Article 60, paragraph 7, of VAT Law (Presidential Decree No. 633/1972) may significantly affect the contractual relationships concerning transactions subject to VAT. The said provision entitles the supplier to recharge to the purchaser the VAT (or the additional VAT) paid as a result of a tax assessment by the Tax Authorities.

The introduction of this rule has become essential further to the infringement procedure started by the EU Commission. Previously, the right to recharge to the purchaser the VAT (or the additional VAT) paid by the supplier in the event of a tax assessment was explicitly prohibited; this limitation was due also to practical reasons related to the need of certainty of the underlying legal relationships and the inconvenience to reopen contractual relationships with the sole purpose for the supplier of recovering the VAT that had not been originally charged to the supplier. As a consequence of the entering into force of the new rule, the supplier is now entitled to exercise its right to recharge the VAT paid, although optionally.

Recently, several operating issues have been clarified by the Revenue Agency (Circular Letter 35/E of December 27, 2013).

Scope of application

Article 60 may apply in the event that, as a result of a tax audit, VAT or additional VAT is assessed in the hands of the supplier with regard to a specific transaction. Once the amount due has been paid, the supplier is allowed to recharge it to the purchaser, who, in his turn, is entitled to deduct it. However, penalties and interest related to VAT or additional VAT cannot be recharged.

The rule applies to cases where a reduced VAT rate has been erroneously applied or the transaction itself has been erroneously considered out of the scope of VAT or exempt from VAT (e.g. a transaction deemed not subject to VAT by parties but qualified liable to tax by the Tax Authorities).

Implications for contractual relationships

The new rule is mostly important for its practical implications, especially for its impact on the contractual terms concerning the supplier and purchaser obligations in case of assessment by the Tax Authorities 

Indeed, in case of a contractual relationship subject to VAT (even potentially in case of uncertainty of the applicable VAT regime), being the supplier entitled to recharge to the purchaser the VAT or the additional VAT paid as a result of assessment by Tax Authorities, the rule ensure, in principle, the neutrality of the transaction (since the VAT resulting from the adjustment no longer represents a cost, neither for the supplier nor for the purchaser). More generally, the provision affects the relationship between transferor and transferee, for the benefit of the former.   

As a consequence, a new scenario may involve the contractual relationships between the parties.   

From now on, it is strongly advisable to verify the effects that could result from the application of the new rule, in order to adapt them to the actual will of the parties.  Should the will of the parties be different from the content of the provision, it will be necessary to take into account the insertion of a contractual clause , providing for the express waiver by the supplier of recharging VAT to the purchaser in case of tax assessment.  The most frequent case to deal with is the one affecting a purchaser that, due to the kind of activity carried out (banking, insurance), would not be able to exercise the right to deduct the VAT or the additional VAT assessed in the hands of the supplier and recharged by the latter by virtue of the provision under discussion.  Temporal effect  The new rule applies to tax assessment that have become definitive after January, 24 2012.  Exercise of the right to recharge VAT  The exercise of the right to recharge VAT implies (i) the payment of VAT or additional VAT by the supplier, included penalties and interest, and (ii) the settlement of the tax assessment (through assessment with acceptance, acceptance of the settlement proposal, acceptance of tax inspection reports, acquiescence, judicial conciliation, mediation, non-appeal against the notice of assessment, final decision of the court).  The amounts paid during pending proceedings are excluded, since they are paid as provisional.  The exercise of the right to recharge VAT requires that the VAT or additional VAT assessed should concern specific transactions and the purchaser should be known; therefore, it must be excluded in case of estimated tax assessment.  Exercise of the right to deduct VAT  The right to deduct VAT can be exercised by the purchaser at the latest by filing the VAT return for the second year following the one in which the VAT or the additional VAT has been paid.  In case of non-resident purchaser, not identified in Italy for VAT purposes, the right to deduct VAT can be exercised through the appointment of a fiscal representative.  Fulfillments  In order to exercise the right to recharge VAT, the supplier must issue an invoice or a debit note mentioning the identifying details of the notice of assessment that entitles the right to recharge VAT. The invoice or debit note must be included in the VAT books, but is not to be considered in the determination of the VAT due as a result of periodic VAT settlement or annual tax return.  In order to exercise the right to deduct VAT, the purchaser is not obliged to verify that the payment of the assessed tax has been made by the supplier.