Global Tax Alert | 11 October 2013

Italian Lower Chamber passes guidelines for tax reform

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On 25 September 2013, the lower chamber (Chamber of Deputies) of the Italian Parliament passed a first version of a law that should enable the Italian Government (the Government) to implement a major tax reform (Proposal).

While this is still the early stages of the parliamentary discussion and the Proposal includes general principles that will need to be converted into actual provisions by the Government, the document addresses some innovative and significant changes that might require immediate attention.

As an example, the Proposal includes a rule concerning the adoption of internal tax control frameworks. Adopting a proper control framework should result in simplified tax obligations, more certain tax positions as well as the limitation of criminal law liabilities. In this respect, one may appreciate that even before the implementation of the relevant rule, the adoption of a tax control model should help any Italian company in mitigating its tax and criminal law exposure as well as better managing reputational risks. Italian companies might therefore start considering and developing appropriate models.

The Proposal

The Proposal includes 16 articles concerning the principles that should be followed by the Government in implementing the tax reform as well as the enabling procedures to be followed.

It is provided that the Government will have to adopt the reform by issuing a series of Law Decrees within twelve months starting from the date on which the text approved by the two chambers of the Parliament becomes effective.

The principles which reportedly inspired the reform embrace general rationalization of the taxing system, fight against tax evasion and base erosion, support for business internationalization, simplification of tax obligations, certainty and stability of tax rules, and an enhanced relationship between tax authorities and taxpayers.

Among the various areas of intervention addressed by the Chamber of Deputies, the following may be of interest for multinational groups with Italian operations:

  • Tax avoidance and abuse of law
  • Cooperative compliance and internal tax control
  • Cross-border activities

Tax avoidance and abuse of law

The Government will be required to work on the current anti-avoidance set of rules by harmonizing them with the general unwritten principle of Abuse of Law to provide more certainty to taxpayers. The government should also coordinate the existing provisions with the guidelines included in the 2012/772 Recommendation by the EU Commission on aggressive tax planning.

In doing so the Government should follow a series of principles including:

  • Guarantee the taxpayer with the freedom to choose among transactions with different tax burdens;
  • Exclude abusive behavior if the transaction or series of transactions are justified by non-marginal business purposes;
  • Accept business purposes that do not create an immediate profitability but result in structural and functional improvements of the business;
  • Set the burden of proving the abusive behavior at the level of the tax authorities;
  • Grant the annulment of any tax assessment lacking a clear description of the abuse;
  • Guarantee taxpayers with an effective right to defense in each and every stage of the audit procedure.

Cooperative compliance and internal tax control

The Government will be required to issue specific rules to enhance the relationship between taxpayers and tax authorities including the introduction of new forms of communication with the tax authorities.

Among other things, new rules should specifically address the adoption by large taxpayers of internal tax audit models to manage and control their tax risk. Companies complying with such internal control models should benefit from incentives such as penalty reductions, simplified compliance and quicker advance rulings.

Cross-border activities

In view of encouraging cross-border activities the Government will be called to reconsider the regimes concerning international transactions with specific reference to tax residency, controlled foreign corporations, permanent establishments, dividends from black listed jurisdictions, deduction of black-list costs, and withholding taxes.

At the same time, the Proposal addresses the need to enhance controls over profit shifting practices carried out through a distorted use of the transfer pricing and calls for the introduction, in line with the recommendations taken by international bodies and within the European Union, of systems to tax cross-border operations (including activities that generate advertising revenue) on the basis of adequate estimates of the profit shares allocable to Italy.

Other areas of intervention

The Proposal addresses other action points such as:

  • Reform of the tax assessment system
  • Review of tax incentives and deductible expenses
  • Simplification of tax payments in installments
  • Revision of the criminal law penalty regime related to tax infractions
  • Rationalization of VAT and other indirect taxes
  • Rationalization of the real estate cadastral register

Timing

The version approved by the Chamber of Deputies is now passed to the Senate. Should the document be subject to amendments by the Senate, it will pass again to the Chamber of Deputies and the process will repeat until the same text is approved by both chambers.

In light of the parliamentary approval process, the complexity of the subject matter and other priorities to be currently dealt with by Italy, it is difficult to predict when the next steps will take place and in which year the reform will be ultimately accomplished by the Government.

Future Alerts will cover legislative developments.

For additional information with respect to this Alert, please contact the following:

Studio Legale Tributario in association with Ernst & Young, Milan
  • Domenico Borzumato
    +39 02 851 4503
    domenico.borzumato@it.ey.com
  • Marco Magenta
    +39 02 851 4529
    marco.magenta@it.ey.com
Studio Legale Tributario in association with Ernst & Young, Bologna
  • Mario Ferrol
    +39 335 122 9904
    mario.ferrol@it.ey.com
Ernst & Young, LLP, Italian Tax Desk, New York
  • Emiliano Zanotti
    +1 212 773 6516
    emiliano.zanotti@ey.com
  • Andrea De Nigris
    +1 212 773 0478
    andrea.denigris@ey.com
  • Fabio Rousset
    +1 212 773 9302
    fabio.rousset@ey.com

EYG no. CM3865