By Giuliana Polacco and Annarita De Carne, Studio Legale Bird & Bird, Milan
The Italian revenue agency has described its plans for tax audit activities directed at preventing and fighting tax evasion and has given an indication of how it will deal with tax litigation, tax consultancy, and taxpayer services in general through guidelines issued May 7. The guidelines, included in Circular Letter n. 4, aim to address the need to maintain an adequate level of tax collections amidst disruptions caused by COVID-19.
The guidelines provide a broad picture of the intent and direction of the revenue agency and give useful indications for taxpayers, especially for multinational companies that may be considering investment in Italy or reorganizations of their business. A specific section is dedicated to international aspects, including the increasingly common use of exchange of information procedures.
The COVID-19 emergency situation has had a significant impact on the tax audit activity of the revenue agency. The revenue agency had to deal with the impossibility to conducting on-site audits due remote working situations, as well as reduced financial resources.
As a result, during the pandemic, the revenue agency implemented a number of measures, some of which are still in place. In particular, tax audits were limited to urgent cases (mainly focused on the detection of fraudulent behaviours of taxpayers), the deadline for the notification of tax assessments related to 2015 was postponed from December 31, 2020, to December 31, 2021, and enforcement actions for the collection of taxes have been suspended until August 31, 2021.
However, the guidelines outline a new approach for tax assessment and enforcement to be employed by the revenue agency going forward. They make clear that the tax authorities will solicit the transparent and collaborative approach of taxpayers to maintain stable collections while avoiding an aggressive approach. The tax authorities will also focus investigations on fraudulent activities, where they can detect a tax evasion intent.
In addition, the guidelines, in several paragraphs, stress that dialogue with taxpayers should be enhanced. The tax authorities seek to convey that a fairer tax system should be achieved, especially in a period of profound economic crisis.
Key topics in the guidelines include the revenue agency’s return to assessment and collection activity, large taxpayer activities, and international tax audits.
Resumption of assessment and collection activity
The revenue agency will once again start sending taxpayers so-called “compliance letters.” This is part of the agency’s activity aimed at ascertaining violations in advance.
Moreover, tax assessments (as well as all final notices to apply penalties to taxpayers) for which notification was suspended due to COVID-19 will be served to taxpayers by the end of the year. In addition, collection notices for taxes and penalties already assessed will be served starting August 31, 2021.
The resumption of tax audit activity will include a focus on certain issues, including unqualified claims of tax credits (such as the tax credit for research and development) and the illegitimate grant of subsidies or refunds provided under COVID-19 emergency legislation. There will also be a continued focus on fraud related to intra-community value-added tax (VAT), as well as fraud related to the illegitimate use of tax credits or to false declarations aimed at not applying VAT on certain transactions (e.g., declaration of intent).
The guidelines ensure, however, that the investigation and assessment activity will be conducted in conjunction with taxpayers, including through virtual meetings, to allow for positive communications and preliminary discussions between taxpayers and the revenue agency before the conclusion of a tax audit.
The activities aimed at verifying that claimed tax credit refunds are actually due will also be accelerated to ensure that the taxpayers may recover financial resources necessary for their business activity.
Large taxpayers
A specific chapter of the guidelines is dedicated to activities aimed at preventing and tackling tax evasion with respect to “large enterprises,” which includes enterprises reporting revenues of EUR 100 million (USD 119 million) or more that are subject to control at the regional level, i.e., the regional directorate or (starting from 2019) the VAT groups of the Italian revenue agency.
The guidelines indicate that companies will be selected for audit based on indicators of higher tax risk or based on other facts demonstrating non-cooperative or non-transparent behaviour.
As a result, the entire position of the taxpayer will be analysed with the aid of information technology tools and applications that are able to analyse big data.
Assessment of the transparency of taxpayers’ behaviour and their level of risk will include consideration of ruling requests filed by the taxpayer, the submission of advance pricing agreements (APAs), and participation in the cooperative compliance program. With respect to ruling requests filed by large taxpayers, the guidelines advise offices to launch audit activity aimed at verifying whether the facts described in the rulings requested are accurate and that the conclusions provided have been followed.
The guidelines also include recommendations on the approach to be used with large taxpayers. In particular, audit activity should be completed in line with the “compliance” framework adopted in recent years, which aims to prevent aggressive tax audits and limit tough investigations. This is in line with the recent approach of tax offices, and includes, for instance, starting, when possible, “desk tax audits” (i.e., tax audits performed by sending requests for information and emphasizing virtual methods of communication).
The guidelines give specific indications of focus issues for detecting significant tax evasions.
For instance, recently many audits have focused on the illegitimate use of tax credits (with specific analysis of R&D credits). Other cases that may also give rise to criminal ramifications are the carrying out of fraudulent schemes, the false offsetting of tax credits against taxes due, and permanent establishment issues (which could also be triggered from the relocation of managers due to COVID-19). Additional issues include audits against logistic companies aimed at detecting the irregular use of personnel (staff-leasing), VAT claims regarding the correct application of the tax on intra-community transactions, and withholding tax issues regarding the notion of beneficial owner.
The central directorate aims to ensure that a harmonized and coordinated approach will be taken on a national basis to ensure that the same topic is treated consistently among the different offices inside the revenue agency.
The regional offices will take care to strengthen the use of coordination and interaction with foreign tax jurisdictions, employing the appropriate forms of administrative cooperation ensured by the international sector (now included in the staff of the central directorate for large taxpayers).
The central directorate will provide significant support for the risk analysis of the revenue agency through its office for analysis, investigations and controls of large taxpayers, based on the information subject to international exchange regarding tax ruling reports (Directive 2015/2376/EU – DAC 3 – and BEPS Action no. 5), country-by-country reports (Directive 2016/881/EU – DAC 4 – and BEPS Action no. 13) and cross-border mechanisms (Directive 2018/822/EU – DAC 6). This information is assessed centrally and, if deemed significant for the purposes of identifying aggressive tax planning schemes, will be passed to the regional office for further actions.
In addition, during 2021, the central directorate will be more focused on monitoring the correct application of regulations on the international automatic financial exchange system – common reporting standard, as part of a specific project shared with the World Forum for Tax Transparency and Information Exchange (GFTEOI).
International tax audits
The guidelines also confirm that the Italian tax authorities will continue to expand their use of simultaneous/multilateral audits and implement other forms of administrative cooperation with other countries (for instance, the so-called PAOE, which will consent the tax officers to participate in administrative investigations in the territory of another country). These actions will be undertaken with the support and coordination of the international team of the central directorate to guarantee the correct implementation of the procedures and train the officials involved in the tax audit activity.
This approach is in line with the objectives of the creation of a single platform at the EU level (already endorsed by TADEUS2) and responds to the request of the European Commission to prepare the organizational measures necessary for its implementation.
Conclusions
The guidelines clarify the Italian revenue agency’s approach with respect to tax audit and assessment activity.
The agency will continue to focus on fraudulent and abusive behaviors aimed at hiding or shifting income abroad. It will do this through exchange of information and, more generally, international cooperation, which will represent one of the fundamental tools for combating tax evasion.
However, this will be balanced with compliance activity, open communication with the taxpayer, implementation of measures aimed at supporting taxpayers in the case of uncertain tax positions, and the communication of preliminary analyses with taxpayers before commencing antagonistic and aggressive tax audits.
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