INSIGHT: Tackling Tax Evasion and Promoting Tax Compliance in Italy—Two Sides of the Same Coin

The fight against tax evasion has been one of the most important topics under discussion by the new Italian government formed in September 2019; it has planned to increase the collection of taxes by more than 7 billion euros ($7.7 billion) by intensifying audit activities.

In particular, new provisions included in the year-end Tax Law Decree of October 27, 2019, no. 124/2019, have been implemented, increasing criminal penalties in cases of violation of tax provisions for behaviors that are considered particularly harmful. The Tax Law Decree is also introducing corporate criminal liability for certain tax violations.

The Italian tax authorities are also putting considerable effort into implementing programs that engage the Revenue Agency and taxpayers in a constructive and transparent relationship, in order to prevent tougher audits and confrontation in the tax arena. For this purpose, taxpayers (especially multinational groups) can identify a number of different options to mitigate/remove their tax liability not only from an administrative, but also from a criminal, perspective.

Such objectives were outlined in recent Guidelines issued by the Italian Revenue Agency in August 2019, (Circular Letter no. 19/E of August 8, 2019) which will continue to be followed by the tax authorities and need to be read and interpreted to identify the correct approach to be taken by enterprises for tax purposes.

Revenue Agency Guidelines on Relationship with Taxpayers

The Revenue Agency regularly issues guidelines to explicitly and openly share the approach that will be followed in their relationship with taxpayers, in order to allow taxpayers to make a self-assessment of the potential risks and to identify methods to prevent their facing a significant tax liability.

The Guidelines promote this approach. On analysis, it is clear that the Italian Revenue Agency has a dual approach with regard to taxpayers. On the one hand, the Revenue Agency maintains a very antagonistic and rigid attitude during tax audits, trying to identify the weaknesses in taxpayers’ behavior in order to increase tax collection; on the other hand, it has a strong interest in dialogue and promoting voluntary tax compliance.

Their approach to pursue these objectives is:

• Before an audit: promoting spontaneous tax compliance directly from taxpayers, building a consistent and preventive dialogue;
• Audit procedure: direct tax audit activities on pre-identified taxpayers, taking into account their characteristics (large companies operating in the international arena, medium-sized companies, small entrepreneurs and self-employed workers, individuals);
• Cross activities: activities which by their nature are not directly related to specific taxpayers, but which may have common features, such as those aimed at ensuring the correct interpretation of tax laws through the issuance of circular letters, resolutions and replies to tax rulings.

The attention of the Revenue Agency will be focused on those taxpayers that are regarded as having a high risk profile, as indicated in relevant databases.

In this regard, an important factor to be considered is the bulk of information available at the level of the Italian tax administration. The information now accessible to the Revenue Agency is increasingly sophisticated, thanks to the growing exploitation of existing databases, the evolution of technological tools (e.g. big data, machine learning, artificial intelligence), the recent introduction of electronic invoicing, and other tax obligations introduced, all of which assists the Italian tax authorities to cross-check and analyze the information available in a more advanced fashion. All of this is coupled with the increased exchange of information at international level.

On the other hand, the attitude of the taxpayer in sharing information with the Revenue Agency by, for instance, putting in place transfer pricing documentation, filing tax rulings in case of uncertainty in the application of the tax law, or opting for the cooperative compliance regime, will improve the taxpayer’s rating, with the consequent reduction in the likelihood of being audited.

Risk Assessment

In fighting evasive and abusive behavior by the taxpayer, the Revenue Agency will focus its efforts on high risk taxpayers.

The question is then, how do the Italian tax authorities determine the rating of the taxpayer?

Different elements will be taken into account by the Revenue Agency in building a taxpayer’s risk profile, such as its size, its belonging to a multinational group (this aspect will imply an overview of the whole group position), as well as the general willingness of the taxpayer to be open and transparent with the tax administration.

A general attitude of being transparent is positively valued, and also opting for the cooperative compliance program is appreciated. Such a regime, which is currently accessible only to large taxpayers, will be available in the near future to a wider range of companies (see below).

Another important aspect in determining a taxpayer’s rating is its general approach to drawing the Revenue Agency’s attention to those issues where there may be a disagreement on the interpretation of the law.

On its side, the Italian tax authorities will commit to ensuring a coordinated approach with the different tax offices (e.g. central, regional and local) and with the relevant tax police.

In this regard, it should be noted that medium-sized companies are the most differentiated in terms of business, localization, complexity, and behavior. Also, in this category of company may fall those taxpayers belonging to multinational groups that perform sales support activities for nonresident entities, and report an amount of revenue which categorizes them as medium-sized companies. This means that the tax assessment can be carried out by provincial tax offices, which are not always familiar with transfer pricing issues and are not used to dealing with multinational companies.

Cooperative Compliance Program

The Italian Revenue Agency has been placing emphasis on a relationship with the taxpayer based on transparency, cooperation and open dialogue, for many years.

Following the Organization for Economic Cooperation and Development (OECD) experience where cooperative compliance regimes were developed and implemented (e.g., the “horizontal monitoring” regime in the Netherlands, and the cooperative compliance model in Australia) and after a cooperative compliance “pilot project” launched in 2013, an official cooperative compliance regime, accessible only to large taxpayers, became effective in 2016.

The Revenue Agency anticipates that, starting from FY2020, the threshold to access the regime will be reduced to 100 million euros, thus incentivizing preventive dialogue with the tax authorities, and avoiding confrontation in the contest of tax audits, settlement procedures, and tax courts, where this dialogue is more difficult.

Such regime is aimed at promoting and reinforcing forms of dialogue and cooperation between the tax authorities and taxpayers, putting in place a tax control framework—a mechanism of detection, measurement, management and control of “tax risk”, where “tax risk” is defined as the risk of managing an undertaking in violation of tax rules or diverging from the aims and principles of the tax system.

The cooperative compliance regime requires an actual commitment from both the Italian tax administration and from taxpayers. The tax authorities must:

• evaluate with transparency, objectivity and proportionality the risk control system adopted by the taxpayer;
• promote a relationship inspired by transparency, collaboration and impartiality with the aim of realizing tax certainty; and
• pre-emptively examine potentially relevant tax risk situations and respond as quickly as possible to taxpayers.

In turn, the taxpayer must:

• introduce and maintain a tax control framework;
• take a collaborative approach and engage in transparent behavior;
• promptly and exhaustively inform the tax authorities of tax risks and transactions that are potentially aggressive from a tax perspective; and
• promote inside its organization a business culture inspired by honesty, impartiality and tax compliance.

Participation in this regime will improve the “risk profile” of the taxpayer and may have a positive effect in the case of criminal violations in specific transactions, in which no agreement is reached with the tax authorities.

Participation in the regime will also have benefits granted by the tax authorities by operation of law (e.g., reduction of penalties in case of divergent position from that of the Revenue Agency, reduced time of reply in filing of ruling, quicker procedure in a request for value-added tax refund), but these are not the only benefits. The management of tax risks inside the company, by putting in place the tax control framework, irrespective of the actual participation in the program, may also prevent reputational risk, and is viewed positively by a company’s stakeholders, the market, and financial investors. There is particular attention on how a company generally manages tax risk, and whether the so-called tax culture is developed inside the company.

Tackling Illegitimate Behavior and Tax Fraud

The clear message coming from the Revenue Agency is that it will focus on illegitimate and fraudulent behavior, which may be detected by cross-checking and exchanging information among different tax administration offices, including public prosecutors and the tax police. This is coupled with the increased exchange of information at international level. Attention will be paid in particular to the artificial transfer of tax residence or business/assets abroad.

Assessment activities will then be performed by leveraging the exchange of information provided by EU directives and other international agreements, together with other automated exchange of information, such as country-by-country reporting, international tax rulings, and advance pricing agreements.

Increased Pressure on Taxpayer through Criminal Tax Ramifications

The Revenue Agency has always used the pressure of possible criminal exposure to bring taxpayers to comply with tax formalities and find a compromise through a settlement solution in an audit. Recent cases published in the financial press have shown this approach.

The government, with the Tax Law Decree, has amended the current criminal tax framework, increasing the penalties for certain violations which are considered particularly harmful. The consequence is that the detrimental nature of the penalty would be stressed because it will be more difficult (based on the procedural rules) to avoid the application of criminal charges through the use of alternative measures, such as plea bargaining, to mitigate penalties.

The main changes are those related to the fraudulent filing of tax returns, which can be committed either by the use of documents for nonexistent transactions, or by transactions carried out through fictitious activity. In the first case, the penalty will be imprisonment from four to eight years (previously the penalty ranged from eighteen months to six years), and in the second case, imprisonment ranging from three to eight years (previously the penalty ranged from eighteen months to six years).

It should be underlined that this provision has been applied by the tax authorities in Italy not only in cases of tax evasion, but also in situations where multinational companies were challenged as not having disclosed their operational profile transparently.

In the case of filing of a false tax return, the thresholds have been reduced, i.e., a violation will be committed where the undeclared revenue is higher than 2 million euros, and the applicable penalty will be imprisonment from two to four years and six months (previously the penalty ranged from one to three years).

It is always possible to regularize the violation through the filing of a tax return—to be done, however, before the taxpayer becomes aware of any tax audit or criminal investigations.

Seizure measures are also confirmed in case of the filing of a fraudulent tax return where the tax evaded is higher than 100,000 euros.

Finally, a landmark provision included in the Tax Law Decree refers to the extension to enterprises of criminal liability for tax crimes (current Law no. 231/2001). So far, the liability for tax violations has only fallen on individuals, i.e., directors and managers who are responsible for tax compliance and who sign tax returns.

Some of the reasons for not including tax crimes within the criminal liability law were based on preventing the duplication of charges against enterprises, due to the significant financial impact of administrative penalties which were already considered capable of discouraging such crimes.

However, with the strong intention to prevent tax evasion and limit fraudulent behavior, certain tax crimes have been introduced in Law no. 231/2001. In particular, the law now includes crimes such as the fraudulent filing of tax returns through the use of false documents (for taxable income higher than 100,000 euros), as well as through the use of false invoices, the issuance of false invoices, the filing of fraudulent tax returns through fictitious behavior, the hiding or destruction of accounting books, and fraudulent behavior aimed at omitting the payment of taxes.

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

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