Italy Tax: New VAT reporting requirements introduced

Law Decree 40/2010, published in Italy's Official Gazette No. 71 of 26 March 2010, provides new VAT (Value-Added Tax) reporting requirements for transactions with black-list countries or transactions otherwise deemed to be high risk transactions from a tax perspective. The new law will require all Italian VAT-registered taxpayers (corporations, partnerships and individuals, whether or not Italian resident) to report all relevant transactions to the Italian tax authorities on a periodic basis. The implementation of the new reporting requirements is subject to the publication of a Finance Ministry decree providing detailed instructions and requirements, which should be issued within 30 days from the publication date of Law Decree No.
71.


Background

Under current rules, taxpayers must report in the annual income tax return the total amount of purchases made during the tax year from suppliers in black-list countries. This reporting requirement, however, applies only to purchases of goods and services from non-EU suppliers (regardless of whether the supplier is within the group or a third party). The tax authorities can challenge a deduction claim for the purchase costs if the taxpayer is unable to provide substantial evidence that:
- The foreign supplier in a black-list country mainly carries out an actual business activity; or
- The transaction was actually carried out and the Italian taxpayer derived a real economic benefit from the purchase.

Over the last few years, the application of these tests has become progressively more difficult and has given rise to litigation with the tax authorities.


New requirements

The new VAT (Value-Added Tax) reporting requirements will be added to the existing reporting requirements that apply for income tax purposes. The reporting rules, which are aimed at combating VAT carousel fraud and similar abuses, will be significantly broader in scope and more detailed than the current rules because they will require that all transactions with entities in black-list countries be reported (i.e. both sales and purchases and not just purchases as required by the existing rules).

It is possible that the decree to be issued by the Finance Ministry could include black-list companies based in EU Member States (e.g. Cyprus, Luxembourg and Malta) that are not subject to the current reporting rules and also could apply to transactions carried out with entities in non-black-list jurisdictions in respect of specific business sectors and groups that are considered high risk clusters. On the other hand, the decree could provide an exemption from the reporting rules for specific black-list countries or specific sectors in a black-list country.

The penalty for omitted, incomplete or inaccurate reporting will range between EUR 516 and EUR 4,132 per reporting obligation, and the general rule providing for a reduction in the total amount of penalties in the case of several continuing irregularities will not be applicable.


Action steps

Italian VAT-registered taxpayers carrying out transactions with foreign entities should carefully monitor the status of the Finance Ministry decree, which will provide the implementation rules for the new reporting requirements. As noted above, this decree should be issued shortly.