that the principle of abuse of law has its origins only in the case law developed by the Italian High Court (in contrast to the position regarding tax avoidance) and without any material deed of law, the reform is expected to be welcomed by taxpayers and professionals alike.
Therefore, in order to ensure legal certainty and to fill the gap in the Italian legal system, Article 5 of the Legge Delega empowers the Italian Government to revise the existing anti-tax avoidance provisions currently in force and to combine them with a view to codifying the aforementioned principles incorporating abuse of tax law and tax avoidance into one single set of principles.
To this end, paragraph 1 provides for a legal definition of the “abuse of law” stating that it consists in the misuse of juridical instruments, though in compliance with law provisions, but exclusively aimed to obtain tax benefits or tax savings lacking significant business reasons.
Moreover, the operation will be precluded when its sole purpose is to obtain tax savings only. If however, it is based on significant business reasons, including any potential deferred effects, the transaction will be considered valid and not abusive.
Article 5 also imposes upon the government the need to provide for specific procedural rules able to guarantee a valid preliminary debate with the Italian tax authorities and to protect defense rights in every phase of the tax assessment and tax audit process. In this sense, such law states that the debate and the defense rights must be guaranteed in every phase of the tax assessment procedure.
Given that the courts will still maintain their discretionary powers when it comes to evaluating whether or not certain operations should be considered abusive, legal certainty and transparency will be improved by the introduction of this new provision and the Italian legal system will finally adapt to the European standards regarding the abuse of law and tax avoidance.
Finally, it is important to note that according to the new legislation, tax courts will no longer be empowered to raise abuse of law during the trial; only officers of the Tax Administration will be able to raise this issue. In the recent past, officers of the Italian Tax Administration used to raise abuse of law in many cases fearing that tax courts would similarly do so, thus entailing a default in their administrative action and subsequent personal liabilities.
III. Corporate Governance and Tax Risk Administration for Large Taxpayers –the so called “Horizontal Monitoring” (Article 6)
The Legge Delega introduces new forms of communication and cooperation, aiming to improve the relationship between the taxpayers and the Internal Revenue, in light of enacting a voluntary tax compliance scheme.
According to Article 6, with reference to the Internal Revenue’s activities directly carried out in favor of the taxpayers (and in particular regarding large corporations, which in Italy number around 1,200), the Italian government has to regulate corporate structures that manage tax risk, clearly setting liabilities regarding internal investigations.
Furthermore, paragraph 4 introduces a simplification of the compliance procedures for taxpayers satisfying the aforementioned requirements.
The intent of the Italian legislator is to set general principles of law based on the improvement of the relationship between taxpayers and the Internal Revenue, according to the OECD guidelines on the enhanced relationship2 doctrine.
Restoring this relationship will entail:
Full transparency in the preliminary debates with the Italian tax authorities;
Much shorter process schedules for tax rulings (interpello), and therefore better and faster time-to-market decisions for taxpayers
The reference model in the drafting of this Article has been the U.K. Code of Conduct and the Dutch Horizontal Monitoring practise.
We expect that the new tax risk administration systems (that will be enacted by the taxpayers in compliance with the Legge Delega) will take their inspiration from those currently being set forth by Bank of Italy regulations and, in a wider sense, by the European New Supervisory System Mechanism (SSM).
IV. Reform of the Criminal and Administrative Tax Penalties (Article 8)
Pursuant to Article 8 of Legge Delega, the Italian Government will have to revise the criminal and administrative penalties system concerning tax offences.
The guiding principle in the reform will be proportionality in penalties application, stricter punishment of tax crimes involving fraudulent behaviors and simulated conducts aimed at creating or using false documentation and, in general, adapting sanctions to the danger of the actual conducts in question, in view of respecting the proportionality criteria.
The most radical change pertains to the revision of the unfaithful tax return crime. As Italy is the only country in the EU that applies criminal penalties to misinterpretation of tax law, the new legislation aims to provide only administrative sanctions for this offence.
Nevertheless, the fraud crime (especially when it involves the use of false documentation) will still be an offence for which prosecution would be vigorously pursued in accordance with international standards. The difference between unfaithful tax return and tax fraud should subsequently be more clearly defined.
Currently, while this distinction seems clear from a purely legislative perspective, judicial practice differs where public prosecutors start criminal proceedings under tax fraud, especially where the amount of potentially unpaid tax is high and there is little evidence of the use of fraudulent measures in the taxpayers’ conduct.
Moreover, Article 8 intends to outline the differences between tax avoidance and tax evasion, including with respect to the applicable penalties.
V. Innovations in the Field of Tax Proceedings (Article 10)
Ultimately, according to Article 10, the Italian government is empowered to increase taxpayers’ judicial protection by making the principle of preliminary debate (principio del contraddittorio) a compulsory step in the administrative process of tax assessment.
This is also in line with Articles 41 and 48 of the Charter of Fundamentals Rights in the EU, published in 2010 in the EU Official Gazette.
Finally, this is a very important influence of EU law into the Italian Legal environment.
It will certainly be interesting to witness the Legge Delega implementation and to see how the government will enact its general principles in the forthcoming legislation.
The Tax Reform represents an essential turning point in the Italian tax system, including from an international perspective, especially given the fact that it is aimed at aligning a tax system conceived 40 years ago to modern times, to new social behaviors and needs, and to more standardized international practise.