The Certainty of Tax Law Act represents an important piece of the mosaic depicted by the wide tax reform delegated to the Government by Law no. 23 of 11 March 2014. Other important acts implementing said tax reform have also been recently approved or are in the pipeline. A separate On the Subject will address the new tax provisions of main interest in the area, among others, of international corporate taxation.
The Certainty of Tax Law Act contains provisions mainly focused on three items:
- The introduction of a new general anti-abuse rule (GAAR);
- The amendment of the current rule concerning the doubling of the statute of limitations for tax assessments in case of tax violations that can result in a criminal infringement; and
- The introduction of a new cooperative compliance regime for large taxpayer companies.
An extensive and detailed discipline of the abuse of (tax) law has been introduced, with the aim of minimizing the uncertainties on the interpretation and assessment of the existence of an abusive conduct by the taxpayer.
Under previously existing legislation, a “semi-general” anti-avoidance provision was enacted (Article 37-bis of Presidential Decree no. 600/1973), but its scope was limited to income taxes only. Moreover, as a pre-condition for such provision to apply, it was necessary that at least one of the transactions expressly listed by the law (“tainted transactions”) was included in the alleged tax-avoidance scheme carried out by the taxpayer.
However, in the last decade, the Italian tax courts, and particularly the Supreme Court of Cassation, have progressively developed an extremely wide doctrine of abuse of tax law, applicable beyond the narrow borders provided for by Article 37-bis as a consequence directly descending from the general principles set forth by the Constitution of Italy. Certain unreasonable applications of such doctrine in a number of important court cases created a great deal of uncertainty among taxpayers and practitioners, and the tax authorities started to use this powerful tool more and more aggressively. The need of a new legislation was strongly felt.
The new GAAR is applicable to all taxes, both direct and indirect, and should substantially reduce the uncertainties arisen over the years. Among the most important features of the new GAAR, the following should be noted:
- It provides a clear—although necessarily general—definition of what is considered abuse of law: transactions without economic substance which formally respect the law, but essentially achieve undue tax advantages.
- It clarifies that the taxpayer is free to choose among different tax regimes offered by the law and among transactions with a different tax treatment.
- It confirms that the taxpayer can submit a ruling request to the tax authorities in order to know in advance whether a certain transaction can be considered as abusive.
- It provides for clear procedural rules for tax assessments based on an alleged abuse of law, with sound guarantees for the taxpayer.
- It clarifies the burden of proof with the tax administration (i.e., the existence of the abusive conduct) and with the taxpayer (i.e., the existence of valid non-tax reasons for such conduct).
- It clarifies that, in case of litigation, the abuse of law cannot be identified by the tax court ex officio, if not previously alleged by the tax administration and to the extent of such allegation.
- It confirms that, in case of litigation, higher taxes assessed on an alleged abuse of law can be collected only after a first instance judgment rejecting, totally or partially, the appeal of the taxpayer.
- It states that an abuse of law can be assessed only if there are no other specific tax provisions that can effectively contrast the taxpayer’s conduct.
- It clarifies that abusive transactions cannot result in tax crimes. Civil penalties remain due.
The Doubling of the Statute of Limitations
Under Italian law, the ordinary statute of limitations for tax assessment is 31 December of the fourth year following the year in which the tax return was filed. In case of omitted filing of the tax return, the statute of limitations is 31 December of the fifth year following the year in which the tax return should have been filed.Such ordinary statute of limitations is doubled when the tax authorities find a violation that can result in a tax crime, thus giving rise to their obligation to submit the notice of crime to the Public Prosecutor.
Under the current rule, as interpreted by the tax authorities and some courts, the statute of limitations is doubled even if the tax authorities submit a notice of crime to the Public Prosecutor after the ordinary statute of limitations has expired. In other words, according to this interpretation, the tax authorities can re-open fiscal years already closed, if they find a violation that can result in a tax crime.
The Certainty of Law Act amends this rule by clarifying that the statute of limitations is doubled only if the notice of crime is actually submitted to the Public Prosecutor before the expiration of the ordinary statute of limitations. Under this amended rule, no re-opening of closed fiscal years will be allowed.
The Cooperative Compliance Regime
A new cooperative compliance regime has been introduced with the aim of promoting an enhanced cooperation framework between the tax administration and taxpayers.
Corporate taxpayers can opt in this regime if they have implemented an adequate internal system to manage and control the tax risk (“a system of detection, measurement, management and control of the tax risk”).
In a transition phase (i.e., at least until 31 December 2016), the option is only reserved to corporate taxpayers with (i) an annual turnover higher than € 10 billion or (ii) an annual turnover higher than € 1 billion who adhered to the Pilot Project on Cooperative Compliance launched by the Revenue Agency in 2013.
The tax risk management system must ensure:
- A clear attribution of roles and responsibilities within the corporate organization;
- Effective procedures of detection, measurement, management and control of the tax risk; and
- Effective procedures and remedies in case of flaws.
- Enhanced communication between taxpayers and Revenue Agency in a framework of relationships inspired to transparency and collaboration and aimed at achieving certainty. This implies, among others, the following effects:
- Taxpayer must timely disclose transactions that may be deemed as aggressive tax planning (according to a list of aggressive tax planning schemes to be issued by the Revenue Agency), and the Revenue Agency must timely examine those cases in order to provide certainty of the tax treatment.
- Reciprocal duty to respond to any question or request within the shortest possible time.
- Taxpayer must promote a corporate culture inspired to principles of fairness and respect of tax laws, also ensuring the appropriate knowledge of the law at all corporate levels.
- Fast track in advance of ruling procedures (maximum 45 days for response versus 90/120 days under ordinary procedures)
- No need of guarantees for tax reimbursements
- Reduction of applicable penalties to half of the minimum in case of assessments concerning tax risks timely communicated by the taxpayer
Taxpayers who meet the necessary requisites, and are willing to adhere to the cooperative compliance regime, must file an application with the Revenue Agency. The latter must check the requisites (with particular reference to the existence and adequacy of the tax risk management system) and respond within the following 120 days. In case of admission to the regime, this will be effective starting from the fiscal year in which the application was filed, and until the taxpayer decides to opt out or the Revenue Agency assesses that the necessary requisites no longer exist.