Global Tax Alert | 5 August 2013
Italy issues guidance on bad debt loss deduction
On 1 August 2013, the Italian Revenue Agency (Revenue) issued Circular Letter 26/2013 (Guidance) providing clarifications on the amendments introduced by Law Decree 83/2012 (Decree) to the bad debt relief regime. While addressing the main features of the amendments, the Revenue pooled together interpretations and clarifications given in the past that may be of help in understanding when bad debt losses may be deducted in general.
Clarifications on the Certainty and Accuracy prerequisites
While reinforcing the main principle that bad debt losses are deductible to the extent that they result from “certain and accurate elements” (and, in any event, if debtors are subject to bankruptcy procedures), the Revenue took the opportunity to clarify the factual elements that shall be complied with by taxpayers when taking a deduction for bad debt losses.
Specifically, the Guidance provided clarifications about the Certainty and Accuracy prerequisites that taxpayers should meet under the following scenarios:
- • The bad debt loss results from an internal valuation of the credit risk. In this case taxpayers should provide evidence of any possible actions undertaken to recover the credit (including legal proceedings) and gather documentation proving the financial insolvency of the debtor.
- • The bad debt loss results from the transfer of the relevant receivable. The right to deduct the bad debt loss should arise, among other things, when the credit is sold to a non-related financial entity (resident in Italy or in countries allowing exchange of information).
The Guidance also clarified that in the case of a non-resident debtor domiciled in a black-listed country, the prerequisites set forth by the applicable black-list cost rule should also be met in addition to the mentioned Certainty and Accuracy conditions.1
Clarifications on the amendments under Decree 83/2012
The amendments provided by the Decree introduced the following specific cases where the Certainty and Accuracy principles are deemed to be satisfied on a priori basis:
- • Negligible bad debt losses where the repayment date has expired by at least since six months;
- • Bad debt losses related to receivables that can no longer be collected by law;
- • Bad debt losses arising from a restructuring plan regulated by the Italian Bankruptcy law;
- • Bad debt losses related to the de-recognition process performed by IAS adopters.
In this respect, the Guidance provided the following clarifications.
Negligible bad debt losses where the repayment date has expired by at least since six months
Bad debt losses falling within the scope of the negligible bad debt loss rule are those not exceeding (i) €2,500 or (ii) €5,000 in the case of Large Business Taxpayers (i.e., with a turnover or operating revenues not lower than €100 million). Under both cases, the repayment date must have been expired for at least since six months.
The €2,500/5,000 threshold refers to the nominal value of the receivable (including VAT) or, as the case may be, to the price paid for its acquisition. In that respect, the Guidance clarifies that the nominal value basis should not be affected by delay interest or by any write-offs performed by the taxpayer.
Generally, the €2,500/5,000 threshold shall be verified on a transaction by transaction basis (i.e., each bad debt arising from each contractual right towards the debtor). However, in the case of agreements implying the settlement of several economic obligations (such as multiservice and insurance contracts), the threshold shall be verified at the end of the fiscal year by pooling together the net balances of the bad debts that already expired since six months while referring to the same debtor.
The Guidance also clarified that the above deduction may only occur to the extent the deemed loss is accounted for in the taxpayers profit and loss (either as a loss or as a write-off) and that the credit is not subject to insurance coverage (in this case in fact the loss would turn into a credit vis-a-vis the insurance company).
Bad debt losses related to receivables that can no longer be collected by law
The amendments refer to the ten year ordinary expiration terms for credit collections provided under the Italian civil law rules.
Upon expiration of the mentioned term, since the Certainty and Accuracy principles are deemed to be satisfied, the taxpayer is allowed to deduct the bad debt loss.
However, the Guidance clarified that the deduction may be challenged by the Revenue if the taxpayer is not able to demonstrate that any attempts to recover the credit were made.
Restructuring plan regulated by the Italian Bankruptcy law
In this context, it was clarified that the restructuring plan may trigger the deduction of the bad debt loss to the extent the debtor is subject to one of the bankruptcy proceedings under Italian applicable rules.
De-recognition of receivables performed by IAS adopters
The Guidance stated that IAS adopters may deduct bad debt losses to the extent the prerequisites for the de-recognition process ruled by the IAS principles are met.
However, it was also clarified that even in this case the taxpayer should be in the position to demonstrate the business rationale of its decision.
1. For a description on the black list cost rule, see EY International Tax Alerts Guidance on new Italian CFC rules and black list rules of 18 October 2010 and Italy's Supreme Court rules on the deduction of expenses related to transactions with Black List entities of 17 July 2013.
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
- • Marco Magenta
+39 02 851 4529
Studio Legale Tributario in association with Ernst & Young, Bologna
- • Mario Ferrol
+39 335 122 9904
Ernst & Young, LLP, Italian Tax Desk, New York
- • Emiliano Zanotti
+1 212 773 6516
- • Andrea De Nigris
+1 212 773 0478
- • Aldo Bono
+1 212 773 3216
EYG no. CM3703