Global Tax Alert | 6 August 2013
Italy issues operative guidelines on tax audits for 2013
On 31 July 2013, the Italian Revenue Agency (Revenue) issued its annual guidelines (Guidelines) for Revenue auditors on goals to achieve and tax strategies to pursue in the carrying out of FY 2013 audit activities (Circular Letter 25/2013).
The Guidelines are consistent with a broader action plan signed by the Minister of Finance on 24 April 2013 on tax policy objectives for the 2013-2015 period, which sets forth the reinforcement of the fight against tax evasion and tax avoidance as one of the main pillars.
The Revenue specifies that its budget (in terms of the tax amount to be recovered through audit activities) for FY 2013 has been set at a level compatible with a maximum effort in using the available resources and with the aim to optimize the results of each audit by focusing on the cases of greatest risk.
The Guidelines also state that the tax audit activities to be carried out during FY 2013 should follow the approach of the past years by focusing on taxpayers and transactions characterized by a high risk profile in terms of tax evasion and tax avoidance potential.
Selection of taxpayers' risk profile
Among the different categories of taxpayers, the Revenue addresses specific considerations with reference to “Large Business Taxpayers” (LBT), i.e., companies with a turnover or operating revenues not lower than €100 million, which are generally subject to the Tax Tutoring Program.1
With reference to the LBT category the Guidelines state that:
- • The audit activities to be carried out in FY 2013 will mainly concern taxpayers that have already been subject to the Tax Tutoring Program in prior years. In this respect, for taxpayers that in the past have resulted with a low risk profile for at least two FYs in a row, tax control activities might be limited to an update of the respective risk profile record with the data disclosed in the recently filed tax returns and in the relevant balance sheet.
- • The risk profile could increase for companies that have not complied with advanced tax rulings sought with the Revenue.
- • When updating the risk profile records, the authorities should positively consider the propensity of the taxpayer in building a transparent and cooperative relation with the tax administration. For instance, the Guidelines state that a cooperative approach is demonstrated if the taxpayer has complied with the Transfer Pricing documentation standard requirements and flagged the relevant box in its tax return.2 In this respect, the Guidelines particularly emphasize that compliance with the Transfer Pricing documentation rules must be positively considered when updating the taxpayer's respective risk profile record.
- • Information on taxpayers risk profiles must be shared with the Tax Police (Guardia di Finanza) with whom the Revenue should coordinate more when carrying out audit activities.
Selection of high tax risk areas and audit priorities
The Guidelines also identify certain high risk areas and tax positions to which audit activities will give priority and devote particular attention. These include:
- • Transactions qualifying as aggressive tax planning schemes applied on an international scale as addressed by the OECD report on “Aggressive Tax Planning based on After-Tax hedging 2013;”3
- • Tax base erosion schemes as addressed by the OECD documents on BEPS (Addressing Base Erosion and Profit Shifting);4
- • Tax positions related to FYs for which statutes of limitation will expire on 31 December 2013;5
- • Deduction of costs arising from transactions with entities located in black list countries;6
- • Situations whereby taxpayers have filed claims for tax refunds;
- • Situations whereby foreign entities may be attracted to Italian tax residency;
- • Situations that may typically reveal the existence of an Italian (hidden) permanent establishment of nonresident entities.
Efforts to build a cooperative compliance framework
The Guidelines also put specific emphasis on the efforts that the tax administration should make in order to promote the creation of a cooperative framework. To this purpose, the tax authorities are called to boost pre-litigation settlements and encourage taxpayers to implement internal tax control models aimed at complying with tax rules.
In this respect, the Guidelines also refer to the recent launch of a pilot project to implement a Co-operative Compliance Program (CCP) in Italy. The CCP is deemed to make the mentioned Tax Tutoring Program for LBT compliant with the guidelines issued by the OECD in the “Co-operative Compliance: A Framework from Enhanced Relationship to Co-operative Compliance” report.7 The CCP should generally imply a commitment by LBT to transparency in exchange for openness and responsiveness by the tax authorities in solving significant issues in a timely and effective manner.8
1. The Tax Tutoring Program originally applied to the “Enterprises of Particularly Significant Size,” i.e., LBT that in a given FY have generated a turnover consistently higher than €100 million, but it has been gradually extended to all LBT. The program consists of a more in depth form of tax control which is tailored on the basis of specific industries or type of transactions by also implying an enhanced level of transparent and cooperative relationship between authorities and taxpayers.
2. For additional details on the Transfer Pricing standard documentation requirements, see EY International Tax Alerts Italian government adopts transfer pricing documentation discipline of 4 June 2010 and New Italian Transfer Pricing documentation standard established of 1 October 2010.
3. Document available on the OECD website www.oecd.org/ctp/aggressive/After_Tax_Hedging_Report_Website.pdf.
4. Document available on the OECD website www.keepeek.com/Digital-Asset Management/oecd/taxation/addressing-base-erosion-and-profit-shifting_9789264192744-en.
5. This would generally coincide with FY 2008.
6. For additional details on the mentioned black list cost rule, see EY International Tax Alert Italy's Supreme Court rules on the deduction of expenses related to transactions with Black List entities of 17 July 2013.
7. Document available in the OECD website www.oecd.org/tax/administration/co-operative-compliance.htm.
8. See EY Global Tax Alert Italy launches pilot project for tax Co-operative Compliance Program, applications required by 31 July 2013 of 1 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. CM3704