INSIGHT: Italy’s New Covid-19 Tax Measures—Room for Improvement

The Italian government immediately reacted with extraordinary tax measures at the very beginning of the Covid-19 pandemic crisis, by enacting the “Save Italy Decree,” Law Decree no. 18 on March 17, 2020. The scope of the initial legislation was mainly to tackle the immediate potential problems of liquidity for enterprises, professionals and employees with respect to the payments of taxes and social contributions, postponing the deadline for tax payments and encouraging donations to combat the spread of Covid-19.

Additional clarifications were also necessary to address the significant number of questions raised by taxpayers and enterprises.

However, due to the general lockdown imposed in Italy, it rapidly became clear that additional measures needed to be introduced to prevent the collapse of the economy and businesses. The government approved additional provisions aimed at offering more tangible help from a financial perspective, as well as alleviating the burden of enterprises regarding the payment of taxes and efforts to meet compliance deadlines. The new legislation has been named the “Liquidity Decree” (Law Decree no. 23 issued on April 8, 2020).

The Liquidity Decree has granted business enterprises the possibility to obtain loans guaranteed by the state, to be repaid in six years, to enhance liquidity and avoid bankruptcy. Commercial legislation has also been amended to prevent enterprises going into liquidation or becoming bankrupt. Moreover, suspension of tax payments has been extended to more taxpayers.

An additional decree (the so-called Italy Relaunch Decree) has recently been approved with additional measures focused—among other things—on the postponement of tax payments and a fine-tuning provision on the tax dispute side with respect to the term to lodge an appeal to the tax courts in case of an ongoing settlement procedure. Another important amendment will relate to the extended power to assess expiring fiscal years by one year (instead of two as provided by the Save Italy Decree).

The guidelines issued so far by the Revenue Agency have attempted to clarify taxpayers’ doubts and concerns which have arisen.

Below, the main features of the tax measures of the Liquidity Decree are summarized in comparison with the previous legislation, based on the clarifications provided by the Revenue Agency so far.

Postponement of Tax Payments

The Save Italy Decree (see Article 61 of the Decree) suspended tax payments for those business sectors most affected by the restrictions imposed by the Italian government to combat the outbreak of coronavirus (e.g. theaters, tour operators, travel agencies, hotels and accommodation, restaurants, museums, fitness centers). In light of the continuing lockdown, the Liquidity Decree has extended the postponement of tax payments, taking into account the thresholds of revenues and the decrease of turnover.

In particular:

• for taxpayers with turnover lower than 2 million euros ($2.16 million) in the previous fiscal year: payments expiring in the period between March 8 and March 31, 2020, related to withholding taxes, regional and municipal charges, value-added tax (VAT), social security and welfare contributions and premiums for compulsory insurance are postponed to May 31, 2020 and could be made in a single installment or split into five equal monthly payments starting from the same date;
• for taxpayers having tax domicile, registered office or operational headquarter in Italy with revenues or fees lower than 50 million euros in the tax period preceding that of the entering into force of the Liquidity Decree, suffering a decrease in turnover or compensation of at least 33% in March and April 2020 compared to the previous year: payments due in March and April 2020, related to withholding taxes, regional and municipal charges, VAT, social security and welfare contributions and premiums for compulsory insurance, are postponed to June 30, 2020 and could be made in a single installment or split into five equal monthly payments starting from the same date;
• for taxpayers having tax domicile, registered office or operating headquarters in the provinces of Bergamo, Brescia, Cremona, Lodi and Piacenza: VAT payments due in April and May 2020 are suspended if the taxpayer suffered a decrease in turnover of at least 33% in March and April 2020 compared to that achieved in March and April 2019, irrespective of the volume of revenues or fees. Such payments can be made, without application of penalties and interest, in a single installment by June 30, 2020 or split into five equal monthly payments starting from the same date.

The Relaunch Decree will further postpone the terms to make the tax payments to September 16, maintaining the option to perform them in one single or four installments without the application of penalties and interest.

The Revenue Agency clarified that the suspension of tax formalities also applies to nonresident taxpayers in Italy or those having appointed a fiscal representative. Indeed, the discrimination between compliance requirements for resident and nonresident taxpayers was highly criticized and would have caused unjustifiable discrimination.

In our view, the Italian government has not so far introduced any robust measures to actually support and preserve the liquidity of taxpayers: the measures introduced represent a mere postponement of tax payments, subject to the condition that a reduction of turnover is registered. In a period of economic crisis and financial constraints, more solid measures could have been envisaged to boost the economy. An attempt is made in the Relaunch Decree by exempting companies and professionals with revenues lower than specific thresholds from paying the regional tax (IRAP) due in June as balance payments for fiscal year 2019 and advanced payment for fiscal year 2020, but the provision is still under discussion with respect to the identification of eligible taxpayers and revenues to be considered to benefit from the exemption.

Postponement of Tax Formalities

The Liquidity Decree has also confirmed that for all taxpayers the tax obligations other than payment of taxes, e.g., filing of tax returns, communications, expiring between March 8 and May 31, 2020, are postponed and shall be performed by June 30, 2020 (the Save Italy Decree postponement was initially set at May 31) without the application of penalties and interest (see Article 62 of the Save Italy Decree).

In addition, the deadlines for filing the withholding tax statement related to tax period 2019, and to provide the recipient with the same certificate are set at April 30, 2020, without penalty for late submission.

Computation of Advance Tax Payments

Italian tax legislation requires taxpayers to pay corporate income taxes in advance, based on the amount of taxes due in the previous fiscal year. The advance payment is split between the months of June and November. As a result, taxpayers are asked to anticipate the payment of taxes due for the current year 2020, by computing the relevant amount through an historical method, i.e., making reference to the taxable income generated in the previous year. Taxpayers may be entitled to compute the advance payment based on a provisional method, but penalties and late interest are applied if the assumptions on which the calculation is based are not met.

To address the concerns of taxpayers in this period of financial difficulty, the Liquidity Decree provides that for the fiscal year following the one pending in 2019, penalties and interest shall not apply in the event of omission or insufficient payment of the advance payments for individual and income tax, as well as for regional tax purposes, computed based on the forecasting method. The condition is that the amount paid is not lower than 80% of the amount that would be due as advance payment on the basis of the tax return relating to the same tax period.

Support for Employees

The Liquidity Decree provides that a bonus of 100 euros, to be weighted by the number of working days at the workplace in March 2020, is granted to employees with a total yearly income not exceeding 40,000 euros. The bonus will not be included in the taxable base for direct tax purposes and shall be paid automatically by the employer, starting with the remuneration for the month of April, and in any case within the terms provided for the adjustments.

Tax Disputes: Postponement of Actions before Tax Courts

The Liquidity Decree extended the suspension of all procedural deadlines provided by the Save Italy Decree, from the initial date of April 15, to May 11. As a result, all hearings originally scheduled in the period March 9–May 11 are postponed, together with all actions connected with the same tax proceedings (e.g. filing of briefs or documents). It has been clarified that the suspension until May 11 is also applicable to tax offices (irrespective of the fact that the suspension window regarding the generality of their activities has been set at May 31, 2020 in the Save Italy Decree). The clarification was necessary in order to align the procedural deadlines provided for taxpayers with those of the tax authorities.

The Revenue Agency has commented in guidelines that the suspension and postponement of action is broad and has to be applied to all pending proceedings, including settlement proceedings and those pending before the Supreme Court. The Relaunch Decree will confirm this with a specific provision.

The Relaunch Decree includes additional provisions aimed at setting specific exceptions with regard to the deadlines for complying with the litigation tax amnesty launched in 2018 (Circular no. 10/E of April 16, 2020).

It is worth mentioning that, due to the limitations on personal meetings taking place and the observation of safety measures, guidelines have recently been issued by the Committee of Tax Courts to define specific procedures to incentivize remote/online hearings and avoid additional delays in the discussion of pending and urgent cases.

Donations to Support Covid-19 Efforts

In addition to the provisions approved in the Save Italy Decree regarding the deductibility of donations made to address the crisis through foundations, associations, committees and entities, the Liquidity Decree has established that free supplies of drugs for compassionate use are not subject to VAT or income tax.

Comments and Points of Attention

The provisions certainly have the aim of mitigating and reducing the concerns arising from the lockdown. However, the suspension or postponement of payments and of relevant formalities is only temporary and cannot really address in full the disruption that enterprises, professionals, and taxpayers may be experiencing. The attempts that Italian government is envisaging in the Relaunch Decree seem not to address the current concerns.

The Liquidity Decree only grants a few months of relief to taxpayers to deal with formalities and payments, but does not provide long-term and general relief for all the very tough formalities to be carried out in the next months which will also have to be performed with those ordinarily applicable in the same period. Moreover, the measures relating to the calculation of advance payment of individual and corporate income tax require a precision that may be difficult to achieve in times of uncertainty. Indeed, penalties are not applicable only where the taxpayer is able to make provisional calculation with a discrepancy not higher than 20% with respect to the actual income, which may not be an easy exercise in these times.

As a result, it is necessary to analyze carefully whether taxpayers may invoke different provisions if they are not able to meet the deadlines provided by the law and make payments or comply with formalities in time. In particular, from a theoretical point of view reference could be made to the general principle of force majeure, according to which “nobody could be punished for having committed a violation due to force majeure” (see Article 6, paragraph 5 of Legislative Decree no. 472).

The guidelines issued by the Revenue Agency have taken into account this possibility, but only with regard to the delayed issuance of electronic invoices (see Circular letter of Guideline no. 9 of April 13, 2020). The interpretation given to the force majeure principle has made reference to that outlined by the European Court of Justice and the Italian Supreme Court (Italian Supreme Court, Order no. 8175 of March 22, 2019 and November 5, 28321), according to which the impossibility of complying with tax formalities requires an objective element, i.e., the presence of unusual and extraordinary occurrence not under the control of the party obliged to perform the obligations, and of a subjective element, i.e., the obligation, on the part of the taxpayer, to guard against the consequences of the abnormal event by taking appropriate steps, without making unreasonable sacrifices (European Court of Justice, C/314/06, paragraph 24; C-325/03, paragraph 25).

Therefore, according to the Revenue Agency, the issuance of extraordinary measures and the possibility granted by the law to postpone payments and formalities should be interpreted as a way to facilitate the compliance of taxpayers and not for justifying further delays and violations. Taxpayers should, therefore, pay attention to the new deadlines and, in case they are not capable of complying with certain obligations, make sure that documentation and factual proof of the impossibility is gathered in order to defend their position before the tax authorities in the case of application of interest and penalties.

The provisions regarding donations seem also to be subject to restrictions and not to meet fully the need for certainty and a benefit in terms of tax savings for taxpayers. The current legislation entitles corporations to fully deduct donations in cash or in kind made through foundations, associations, committees and entities. Additional benefits are granted, but only for free sale of compassionate goods.

In addition, with respect to individuals, the deductibility from income taxes is limited to donations in cash, since the legislation regarding donations is quite complex in Italy, and the deduction of VAT is normally prevented: it is necessary to review in detail each type of transaction in order to establish its value in the case of donations in kind. The VAT treatment also needs to be identified, since deduction of VAT is restricted if the goods and services the object of the free supplies do not constitute part of the business of the company. The consequence is that, for example, VAT on goods like face masks or other medical devices is due and will apply at a high 22% rate. Consumer associations have already raised these issues and hopefully new rules may be approved.

It is also worth noting that the original provision related to the extended statute of limitation was repealed at the time of the conversion of the Save Italy Decree. The Save Italy Decree had initially given the tax authorities the power to assess expiring fiscal years up to fiscal year 2022. This rule was criticized as being unjustifiable if considered with the suspension of tax offices’ activities for a period of three months, with the result that the provision was canceled at the time of the conversion into law of the Save Italy Decree.

Looking again at this, the Relaunch Decree includes a rule which gives tax offices one additional year to merely serve the assessments to taxpayers, while the issuance of the tax assessment will have to be made within the statutory deadline in the current year. The expectation is that such procedure will not impair the right of the taxpayer to defend its position, irrespective of the internal timing discrepancy between the (internal) issuance of the assessment and the (external) notification to the taxpayers.

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.