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Cooperative Compliance Regime in Italy—Five Years After Its Introduction

July 28, 2021, 7:00 AM

As part of new forms of dialogue between taxpayers and the Italian tax authorities, with the aim of promoting voluntary tax compliance, reducing aggressive tax audits and strengthening trust with the tax authorities, several years ago the cooperative compliance regime was introduced in Italy (Legislative Decree No. 128 of August 5, 2015).

Background

The regime, which has been developed by the Organization for Economic Co-operation and Development (OECD) on the basis of positive international experience, has the main purposes of achieving the standards of tax certainty, anticipating the dialogue phase (so called ex ante control) and ensuring a common assessment of situations which could generate tax risks in advance of submission of the tax return, based on the principle that “businesses that are prepared to be fully transparent can expect certainty about their tax position in return.” (OECD (2013), Co-operative Compliance: a Framework—From Enhanced Relationship to Co-operative Compliance, OECD Publishing, Paris.)

Therefore, following the OECD experience, the Italian government on August 5, 2015 enacted Legislative Decree no. 128, which introduced the cooperative compliance regime—Adempimento Collaborativo—into the domestic tax system effective from 2016. (A “pilot project” was launched by the Italian Revenue Agency on June 25, 2013. The project was aimed at identifying the features a new form of relationship between large business taxpayers and the Italian Revenue Agency should have for the purpose of consistency with the OECD’s most recent approach. Among all the applications received, 14 entities were elected to participate in a series of workshops.)

How the Regime Works

The Italian cooperative compliance regime is open to resident and nonresident taxpayers with a permanent establishment in Italy which meet specific revenue levels and are equipped with a system for the detection, measurement, management and control of tax risk (“tax control framework”) (Article 7 of Legislative Decree No. 128 and point 2 of the Agency’s Measure of April 14, 2016).

In a nutshell, a well-designed and effective tax control framework (TCF) will have to be integrated within the wider group internal control system and shall include at least the following:

  • a clear attribution of roles and responsibilities and effective procedures for the purpose of detecting, measuring, managing and controlling tax risks and assuring implementation of tax relevant controls;
  • adequate flow of information from and towards the tax function;
  • a structured monitoring process for TCF continuous improvement and update.

Under this new framework, taxpayers are incentivized to provide complete and timely spontaneous information and to behave in a transparent and cooperative manner, reflecting the Revenue Agency’s commitment to making tax compliance easier, and helping businesses achieve a greater degree of certainty.

A Regulation of the Revenue Agency dated May 26, 2017 set out the initial provisions for the implementation of the regime relating to the framework of the open engagement with the taxpayer (e.g. operative details and quantitative and qualitative materiality thresholds of the cases in respect of which the duties of cooperation and transparency shall operate), but very recently the Revenue Agency issued a new Resolution 49/E, dated July 22, 2021, following engagement with the group already admitted to the regime.

The Resolution provides clarification with regard to certain aspects which still needed more explanation, in particular with reference to the formalization of the analysis performed during the procedure, the “deferred analysis” and the risks set out in the so-called Risk Map.

For the purposes of the regime, the tax risk is defined as “the risk of operating non in compliance with tax rules or in contrast with the aims and principles of the tax system.” (as per Italian Legislative Decree 128/2015, Article 3, translated).

Progress of the Regime

The first phase of application of the regime ended on December 31, 2019. It was limited to large taxpayers, i.e. with at least 10 billion-euro ($11.8 billion) turnover or revenues, or 1 billion-euro turnover or revenues if the taxpayers applied to the initial pilot project. However, during phase 1, access to the regime was also granted to VAT groups (as per Article 70-duodecies, paragraph 6 bis of Presidential Decree 633/1972).

Last year the threshold turnover was reduced to 5 billion euros (see Decree of the Minister of Economy and Finance dated March 30, 2020). The target of the Legislative Decree which introduced the cooperative compliance regime was, however, to launch a process which would lead to the extension of the program to taxpayers with revenue exceeding 100 million euros.

As of today, more than 30 companies, including groups, have accessed the Italian cooperative compliance regime.

The feedback from the tax function of companies that entered into the regime is very positive. Having a TCF is an opportunity, not only as a requirement to access the cooperative compliance regime, but also with a view to ensuring open engagement and dialogue inside the company, and to spreading a culture based on the principles of transparency and awareness. Preventing any tax risks is also key to preserving reputational consequences for the companies.

In addition to the revenue thresholds, the regime is accessible to those taxpayers that filed a special ruling on new investment in Italy (i.e., investment higher than 20 million euros) and committed themselves to complying with the reply provided by the Italian Revenue Agency in the context of this ruling procedure (Article 8 of the Decree of the Minister of Economy and Finance of April 29, 2016). Such opportunity allowed a certain number of Italian companies to access the regime even in the absence of the turnover requirement.

Moreover, again with a view to promoting these new forms of preventive dialogue with large taxpayers, the Regulation issued by the Director of the Revenue Agency of April 16, 2019 sets out the requirements, procedures and deadlines for the submission of the application to access the “enhanced cooperation and collaboration procedure” for nonresident companies belonging to multinational groups with consolidated turnover in excess of 1 billion euros and which carry out economic activities in Italy likely to give rise, as a whole, to a permanent establishment in the territory of the state (provided for by Article 1-bis of Decree-Law no. 50 of April 24, 2017).

In particular, the voluntary disclosure of a hidden permanent establishment of a nonresident entity in Italy would grant access to the regime, irrespective of the fact that the permanent establishment in Italy would have reported in the respective accounts the revenues provided by the law.

Access to the regime will prevent any possible tax investigation. In fact, any activities related to the cooperative compliance regime, including the control of the tax returns submitted by taxpayers admitted to the regime, will be managed exclusively by the tax office competent for application of the regime (the special Cooperative Compliance Office established inside the Central Directorate) in order to maximize the benefit of in-depth knowledge of the taxpayer and its systems. Any inspection related to a fiscal year prior to access to the regime will be carried out by the tax offices dedicated to the tax investigation in coordination with the Cooperative Compliance Tax Office (Revenue Agency Circular Letter no. 4/E dated May 7, 2021).

The attention of the Italian tax authorities to the presence of a TCF is increasing, irrespective of the actual access of the taxpayer to the regime which, as mentioned above, is currently possible only for large companies. In particular, having a TCF in place may be seen as a clear signal of the willingness of a company to proactively manage tax risks inside the business organization, spreading a culture of transparency, cooperation and tax compliance. Such approach could be very helpful in the case of tax audits which may end with criminal ramifications.

Moreover, it is important to appreciate the possible synergies between the TCF and other internal control systems necessary inside the company.

Developments in Criminal Corporate Liability

In this context, it is worth mentioning the most recent developments in corporate criminal liability. The last two years were decisive for the inclusion of tax offenses among the predicate offenses capable of triggering corporate liability (Legislative Decree N. 231/2001, “Decree 231”), a matter which has been the subject of controversial debate in Italy spanning the past decade.

These developments have increased the pressure on Italian and foreign companies acting in Italy, both in terms of sanctions risk and the need for preventive compliance programs.

“231 Model”

In short, Decree 231 provides for the liability of entities before the criminal courts where a person with representative, administrative or directive capacity (also de facto), or a person subject to their direction or surveillance, commits—or attempts to commit—one of the predicate offenses listed in the Decree in the interest or to the benefit of such entity.

The list of predicate offenses is quite broad. Recently, after many years of debate, tax violations have been added to the list (Article 25 quinquiesdecies, Decree 231), among others, “unfaithful” tax returns, fraudulent tax returns, undue use of tax credits, etc.

It is important to underline that under Decree 231, when a predicate offense is committed, a company can avoid or reduce liability if it proves, inter alia, that it has adopted and effectively implemented adequate systems and controls in accordance with the Decree, including an organization and management model (a “231 Model”) suited to preventing the type of crime that was committed.

Synergy Between 231 Model and Tax Control Function

Turning to the synergy between the TCF and 231 Model, the Italian Tax Police, in a recent Circular Letter (Circular Letter no. 216816/2020), indicated that despite the different elements of each regime, it is indisputable that with regard to areas common to the two systems the positive judgment expressed by the Revenue Office for the purposes of admission to collaborative compliance may constitute a useful element of evaluation to be referred to the competent judicial authority.

Such approach has also been followed more recently by the main association representing manufacturing and service companies in Italy, Confindustria, which in June issued guidelines focused on the preparation of the 231 Model in light of the latest developments.

Confindustria has stressed the fact that companies that have adopted the TCF have in fact already implemented a “system for the detection, measurement, management and control of tax risk.” It is, therefore, a system that can constitute a “platform for directing the organizational models towards an effective control of the risk of committing the recently introduced offenses.”

The structural analogy of the tax risk control system with regard to the 231 Model is manifest, as is the monitoring/testing activity aimed at identifying shortcomings or operating errors and consequent corrective actions, as well as periodic reporting to management bodies for examination and consequent assessments.

Another pillar on which both risk management systems are based is information flows that must be accurate, complete, timely and constant, so as to ensure the circulation of information at all levels of the company.

Therefore, despite the specific characteristics which clearly differentiate the TCF from the 231 Model and underlying regime, the basic elements that a TCF may contain would also be useful in updating the organizational model aimed at preventing tax risk by companies which do not fall within the scope of application of cooperative compliance.

In this regard, companies can adopt the TCF regardless of whether they may actually adhere to the official regime (also in light of what was stated in the Circular Letter issued by the Tax Police last year). In this case, the TCF, even though it lacks the validation of the Revenue Agency, may be seen as a structured protocol that may reinforce the 231 Model in terms of preventing tax offenses.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Giuliana Polacco is Senior Counsel and Annarita De Carne is Senior Associate with Studio Legale Bird & Bird.

The authors may be contacted at: giuliana.polacco@twobirds.com; annarita.decarne@twobirds.com

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