International Tax Review (ITR): What advice would you give to companies operating in Italy on how to reduce the risk of becoming involved in a dispute with the tax authorities?
Compliance is the key. Having a business model disclosed in advance using an advance pricing agreement (APA) may prevent the most frequent challenges arising from the Italian tax authorities in recent years, such as transfer pricing adjustments, hidden permanent establishment and deemed Italian residency of foreign holding companies – so called esterovestizione.
Also, putting together transfer pricing documentation is useful. Italy implemented a regulation dated September 29 2010 based on the European Code of Conduct on transfer pricing documentation, having a set of transfer pricing documentation in line with the regulations implies that, where a transfer pricing adjustment challenge is made in a tax audit, the penalties – usually ranging from 100% to 200% of the higher tax assessed – are not applicable.
ITR: What options do Italian taxpayers have to resolve disputes with the authorities other than litigation?
Antonio Tomassini (pictured right): According to Italian tax law, a tax audit report notified at the end of a tax inspection only represents an assessment proposal from the relevant tax office requesting the application of higher taxes and penalties.
It therefore does not involve any direct juridical or financial consequences considering that the taxpayer is not required to pay higher taxes or penalties until the final tax assessment is issued.
Against the tax audit report, the company could react as follows:
· the taxpayer can file a defence brief within 60 days of the notification of the tax audit report, asking for dismissal of the case. Such filing can be useful as an additional defensive argument in tax litigation if the tax office does not give grounds for the relevant tax assessment taking into account the defensive arguments provided;
· to avoid any potential tax litigation procedure, the taxpayer may decide to accept all challenges arising from the tax audit report. In such a case, the penalties due would be reduced to one sixth of the minimum applicable amount; or
· taxpayers are entitled to initiate the tax settlement procedure which could allow them to avoid litigation before the Tax Court. Should an agreement be reached, the taxpayer will be requested to pay the higher tax settled, and penalties will be reduced to one third of the taxes settled.
If these defensive remedies fail, the tax office is entitled to issue the final tax assessment.
Taxpayers can appeal the tax assessment before the Tax Court. Before the first hearing, it is still possible to come to a court settlement with the tax authorities. Here, the penalties will be reduced to 40% of the total amount of taxes settled.
Finally, note that multinationals may also initiate – in parallel or in place of the above mentioned domestic remedies – the mutual agreement procedures (MAP) provided for by both the EU Arbitration convention and double tax treaties.
The Italian tax authorities issued a specific circular letter on this matter in June.
ITR: Are you seeing any trends in the types of dispute cases the Italian tax authorities are taking up, and those where they are succeeding in the courts?
In Italy, the major trend in tax disputes concerns the assessment issued under, or supported by, the so called "abuse of right" principle.
In Italy we have a general anti-avoidance rule (GAAR) provided for by art. 37 bis of DPR 600/1973 but this is only applicable to certain expressly listed transactions such as mergers, de-mergers, contributions in kind and credit sales.
According to the GAAR, the tax authorities may disregard transactions without business grounds aimed only at avoiding direct taxes.
By invoking the general principle of "abuse of right", the Italian Supreme Court expanded the application of such an anti-avoidance rule to all transactions and taxes.
Such a trend is absolutely not in favour of the taxpayer. However, the Italian government is going to introduce a new provision on the abuse of right principle to restrict the chance to use it.
In this respect, the only positive trend for taxpayers is the inability, according to various Tax Court decisions, to use the abuse of right principle under the registration, cadastral and mortgage tax system.
ITR: What can taxpayers expect from Italy’s tax authorities in the future?
Alessandro Martinelli (pictured below): In the next couple of years, especially due to the financial crisis, it's really likely the Italian tax authorities will keep the same aggressive approach in international tax issues regarding multinational groups.
The tax authorities plan to intensify inspections of large corporations, with a target of achieving annual audits.
The focus will be on transfer pricing, tax residency issues such as permanent establishment and companies with a deemed fictitious legal site abroad, and on the tax structures chosen for foreign investments since many large Italian corporations are focusing their new initiatives in emerging countries.
It will be crucial to have a tax compliance and risk management programme because audits will focus on fair value issues, which are not easily manageable in the limited time of an inspection – average inspections for large corporations last around two months.
The tax authorities continue to monitor business reorganisations, especially under the anti-avoidance rules which were recently strengthened by use of the "abuse of right" principle.
Multinationals must therefore carefully evaluate their reorganisations from a tax perspective and explore the possibility to submit a preliminary ruling to the tax authorities to gather a blessing from them.
Furthermore, it is extremely advisable to keep a relevant set of documentation for various transactions to demonstrate the real business reasons underpinning the structure chosen.
