Italy: The Supreme Court reports on the scope of the EU DRM Directive

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Italy: The Supreme Court reports on the scope of the EU DRM Directive

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These developments in EU and Portuguese legislation followed a general transparency framework

Gian Luca Nieddu and Barbara Scampuddu of Hager & Partners take a closer look at the Italian Supreme Court’s report on the recently introduced tax dispute resolution mechanisms.

On October 2 2020, the Italian Supreme Court published a report (No. 73 of September 28 2020) that analyses the provisions introduced by Legislative Decree No. 49/2020 (Decree), which implemented the EU Directive 2017/1852 concerning the recently introduced tax dispute resolution mechanisms (DRM Directive).



The decree entered into force in Italy on June 25 2020 and applies to mutual agreement procedure (MAP) filed as of July 1 2019. It relates to disputes about the tax treatment of income or capital earned in a fiscal year, starting from January 1 2018.



The report is key since the Supreme Court can be appealed to for disputes concerning the interpretation of law provisions and principles. Therefore, in the sections below, there will be a focus on the parts of the report which need to be properly considered, among others, when multinationals have to design their cross-border defence strategies against possible tax issues.

Subject and scope of the DRM Directive

The DRM Directive takes up the structure of the EU Arbitration Convention, re-proposing the following fundamental steps:

  • Submission of the application by the taxpayer;

  • Assessment by the competent authorities on the admissibility of the application;

  • Achievement within two years of the amicable agreement aimed at eliminating double taxation;and

  • In the absence of an agreement, provision of mandatory arbitration through the establishment of an advisory commission with the task of issuing an opinion on how to resolve the case.


However, in comparison with the EU Arbitration Convention, the DRM Directive aims at overcoming its limits and operational criticalities encountered by the European Commission and by companies. Particularly, this is in regard to access to the procedure by taxpayers, its effective conclusion, excessive duration, little use of arbitration and its limited scope.




The first element of novelty is the widening of the field of application of the procedure. It is no longer limited, as in the EU Arbitration Convention, to just disputes generated by adjustments to transfer prices between associated companies resident in the EU. It has been extended to include further cases relating to double taxation contemplated in bilateral conventions.



Therefore, the directive applies in relation to the conventions, as will be amended by multilateral instrument, including the specific minimum standards.



Furthermore, the DRM Directive – adopted for the express purpose of identifying an effective tool for resolving international disputes that are more incisive than the existing ones - introduces mechanisms of an arbitration nature (eventual) and of recourse to the competent national courts. Therefore, the directive is not limited to establishing coordination obligations between the tax administrations of the EU member states, but also creates real rights for taxpayers.

Modifying taxes to reflect the procedure

Compared to the existing framework in the field of international tax disputes, one of the most innovative elements introduced by the decree is the overcoming of the definitive nature of taxes for the purposes of activating the international procedure in question (amicable phase and arbitration phase).



Unlike what the revenue agency has affirmed in the application of the EU Arbitration Convention, it is possible to lodge a complaint pursuant to the directive. This is even possible in cases in which the tax dispute, provided that it originates from an inspection activity by the tax administration, has been already settled via administrative procedures, without requiring the prior establishment of the domestic tax litigation procedure.



Included in this circumstance are the omitted appeal of the deed, the deflationary institutes governed by Legislative Decree No. 218 of 1997 and tax mediation. Nevertheless, according to the explanatory report accompanying the decree, the possibility of accessing the mutual agreement procedure would be prevented in cases of active repentance pursuant to Article 13 of Legislative Decree No. 472 of 1972, for which the violation has not been ascertained and no access, inspection, audit or other administrative assessment activity has begun. This interpretation of the government was criticised by the commentators as being against the aims of the DRM Directive, and was not supported by its text or by that of the decree.

Interaction with the tax trial

The DRM Directive does not require the taxpayer to renounce the judicial appeal against the remark from which the controversial issue originates. The international administrative procedure can advance and terminate without the taxpayer having renounced the judicial procedure – as already provided for in many bilateral conventions – which will only be suspended. Nevertheless, the Directive provides for the faculty (for member states bound to comply with the judgments of their domestic courts) to provide for preclusive effects on the procedure where a decision on the same controversial issue is taken by a domestic tax court.



Having said this, the decree expressly provides that the application to open the MAP is not subject to the preliminary establishment of the domestic tax dispute. The taxpayer, therefore, can always choose whether or not to appeal to the competent tax court, regardless of the fact that the same issue is the subject of a MAP. If it intends to prevent the additional taxes challenged by tax office from crystallising, and is no longer be modified even in the context of the MAP, it is preferable to start the domestic litigation procedure.



Moreover, when the tax litigation on the controversial issue is also pending before the competent tax court, the decree grants the taxpayer the unprecedented possibility to ask alone – no more in conjunction with the tax office – for the suspension of the judgment pending the outcome of the MAP.



Furthermore, in case the outcome of the introduced procedure is not satisfactory, the taxpayer can evaluate the reactivation of the suspended domestic judgment. Where an amicable agreement should be reached before the formation of the internal judgment, they can always choose whether to accept the negotiated solution, with the simultaneous waiver of the judicial appeal, or whether to refuse it, cultivating the judgment.



If the judge suspends the process, any collection in progress is automatically suspended (ex officio) until the procedure is concluded.



Gian Luca Nieddu

T: +39 02 7780711

E: gianluca.nieddu@hager-partners.it



Barbara Scampuddu

T: +39 02 7780711

E: barbara.scampuddu@hager-partners.it

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