Italy’s Reformed Tax Litigation System Brings a Wave of Changes

The long-awaited reform of tax litigation procedures has finally been approved by Law No. 130, of Aug. 31, 2022 published in the Official Gazette Sept. 1, 2022. Certain provisions have been effective since Sept. 16, 2022, while others will come into effect at a later stage.

The reform represents a milestone in the process promoted by the tax community and mainly aimed at establishing a fair litigation system through the reduction of the length of tax procedures, the introduction of new procedural rights for taxpayers, and the improvement of the quality of final decisions. The reform is key to improving the competitiveness of the Italian system and attracting foreign investors, witnessed by the fact that the grant of some of the funds of the Italian post-pandemic Recovery and Resilience Plan was subject to the approval of the reform.

The Italian litigation system has been highly criticized because it does not grant taxpayers certainty and justice within a reasonable time frame, as would be expected in an impartial process. The time to obtain a final decision by Supreme Court could extend to 10 years, as it formed a bottleneck, with thousands of cases pending. As a result, the reform has been coupled with a partial amnesty for cases pending before the Supreme Court.

The reform takes two approaches; on one side, it is focused on procedural aspects (e.g., change of name of tax courts, introduction of a single judge, suspension of the advance collection of taxes requested with tax assessments). On the other side, it intervenes in some aspects of the tax trial (e.g., admission of the witness written evidence, burden of proof, rejection of mediation, settlement procedure). The reform also implements a completely new system of appointment of tax judges, starting a replacement of the current judges with panels of dedicated tax expert judges.

A summary of the main changes is outlined below.

Modifications to Procedural System

Tax Justice Courts

There has been a cosmetic change in the name of the tax courts, which are now called “court of tax justice” of first instance and second instance, instead of provincial and regional tax courts.

However, beyond this, the real revolution is the replacement, over several years, of the current judges with independent and professional judges dedicated to tax cases. In particular, 576 new judges will be recruited after a specific exam. It was considered critical to create an independent section of judges with expertise in tax and accounting matters—thus far the panel of judges has consisted of professionals with a variety of different backgrounds.

Finally, for notified appeals commencing as of Jan. 1, 2023, cases having a value lower than 3,000 euros ($2,900) will be assigned to a single judge, instead of a three-judge panel.

Remote Hearing

An appeal brief filed on or after Sept. 1, 2023 may include a request to hold the hearing remotely. If both parties are interested and request a remote hearing, it is mandatory that this be scheduled. Moreover, the hearing to discuss the suspension of the advance collection of taxes and penalties which the tax authorities have requested during the tax proceedings will be held remotely by operation of law.

Collection of Taxes and Penalties in Course of Tax Litigation

In general, irrespective of the filing of an appeal against a tax assessment, the Italian revenue agency is allowed to collect certain amounts pending tax litigation. The taxpayer may file a petition with the competent tax court for the suspension of this anticipated collection of taxes. The competent tax court would grant a suspension during a hearing, normally called a “suspension hearing,” if the collection may cause serious and irreparable damage to the taxpayer and, if on initial analysis, the arguments raised by the taxpayer against the tax assessment are deemed to be established.

The reform provides that the suspension hearing must be set within 30 days following the filing of the suspension request, and the parties will be notified of the date of the suspension hearing at least five days prior to the hearing date (previously the deadline was set at 10 days). The suspension hearing will not coincide with the hearing on the merits of the case.

It is worth noting that the judge may grant the suspension contingent upon filing of a guarantee, unless the taxpayer is qualified as “reliable” from a tax perspective, i.e., in the previous three fiscal years it has received certain scores calculated through the information reported in its tax return which provide evidence that no risks are associated with its position.

The Tax Trial: a New Perspective

Burden of Proof

The reform has introduced a specific provision which states that the Italian tax authorities must ground their tax adjustments on adequate proof of evidence, and that the tax justice courts must duly take this into account in their decision. In practice, it is now not disputable that the burden of proof falls on the tax authorities.

Although such principle should already have been in place, since it is embedded in the civil litigation procedure system, its actual application in tax proceedings by tax offices and judges was not always correct. For instance, in cases focused on the challenge of costs deemed not strictly connected to an enterprise’s business, or challenge of alleged nonexistent transactions in the context of value-added tax fraud, very often the tax authorities attempted to shift the burden of proof onto the taxpayer, and judges would not uphold the exceptions raised by the taxpayer (Supreme Court No. 22449 of July 12, 2022).

The new provision clearly mentions that that the challenges raised by the tax authorities in the tax assessment must be properly supported from a probatory perspective. The judge shall examine the evidence provided in support of the tax claim and provide clear explanation of his/her conclusions in a justified decision. If the burden of proof rule is not adequately satisfied, the tax assessment must be declared null and void.

On the other hand, in the case of request for refund of tax credits, the burden of proof is on the taxpayer, as already stated by the Supreme Court in several cases (e.g. Supreme Court No. 2384/2020).

Written Witness Evidence

Another important innovation to the tax procedure is the admission of written witness evidence as an element of proof, applicable for appeal briefs filed on or after Sept. 16, 2022.

The significance of this new rule is that so far the tax procedure has been only a documentary process, with the result that no witnesses were admitted. However, this limitation has been considered as being not in line with the principle of the right of defense, as also indicated by the European Court of Human Rights, with the result that in some cases the tax courts have considered legitimate written attestations filed by the parties (particularly the tax authorities) in tax proceedings.

Tax courts could therefore now request that a witness replies to certain questions in writing along the lines of a specific model, without the need for the parties to the proceeding (tax authorities and taxpayer) to agree to the admission of such evidence. Once the answers or statements have been examined, the tax court could also ask that the witness be called to testify before it or before the delegated judge.

The written witness evidence introduced by the reform is, therefore, not an “ordinary” means of evidence but an exceptional one, left to the discretionary decision of the new tax courts. Nevertheless, this is an important development to be taken into consideration by the taxpayer—when, for instance, there would be a need to reject third-party statements collected by tax inspectors in the course of the tax investigation, or to prove facts additional to those reported in the tax reports.

From the above, it is now clear that the tax litigation process will have to be prepared well in advance, from the collection of the documentation supporting decisions and transactions carried out in business activity, during the tax audit phase, and, of course, at the time of drafting the appeal for starting the litigation process, where all the procedural exceptions will have to be raised.

Mediation and Settlement Procedure

The complaint/mediation procedure is applicable for tax disputes where the value does not exceed 50,000 euros (meaning the tax adjustment should not be higher than this amount, while if only penalties are assessed, penalties should not be higher than this amount). In such cases, before lodging an appeal, the taxpayer is obliged to file a request of complaint/mediation.

In general, in evaluating the complaint/mediation request lodged by the taxpayer, the tax office must bear in mind three specific criteria provided by law: the “possible uncertainty of the disputed issues,” the “degree of sustainability of the claim,” and the “principle of economy of administrative action.”

With the purpose of reducing the number of cases pending before the tax courts, the reform introduced two important changes that must be taken into account by the tax office before rejecting mediation: the possibility to be condemned to the payment of legal expenses, and the possibility that the tax officer in charge of the procedure could suffer administrative liability.

It is also provided that in disputes eligible for the complaint/mediation procedure, the court of tax justice may offer a settlement proposal to the parties, which can be made in or out of court. Once the parties agree on the terms of a settlement proposal, the case is closed, and any legal expenses shall be borne by each of the parties, irrespective of which one started the litigation, unless a different arrangement is specifically reached on this aspect in the settlement agreement. If one of the parties or the judge has made a settlement proposal that was not accepted by the other party without a justified reason, the latter shall remain liable for the costs of the judgment, increased by 50% if the conclusions of the decision are less favorable than the settlement proposal.

Closing of Cases Pending Before Supreme Court

The reform has also focused on the cases pending before the Supreme Court, for the purpose of closing those which have insignificant value through an amnesty, in certain circumstances.

In particular, cases may be closed:

• If the tax authorities lost the two first stages of the tax proceedings and the value of the case does not exceed 100,000 euros, by the taxpayer paying an amount equal to 5% of the value of the dispute;
• If the tax authorities have entirely or partially lost one of the stages of the tax proceeding and the value of the case does not exceed 50,000 euros, by the taxpayer paying an amount equal to 20% of the value of the dispute.

The request for a case to be admitted to the Supreme Court tax amnesty must be filed by Jan. 16, 2023, and payment must be made for each case separately. The sums paid pending the procedure will not be refunded.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Giuliana Polacco is senior counsel and Annarita De Carne is associate with Bird & Bird Italy.

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