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Italy Turns to AI to Find Taxes in Cash-First, Evasive Culture

Oct. 31, 2022, 8:45 AM

Italy’s aggressive use of artificial intelligence to close Europe’s biggest tax gap is starting to make inroads, but still must overcome a national legacy of tax avoidance and strict EU data privacy laws.

“In the last few years, the use of technology and digitization has proven to be a real game changer,” said Paolo Valerio Barbantini, deputy director general and head of the taxpayers division of the Italian Revenue Agency, in a recent video.

The agency has identified 1 million high-risk cases this year and prevented more than 6.8 billion euros ($6.85 billion) in fraud, the tax authority said.

Over the summer, the Ministry of Economy and Finance adopted a decree authorizing the Italian Revenue Agency to launch a new algorithm that cross references financial data to identify taxpayers at risk of not paying.

The VeRa algorithm compares tax filings, earnings, property records, bank accounts and electronic payments looking for discrepancies. High-risk taxpayers then receive a letter asking them to explain the differences. The more data VeRa processes, the smarter it becomes.

But use of this taxpayer data must respect the General Data Protection Regulation, the European Union’s 2016 data privacy law, limiting what data the government can use and determining how the AI strategy is implemented.

Italy’s Privacy Paradox

Italy has a paradoxical relationship with privacy, said Veronica Pinotti, a partner at White & Case LLP in Milan who specializes in data privacy law.

“This is the one of the countries that is applying the GDPR in the most aggressive way,” she said. But at the same time, Italy has been adopting increasingly sophisticated surveillance technology over the past 10 to 15 years, sidestepping privacy considerations in the name of combating organized crime and rampant tax fraud.

“Different agencies strongly cooperate with each other as well,” Pinotti said.

The Italian Data Protection Authority, which oversees implementation of the GDPR, has also become more active in recent years, taking decisive action against companies, she said.

It took almost two-and-a-half years for the finance ministry to formulate a VeRa decree that received the data protection authority’s approval, said Alessandro Santoro, an adviser to the Ministry of Economy and Finance who heads its anti-tax evasion committee. Implementation won’t be immediate.

“They will need to do testing and experimental procedures,” Santoro said. He expects the process to take at least a year.

Unparalleled Data Collection

Tax authorities worldwide are increasingly using AI for tax administration, with several countries specifically using it to fight tax evasion.

India uses AI to assess taxpayer risk and conduct audits. In France, officials used artificial intelligence and satellite images to detect 20,000 undeclared swimming pools and collect 10 million euros in undeclared tax.

But few tax authorities have as much data to draw on as Italy.

The country loses more than 99 billion euros per year to tax invasion, including about 30 billion euros in unpaid value-added tax—the most in the EU, according to the European Commission.

During the Covid-19 pandemic, a pause on enforcement actions caused the total amount of uncollected tax in Italy to balloon to 1.1 trillion euros, Italy tax revenue director Ernesto Maria Ruffini told Parliament in April.

Italy’s traditionally high income taxes, a cash economy, and culture of impunity have been major drivers of the crisis. More than 80% of payments in Italy are made in cash, enabling VAT evasion, according to the Bank of Italy.

Organized crime, corruption, and EU-enforced austerity have weakened public-sector services, such as health care and education, leading to a general feeling that the quality of services isn’t commensurate with the amount of tax owed. As a result, a thriving economy exists off the books, which many people consider culturally acceptable.

Piecemeal measures have been introduced in various budget laws to try to close the tax gap, or the difference between the amount of tax owed and the amount collected. As of January 2019, all business invoices must be issued electronically, with the tax authority automatically receiving copies. Certain expenses are only tax deductible if paid electronically, and by law, all retailers must accept electronic payments.

Data Uses Limited

Typically, the GDPR only allows personal data to be used for the purposes agreed to by the data owner, he said. However, the GDPR has several carve-outs. Authorized officials can process data “for tasks carried out in the public interest,” and to prevent and investigate crimes, including tax evasion.

But each use must be codified into law—Parliament approved VeRa as part of the 2019 budget legislation—with processes in place that respect the data owner’s rights.

Once it’s passed, relevant legislation must respect three key GDPR principles, said Roberto Antoniotti, head of technology and innovation for Grant Thornton in Milan. Algorithms must be transparent, data must be anonymized, and inputs cannot be discriminatory.

“So even if you know there’s a lot of tax evasion in a certain type of business in a specific region, you can’t program the algorithm to include inputs from that sector or that region,” he said.

New Government Priorities

Use of AI in tax administration is likely to continue as Italy forms a new government, but fighting tax evasion seems like less of a priority for the conservative-party coalition that prevailed in the Sept. 25 snap election, said Francesco Marconi, partner and coordinator of the international tax division with Andersen in Italy.

Giorgia Meloni’s far-right Brothers of Italy party, which leads the coalition after winning 26% of the vote, is more focused on expanding the 15% “flat tax” for self-employed contractors earning less than 65,000 euros per year, Marconi said.

“Especially at the beginning, I think their focus will be on increasing the flat tax threshold, creating a soft landing for anyone who exceeds it, and bringing more people into the system,” Marconi said.

During a speech before the lower House of Deputies on Tuesday, Meloni said she wanted to focus anti-tax evasion efforts on “total evaders, big companies and major VAT fraud,” while offering amnesty to small-and-medium sized firms that are out of compliance.

Brothers of Italy didn’t respond to requests for comment.

Its coalition partner, Matteo Salvini’s Lega party, has called for abolishing the progressive tax system altogether, but that’s much harder because progressive taxation is enshrined in the Italian Constitution, Marconi said.

To contact the reporter on this story: Janna Brancolini in Milan, Italy, at

To contact the editors responsible for this story: Meg Shreve at; Gregory Henderson at