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Eucotax Wintercourse 2008
“Tax Competition”
Ermanno Giuliani Federica Pitrone
Paola Rinaldi Margherita Saccà Francesco Seccia
Livia Ventura
Coordinamento della ricerca: Alessio Persiani e Federico Rasi
Direzione della ricerca: Giuseppe Melis ed Eugenio Ruggiero
aprile 2008
© Luiss Guido Carli. La riproduzione è autorizzata con indicazione della fonte o come altrimenti specificato. Qualora sia richiesta un’autorizzazione preliminare per la riproduzione o l’impiego di informazioni testuali e multimediali, tale autorizzazione annulla e sostituisce quella generale di cui sopra, indicando esplicitamente ogni altra restrizione
Dipartimento di Scienze giuridiche
CERADI – Centro di ricerca per il diritto d’impresa
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Il presente lavoro nasce dallo Eucotax Wintercourse, al quale l’Università Luiss Guido Carli
partecipa sin dal 1995.
Si tratta di un progetto di cooperazione nell’attività di ricerca in materia di diritto tributario (European Universities COoperating on TAXes), al quale partecipano, oltre all’Università LUISS Guido Carli, prestigiose università europee ed americane, tra cui la Georgetown University, la Handelshögskolan i Stockholm, la Katholieke Universiteit Leuven, la Universitat de Barcelona, la Universität Osnabrück, l’Universiteit van Tilburg, l’Université Paris 1 Panthéon–Sorbonne, la Queen Mary University of London, la Wirtschaftsuniversität Wien, la Corvinus University of Budapest.
Ne forma oggetto, con cadenza annuale, un argomento di studio di carattere generale, che viene suddiviso in sei sub-topics, per ciascuno dei quali viene elaborato un questionario. Gli studenti delle singole Università rispondono ai questionari dall’angolo visuale del proprio Stato di appartenenza, per poi confrontarsi nel corso di una settimana di lavori comuni con i colleghi delle altre Università. Si perviene così ad un documento conclusivo unitario, nel quale gli studenti evidenziano per ciascun argomento i profili generali, le risposte normative o giurisprudenziali fornite nei diversi Stati, gli elementi critici emersi a seguito dell’indagine comparata e le relative proposte di soluzione, anche in vista di una possibile armonizzazione della disciplina normativa a livello comunitario.
Ha formato oggetto dell’ultima edizione del Wintercourse – tenutosi presso l’Università di Budapest dal 3 al 10 aprile 2008 – il tema della Concorrenza fiscale tra ordinamenti, così articolato:
1. Il transfer pricing;
2. Le procedure amministrative quale strumento di competizione fiscale;
3. Il regime fiscale delle società holding e di altri enti beneficiari di regimi fiscale di favore;
4. Il regime fiscale dei gruppi di imprese;
5. I Beni immateriali nel diritto tributario;
6. Gli Expatriates .
I lavori della delegazione italiana – che in questo documento si presentano – sono stati redatti, nell’ordine, dagli studenti Paola Rinaldi, Francesco Seccia, Federica Pitrone, Ermanno Giuliani, Margherita Saccà e Livia Ventura.
Il dott. Alessio Persiani ed il dott. Federico Rasi hanno assistito gli studenti nella preparazione dei lavori e nella successiva discussione presso l’Università di Budapest.
I lavori sono stati diretti dal Prof. Giuseppe Melis e dal Dott. Eugenio Ruggiero.
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Elenco dei contributi
TRANSFER PRICING STANDARDS .......................................................................................14
1.INTRODUCTION....................................................................................................................15 2. GUIDELINES ON CROSS BORDER REGULATIONS .......................................................16 3. BURDEN OF PROOF SHARING: .........................................................................................19 4. ARM’S LENGTH PRINCIPLE...............................................................................................21 4.1 REITERATION OF ARM’S LENGTH PRINCIPLE AND REJECTION OF PROFIT
SHARING METHOD........................................................................................................................................ 26 5. INTRAGROUP LOSSES ........................................................................................................ 27 6. INTRAGROUP CONTRIBUTIONS..................................................................................... 28 7.DEFINITION OF TRANSFER PRICING ............................................................................ 29 7.1. METHOD BASED ON THE TRANSACTION.................................................................................... 29 7.1.1 The method of price comparison ............................................................................................................. 30 7.1.2. Resale price method................................................................................................................................... 33 7.1.3 The cost plus mark up method ................................................................................................................. 35 7.2 LIMITS OF TRADITIONAL METHODS .............................................................................................. 38 7.3 THE NEW FRONTIERS OF TRANSFER PRICING POLICIES...................................................... 40 7.4 PROFIT BASED METHOD....................................................................................................................... 41 7.5 ALTERNATIVE METHODS IN ACCORDANCE WITH OECD:................................................... 42 7.5.1.The Profit Split Method ............................................................................................................................. 42 7.5.3. Transactional Net Margin Method: ......................................................................................................... 44 7.5. ALTERNATIVE METHODS IN LINE WITH THE ITALIAN TAX AUTHORITIES............... 45 7.5.1. Global Profits Apportionment:................................................................................................................ 46 7.5.2.Profit Comparison....................................................................................................................................... 47 7.5.3. Return on Invested Capital ....................................................................................................................... 48 7.5.4 Gross Profit Margins in economic sector................................................................................................ 48 8. INTANGIBLES....................................................................................................................... 49 8.1 TRANSFER PRICING METHODS.......................................................................................................... 51 8.1.1 Cup Method ................................................................................................................................................. 51 8.1.2 Transactional Net Margin Method ........................................................................................................... 52
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8.1.3 Profit Split Method ..................................................................................................................................... 53 8.1.4 Other Methods ............................................................................................................................................ 53 9. COST SHARING AGREEMENT .......................................................................................... 54 10. DISPUTES RESOLUTION .................................................................................................. 55 10.1 OUT OF THE COURT PROCEDURES ............................................................................................... 55 10.1.1 Advance Pricing Agreements .................................................................................................................. 56 10.1.2 Safe Harbours ............................................................................................................................................ 57 10.1.3. International Ruling ................................................................................................................................. 57 11. THE CRIMINAL ASPECTS OF THE TRANSFER PRICING........................................... 59 12. FORMULARY APPORTIONMENT AND SEPARATE ENTITY ACCOUNTING......... 60 13. TAX COMPETITION:.......................................................................................................... 62 14. HARMFUL TAX COMPETITION ...................................................................................... 62 BIBLIOGRAPHY ....................................................................................................................... 64
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TAX PROCEDURES.................................................................................................................. 67
1. PERSONAL INCOME TAX RETURN ............................................................................................ 68 1.1. RATIO. LEGAL NATURE. ............................................................................................................................... 68 1.2. FILING A TAX RETURN ................................................................................................................................. 68 1.3.AMENDABILITY ............................................................................................................................................... 69 1.4. “VOLUNTARY CORRECTION” ....................................................................................................................... 70 1.5. NON-RESIDENTS............................................................................................................................................ 70 1.6. FILING THE INDIVIDUAL INCOME TAX RETURN BY NON-RESIDENTS ................................................... 71 2. TAX INVESTIGATION................................................................................................................. 72 2.1. INTRODUCTION TO THE INVESTIGATION.................................................................................................. 72 2.2. TAX SETTLEMENT AND FORMAL CONTROL OF THE DECLARATIONS ..................................................... 74 2.2.1. Tax settlement ............................................................................................................................................ 74 2.2.2. Formal control of the Declarations ......................................................................................................... 75 2.3. THE DIFFERENT TYPES OF INVESTIGATION .............................................................................................. 76 2.3.1. Attributions and powers of the offices ................................................................................................... 76 2.3.2. Principle of the so-called “riserva di legge” ........................................................................................... 77 2.3.3. Tax Return inspection ............................................................................................................................... 78 2.4. MODALITIES AND METHODS OF INVESTIGATION.................................................................................... 79 2.4.1. Partial Investigation ................................................................................................................................... 79 2.4.2. Ex-Officio Method .................................................................................................................................... 80 2.4.3. The Analytical Method .............................................................................................................................. 81 2.4.4. Inductive Method....................................................................................................................................... 82 2.4.5. Method of the so called “brief investigation”........................................................................................ 84 2.4.6. Banking Investigations .............................................................................................................................. 85 2.5. Introduction on system of presumptions .................................................................................................. 86 2.6. INVESTIGATION NOTICE.............................................................................................................................. 87 2.7. ASSESMENT BY CONSENSUS.......................................................................................................................... 88 2.8 POWERS OF OFFICES AND OF THE FINANCE GUARDS. ACCESSES, INSPECTIONS AND VERIFICATIONS
................................................................................................................................................................................. 89 2.8.1 Access ........................................................................................................................................................... 90 2.8.2. Inspection.................................................................................................................................................... 91 2.8.3. Research....................................................................................................................................................... 93
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2.8.4. Documental Inspection............................................................................................................................. 94 2.8.5. Verifications ................................................................................................................................................ 94 2.9. RIGHTS AND GUARANTEES OF TAXPAYER SUBJECT TO TAX AUDITS ...................................................... 95 3. TAX COLLECTION, LEGAL PROCEDURES .................................................................................. 97 3.1. TAX COLLECTION................................................................................................................................... 97 3.2. COMPULSORY PROCEDURES FOR TAX COLLECTION ................................................................................. 98 3.3. LEGAL PROCEEDINGS................................................................................................................................... 99 3.4. NORMATIVE INSTRUMENTS TO AVOID JUDICIAL PROCEEDINGS ..........................................................101 4.THE RIGHT OF CONSULTATION AND A.P.A. ............................................................................. 101 4.1. GENERAL INTRODUCTION.........................................................................................................................101 4.2. ORDINARY CONSULTATION.......................................................................................................................103 4.3. CONSULTATION FOR THE APPLICATION OF ANTI-AVOIDANCE RULES. ABOLITION OF THE
ADVISORY COMMITTEE. ....................................................................................................................................105 4.4. SPECIAL CORRECTIVE OR DISAPPLICATIVE CONSULTATION (EX ART. 37-BIS, PARAGRAPH 8, DECREE
OF THE PRESIDENT OF REPUBLIC 600/73).....................................................................................................107 4.5. CONSULTATION ON CFC - (CONTROLLED FOREIGN COMPANIES).....................................................108 4.6. ADVANCED PRICING AGREEMENTS .........................................................................................................109 TABLE OF AUTHORS ............................................................................................................. 112
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HOLDING COMPANIES AND PREFERENTIALLY TAXED ENTITIES........................ 114
I DOMESTIC LAW ................................................................................................................... 115
1. GENERAL ................................................................................................................................. 115 1.1. DEFINITIONS................................................................................................................................................115 1.2. RESIDENCE OF CORPORATIONS.................................................................................................................116 2. RELEVANT NATIONAL TAX PROVISIONS ................................................................................... 119 2.1. INTER-COMPANY DIVIDENDS ....................................................................................................................120 2.2. CAPITAL GAINS.............................................................................................................................................123 2.3. LOSSES...........................................................................................................................................................125 2.4. COSTS RELATING TO THE SUBSIDIARY......................................................................................................126 2.5 TAX RULINGS.................................................................................................................................................127 2.6. ANTI-ABUSE PROVISION..............................................................................................................................129
II DOUBLE TAX TREATIES ..................................................................................................133
1. GENERAL .................................................................................................................................133 2. RELEVANT DOUBLE TAX TREATY PROVISIONS FOR HOLDING COMPANIES AND PREFERENTIALLY
TAXED ENTITIES..........................................................................................................................134 2.1 INTER-COMPANY DIVIDENDS .....................................................................................................................134 2.2. CAPITAL GAINS.............................................................................................................................................135 2.3 ANTI-ABUSE PROVISIONS.............................................................................................................................136
III EUROPEAN COMMUNITY LAW.....................................................................................138
1. PRIMARY EUROPEAN COMMUNITY LAW ..................................................................................138 1.1. DISCRIMINATION OF RELEVANT FUNDAMENTAL FREEDOMS/ JUSTIFICATIONS ................................138 1.2. THE INFLUENCE OF PREVIOUS ECJ CASE-LAW .......................................................................................140 2. SECONDARY COMMUNITY LAW................................................................................................ 141 3. HUMAN RIGHTS CONVENTIONS / CONSTITUTION ..................................................................143 4. STATE AID/ HARMFUL TAX COMPETITION.............................................................................145 4.1. STATE AID ....................................................................................................................................................145
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4.2. EC CODE OF CONDUCT/OECD REPORT ON HARMFUL TAX COMPETITION ..................................146 4.3. WTO AGREEMENTS....................................................................................................................................148 BIBLIOGRAPHY ......................................................................................................................150
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TAXATION OF GROUPS OF COMPANIES..........................................................................155
I - DOMESTIC SYSTEM ..........................................................................................................156
1. INTRODUCTION.................................................................................................................156 1.1 – ALTERNATIVE TECHNIQUES OF GROUP TAX PLANNING: THE TAXATION BY
TRANSPARENCY SYSTEM..........................................................................................................................157 1.1.1 – REQUIREMENTS OF THE TRANSPARENCY SYSTEM.......................................................157 2. REQUIREMENTS FOR THE CONSOLIDATED SYSTEMS ...........................................158 2.2 - WORLD WIDE CONSOLIDATED ..................................................................................159 3. – LINK BETWEEN PARENT AND SUBSIDIARIES ......................................................... 161 3.3 – OTHER REQUIREMENTS..................................................................................................................162 4 TREATMENT OF LOSSES ...................................................................................................164 4.1 - NATIONAL CONSOLIDATED ..........................................................................................................164 4.1.1 – ADJUSTMENTS IN DETERMINING THE DOMESTIC CONSOLIDATED INCOME165 4.1.1.1 – DIVIDENDS DISTRIBUTED FROM THE CONTROLLED COMPANIES TO THE HOLDING .........................................................................................................................................................166 4.1.1.2 - INDEDUCTIBILTY OF PASSIVE INTEREST.........................................................................166 4.1.1.3 - PAYMENT OF FISCAL BENEFITS ARISING FROM THE USING OF SURPLUSES OF PASSIVE INTEREST.......................................................................................................................................167 4.2 - WORLD WIDE CONSOLIDATED ....................................................................................................168 4.2.1 – ADJUSTMENTS RELATED TO THE FIRST TAX PERIOD OF WORLD WIDE CONSOLIDATION .........................................................................................................................................168 4.2.2 - ADJUSTMENTS WHILE THE WORLD WIDE CONSOLIDATED REGIME IS INTO FORCE (TAX PERIODS FOLLOWING THE FIRST ONE)................................................................169 5 – TREATMENT OF THE HOLDING’S PARTICIPATIONS IN THE SUBSIDIARIES ..170 6 – TRANSFER OF ASSETS...................................................................................................... 171 6.1 - NATIONAL CONSOLIDATED ..........................................................................................................172 6.2 - WORLD WIDE CONSOLIDATION ..................................................................................................172 6.3 – PRESENT SITUATION.........................................................................................................................172 7 – FULFILMENTS OF THE CONSOLIDATED GROUP VIS-À-VIS THE ITALIAN
REVENUE ADMINISTRATION ............................................................................................173
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8 – PROTECTION OF THE MINORITY SHAREHOLDERS’ INTEREST ........................175
II – TAX TREATY LAW............................................................................................................ 176
1 – ENTITLEMENT TO DOUBLE TAXATION CONVENTIONS .....................................176 1.1 – IMPLICATIONS OF THE OECD MC RESIDENCE CRITERIA FOR TRANSPARENT
ENTITIES, TAX EXEMPT ENTITIES AND SIMILAR ........................................................177 1.2 – ENTITLEMENT TO TREATY BENEFITS OF THE GROUP ENTITIES .................178 1.2.1 - NATIONAL CONSOLIDATION.....................................................................................................178 1.2.2 - WORLD WIDE CONSOLIDATED .................................................................................................179 2 – DISTRIBUTIVE RULES ..................................................................................................... 181 2.1 – DIVIDENDS (ART 10 OECD MC) .....................................................................................................181 2.2 – ITALIAN REGULATION ON DIVIDENDS...................................................................................182 2.2.1 - DIVIDENDS PAID BY AN ITALIAN SUBSIDIARY TO A NON RESIDENT PERSON...............................................................................................................................................................................182 2.2.2 – DIVIDENDS PAID BY AN ITALIAN SUBSIDIARY TO A FOREIGN EU-RESIDENT PARENT COMPANY......................................................................................................................................183 2.3 INCOMING DIVIDENDS.......................................................................................................................184 2.3.1 – DIVIDENDS PAID BY A NON RESIDENT COMPANY TO A RESIDENT COMPANY184 2.4 – BUSINESS INCOME (ART. 7, OECD MC) .......................................................................................185 2.5 – OTHER INCOME (ART.21 OECD MC)............................................................................................187 2.6 OTHER DISTRIBUTIVE RULES...........................................................................................................187 2.6.1 INTERESTS..............................................................................................................................................187 2.6.2 - INTERESTS PAID BY AN ITALIAN PERSON TO A NON RESIDENT COMPANY....188 2.6.3 - INTERESTS PAID BY AN ITALIAN COMPANY TO A COMPANY WHICH IS RESIDENT OF A EU STATE.......................................................................................................................189 2.6.4 – INTERESTS PAID BY A NON RESIDENT PERSON TO AN ITALIAN COMPANY ...190 2.6.5 – INTERESTS PAID BY A EU-RESIDENT COMPANY TO AN ITALIAN COMPANY ..190 2.7 ROYALTIES ................................................................................................................................................191 2.7.1 – ROYALTIES PAID BY AN ITALIAN PERSON TO A NON RESIDENT PERSON .......191 2.7.2 – ROYALTIES PAID BY A NON RESIDENT PERSON TO AN ITALIAN RESIDENT COMPANY.........................................................................................................................................................192 2.7.3 – ROYALTIES PAID AMONG EU-RESIDENT COMPANIES ACCORDING TO THE “INTEREST-ROYALTIES” DIRECTIVE’S PROVISIONS...................................................................192 3 – CFC LEGISLATION............................................................................................................193
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4 - METHODS FOR THE ELIMINATION OF DOUBLE TAXATION ...............................194 5 – NON DISCRIMINATION (ART. 24 OECD MODEL)......................................................197 1. PARTICIPATION OF FOREIGN ENTITIES TO THE ITALIAN SYSTEMS OF
CONSOLIDATION .................................................................................................................. 199 1.1 -TREATMENT OF LOSSES SUFFERED DURING THE CONSOLIDATED PERIODS.......201 1.2 - TREATMENT OF LOSSES OCCURRED BEFORE THE CONSOLIDATION ......................203 2 - DETERMINATION OF GROUP INCOME.......................................................................203 2.1 - ABOUT THE SYSTEM OF CALCULATION OF CORPORATE FOREIGN INCOME IN
THE WORLD WIDE CONSOLIDATED...................................................................................................204 2.2 - COMPATIBILITY OF THE CONSOLIDATED REGULATIONS WITH EC LAW ...............204 3 – EC STATE AID RULES .......................................................................................................207 3.1 - INTRODUCTION ...................................................................................................................................207 3.2 - COMPATIBILITY OF THE ITALIAN GROUP TAXATION WITH THE EC TREATY
PROVISIONS ON STATE AID.....................................................................................................................208 3.2.1 - DOMESTIC CONSOLIDATION.....................................................................................................208 3.2.1.1. - RELATIONS WITH THE STATE AID REGULATION .......................................................209 3.2.2 - WORLD WIDE CONSOLIDATED ................................................................................................210 3.2.2.1 - RELATIONS OF THE WORLD WIDE CONSOLIDATED WITH THE STATE AID RULES UNDER EC TREATY ......................................................................................................................210 3.3 - CODE OF CONDUCT ...........................................................................................................................211 3.3.1 - RELATIONS CODE OF CONDUCT – STATE AID PROVISIONS......................................212 3.4 - PROCEDURE TO ELIMINATE HARMFUL TAX PROVISIONS ..............................................213 3.5 - COMPATIBILITY OF ITALIAN GROUP TAX FACILITIES WITH THE CODE OF
CONDUCT.........................................................................................................................................................214 3.7- CODE OF CONDUCT AND ITALIAN TAX LAW..........................................................................215 BIBLIOGRAPHY ......................................................................................................................217
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INTANGIBLES .........................................................................................................................219
INTRODUCTION...........................................................................................................................220 1. COMMON ELEMENTS OF INTANGIBLES ....................................................................................220 2. DIFFERENT CATEGORIES OF INTANGIBLES..............................................................................221 2.1 COPYRIGHT....................................................................................................................................................221 2.2 DISTINCTIVE SIGNS: TRADEMARK ..............................................................................................................222 2.3 PATENT ..........................................................................................................................................................223 2.4 SOFTWARE .....................................................................................................................................................224 2.5 KNOW-HOW...................................................................................................................................................225 2.6 GOODWILL ....................................................................................................................................................226 3. ACCOUNTING STANDARDS AND INTANGIBLES.........................................................................227 3.1 ACCOUNTING DOMESTIC STANDARDS.......................................................................................................227 3.2 INTERNATIONAL ACCOUNTING STANDARDS...........................................................................................230 4. INTANGIBLES IN THE ITC .............................................................................................................................231 5. TRANSFER PRICING..................................................................................................................237 5.1 TRANSFER PRICING IN THE ITC .................................................................................................................237 5.2 OECD AND TRANSFER PRICING ...............................................................................................................239 5.3 ANTI-FRAUD AND ANTI-ABUSE PROVISIONS.............................................................................................240 6. COST SHARING ARRANGEMENT...............................................................................................242 REFERENCES...............................................................................................................................244
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EXPATRIATES .........................................................................................................................246
1. INTRODUCTION.................................................................................................................247 1.1. EXPATRIATE AND EU CODE OF CONDUCT .............................................................................................247 1.2. MIGRANT WORKER AND NON-DISCRIMINATION PRINCIPLE .................................................................247 2. INCOME TAX........................................................................................................................248 2.1. GENERAL DESCRIPTION .............................................................................................................................248 2.2.TAXABLE INCOME.........................................................................................................................................249 2.3.TAXABLE PERSON .........................................................................................................................................251 2.3.1. Resident .....................................................................................................................................................251 2.3.2. NON-RESIDENT.........................................................................................................................................252 2.3.3. Tie breaker rules .......................................................................................................................................252 3. EMPLOYMENT INCOME...................................................................................................253 3.1. GENERAL DESCRIPTION .............................................................................................................................253 3.2. TAXATION OF RESIDENT............................................................................................................................253 3.2.1.Resident working in Italy..........................................................................................................................253 3.2.2. Expatriates.................................................................................................................................................255 3.2.2.1 Withholding ............................................................................................................................................257 3.2.2.2. Deduction of social security contributions .......................................................................................257 3.2.2.3. Double taxation relief...........................................................................................................................258 3.2.2.4. Non-application of 8-bis......................................................................................................................260 3.2.2.5. Double taxation convention and OECD Model..............................................................................260 3.2.3. Cross-border worker................................................................................................................................263 3.3.TAXATION OF NON-RESIDENT ...................................................................................................................265 3.3.1. Taxation rules ...........................................................................................................................................265 3.3.2. Typology of employment’s contract......................................................................................................265 3.4.” REPATRIATION OF BRAIN” .......................................................................................................................266 4. SOCIAL SECURITY CONTRIBUTIONS............................................................................267 4.1. COMPULSORY SOCIAL SECURITY SYSTEM..................................................................................................267 4.1.1. General descriptions ................................................................................................................................267 4.1.2. Social security and international mobility .............................................................................................268 4.1.3. Outbound employment...........................................................................................................................270 4.1.4. Inbound employment ..............................................................................................................................271
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4.1.5. Social security and cross-border workers .............................................................................................271 4.1.5.1. Definition of cross-border...................................................................................................................271 4.1.5.2. EU Case law...........................................................................................................................................272 4.2. SUPPLEMENTARY PENSION INSURANCE ...................................................................................................273 4.2.1. Deduction of contributions ....................................................................................................................273 4.2.2. Implementation of European Directive in Italy ..................................................................................274 TABLE OF AUTHORS: ............................................................................................................276
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EUCOTAX Wintercourse 2008
Budapest
Università LUISS – “Guido Carli” – Roma
Facoltà di Giurisprudenza
Cattedra di Diritto Tributario dell’Impresa
Cattedra di Diritto Tributario Internazionale e Comunitario
TRANSFER PRICING STANDARDS
Paola Rinaldi
Matr. 064073
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1.INTRODUCTION
The scenario of profound changes in trans-national commercial relationships is characterized by
a complete awareness of how internationalisation of inter-company transactions increases the group’s
operational and structural efficiency. The results at global level are more stable and level of risk regards
to their stability and permanency is limited. Multinational enterprises are worthwhile entities in that they
represent the most suitable vehicle for the implementation of these transactions and it is indeed the
transfer pricing policies which, by governing the mechanism of the relationships, represent an element
of complete strategic viability for multinational companies.
A correct definition of transfer pricing policies therefore involves an in-depth understanding
of the articulation and dynamics of multinational enterprises made up of a wide range of companies-
countries, juridically independent but managed by a single economic unit.
The aforesaid must lead to consider transfer pricing a technique in its own right for optimising
entrepreneurial initiatives and not a simple tax planning process.
Transfer pricing therefore involves all relationships between parent companies and their
affiliates as well as the enterprise’s assets and services, trans-national technology flow, rights for use of
trade marks and inter-group financing.
On the other hand, if the transfer pricing policy does not take into account the unitary vision
of the group and the entrepreneurial logic of business linked to it but only seeks saving on taxation, the
so-called pathological effects could arise, such as:
- Fall in the level of market competition due to the unnatural decrease in the associated company’s
costs;
- Distribution of liquidity within the group.
The event of such situations occurring is cause for anxiety by the Tax Authorities who are
deprived of taxable income due to manipulation of values applied to trade between different entities
located in different countries.
Particular attention is therefore paid to legislation in nearly all countries, as well as the
supranational organisms (including OECD) when fixing values, which have to be attributed to the
transfers taking place between associated companies. This is necessary in order to avoid multinational
groups, by leveraging transfer prices between goods and services within the same group located in
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different countries, from transferring taxable material to countries where tax legislation is more
favourable.
Modulated taxation planning on transfer pricing does in fact lead to misrepresentation in
fixing taxable income generated from associated companies within the same group. The aforesaid
effects originated from the lack of effective ‘alterity’ between the contractors who can therefore fix a
sum which is not in line with the normal values for exchange of goods or services.
Control of linking elements between a given income and a given legal ruling is however getting
more difficult because, on the one hand there is a rising mobility in tax payers and on the other hand an
extreme volatility on the taxable income basis with Information & Technology networks.
Tax Authorities’ tasks are even more difficult in single countries due to the need to acquire in-
depth knowledge of multinational enterprises, of the activities and exchanges they work with. The
aforesaid knowledge calls for a careful qualitative-quantitative analysis by acquiring market data on
which benchmarking activities must be based.
2. GUIDELINES ON CROSS BORDER REGULATIONS
In order to contrast the distorted effects in fixing taxable corporate income for companies
belonging to a group, the legislators of the different countries and the supranational organisms have
introduced regulations on transfer pricing.
The aforesaid regulations are aimed at hindering tax avoidance and oriented towards preventing
multinationals, through under or over price estimates, from transferring portions of taxable corporate
income to countries which apply low tax rates to obtain savings on taxable corporate income.
The Italian Rules on transfer pricing are provided by Article 110 paragraph 7 and in Article 9
of the D.P.R.(Decree by the President of the Republic) 22nd December 1986, 917 CITA (Consolidated
Income Tax Act) besides the legal rules there is an important source of information in Tax
Administration circular 32/9/2267 dated 22nd September 1980, in which an interpretation of the
concept of control and criteria is given for normal value fixing.
In accordance with Article 110, paragraph 7 of the CITA (Consolidated Income Tax Act), the
factors which make up income (costs and income) deriving from operations carried out by companies
17
not residing in Italy and linked through financial interests – whether direct or indirect – are estimated
on the basis of the normal value of sold goods or services supplied in the event of an increase in
income. In the event of the contrary happening, i.e. assuming there is a decrease in income, then the
normal value is applied “only when carrying out agreements made with the relevant authorities of foreign countries
following special amicable procedures foreseen by international conventions to prevent double taxation”.
In accordance with Article 110, paragraph 7 of the CITA, measures on transfer pricing are
applied where there are commercial transactions between resident and non resident enterprises that
either directly or indirectly control the Italian enterprise; whether they are controlled by the Italian
enterprise or controlled by the same controller for the Italian enterprise. In order to identify the
controlling body it is necessary to define the concept of:
-resident enterprise:
- non-resident company
-direct or indirect control.
With regards to the resident enterprise, the Tax Administration circular 32/80 is applicable. In
the aforesaid circular the concept of enterprise must be considered in a wide scale interpretation and
consequently subject to provisions as per Article 110, paragraph 7, pursuant to provisions made under
Article 2082 of the Civil Code “anyone who carries out professionally, whether in an individual or collective form an
economic or collective activity with the aim of production or exchange of assets or services”. With the word enterprise
all types of commercial companies are included, individual enterprises and permanent establishment of
non resident persons, therefore all persons subject to taxation capable of producing corporate revenue
in accordance with Article 51 of the CITA (Consolidated Income Tax Act).
The provision as per Article 110 of the CITA refers to “non resident companies”; this definition is
taken from Article 53 of the D.P.R. (Decree by the President of the Republic) 597/73 previously in
force, therefore harmonizing interpretation of Tax Administration circular 32/80.
Use of the word “company” instead of the wider term “subjects” has caused two different types of
interpretations:
- the first stating that the rules on transfer pricing are not applicable in the event of transactions
between resident enterprises and foreign juridical entities which have no corporate structure.;
- the second stating though deems it to be applicable even in the case of non resident companies
which do not have the multi-subjectivity requisites. Under these circumstances however, it is felt
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that to the end of rectifying values the Tax Administration can only use standard tools of
verification without having the possibility of absolute presumption.
In this context the Tax Administration circular 32/80 states that “although Article 53 refers literally
to companies, and would therefore seem to exclude permanent establishments, it must however be taken into consideration
that the permanent establishment of a foreign company not located in Italy has no juridical autonomy other than that of
the parent company because its operations are directly referable to the company it originates from”.
The 1980 Tax Administration circular rules out that the concept of control referred to in Article
110 which must exist between resident enterprises and non resident companies refers exclusively to the
limits laid down in Article 2359 of the Civil Code, in that this includes every assumption of potential or
current economic influence, inferable from the single circumstances. On the basis of provisions as in
Article 2359, a relation of control is mentioned when:
- a company in which another company has the majority of votes applicable in the ordinary meeting
(paragraph 1, point 1);
- companies in which another companies has enough votes to exercise a dominant influence in the
ordinary meeting (paragraph 1, point 2);
- companies on which another company exercises a strong influence due to contractual provisions
(paragraph 1, point 3).
To the ends of defining control the above mentioned juridical-formal conditions are important
as well as the mere status quo, i.e. reference is made to those linking factors made up of the economical
influence of an enterprise on the entrepreneurial decisions of the other which allow for achieving a
modification of transfer pricing.
Since the rationale behind the regulation is that of preventing the deduction of taxable items,
through manoeuvres on compensations for goods and supplying services, the Tax Administration
circular has underlined the anti-avoidance measures in Article 110, clarifying that “to the ends pursued by
Tax Authorities (…) the relevant control must be identified with needs for flexibility and be positioned in a dynamic
context, i.e., keeping in mind that the fundamental conditions for variations in price in commercial transactions are often
found in the power of one of the parties to influence the others parties’ free will not on the basis of market patterns but
depending on the interests of just one of the contracting parties or of a group”.
In accordance with the circular, the situations which can determine mutual relations between
enterprises are:
- Sale of products manufactured by the other enterprise;
19
- Impossibility for enterprise to function without the capital, products and technical know-how of
the other enterprise;
- Right to nominate members of the board of directors or the company’s managing bodies ;
- Family relationships between interested parties;
- Authorization of large loans or prevailing financial dependency;
- Investments by enterprises with bonds or investment trusts, particularly if aimed at price fixing;
- Control of supplies or outlets;
- Existence of contracts which model a monopolistic status;
- All other hypotheses in which potential or effective influence is exercised on entrepreneurial
decisions.
The wide notion of control underlined in the Tax Administration circular is also confirmed by
the seventh directive of the European Community, according to which effective exercise of control can
also be implemented in the case of minority participation.
Therefore the regulation on transfer pricing can be applied not only in the hypothesis of
control as per Article 2359, but also each and every time there is a mixture of interests to such an extent
as to presume a single governing entity of the enterprises involved.
There is a thinking1 however that deems unacceptable this wide interpretation of the concept
of control since the regulation in Article 10 refers to the concept of control and not to that of
dominant influence.
3. BURDEN OF PROOF SHARING:
In the traditional regulation it is common opinion that the evidence represents a knowledge tool
aiming at establishing if a fact, subject to verification, can be considered true. More in detail, the
statement which object is a fact of the real world represents the content of the evidence.
In the civil code there is a set of provisions that regulate the matter, including art. 2697,
provision of general nature relevant to the fulfilment of burden of proof within the proceeding: “Who
aims at asserting a right in a lawsuit must proof the facts which represent its basis”.
1 Mayr S.,The normal value in the relationships between Italian enterprises and the controlled one in Corriere tributario, 1990, p.1993.
20
On this subject, the circumstance that the tax proceeding is a process of appealing of an act of
the Tax Administration cannot be underestimated, therefore it is simple to understand how this
characteristic connects to the aforesaid general principle which, at least with a first approximation,
would tend to assign to the taxpayer the burden of demonstrating facts favourable for him.
However, this is not the interpretation accepted by the jurisprudence and the regulation, which
result in diametrically opposed conclusions.
The nature by topic and empirical of the judgement de facto is evident in the tax proceeding,
where the dispute on the fact often does not regard documental evidences, but is usually based on
statements of common experience2. As every empirical dispute, also that based on the burden of proof
must be solved by the judge, case by case. Therefore it is totally acceptable that the burden of proof can
be fulfilled with topics which reliability is different on the basis of actual facts; so stating that the
burden of proof of major incomes relies on the Tax Administration, identifies the starting step of an
unpredictable dialectic process, which will depend on what it is aimed to be proved, on the available
instruments, on the report with the available information and so on.
A doubt raises on which regulation will be applicable to burden of proof regarding disputes on
the evaluation of normal value of intra-group operations, i.e. if the taxpayer must provide the evidence
of the “normal value” of the applied price or if this relies on the Tax Administration. The Italian tax
regulation does not provide indications on the matter. Therefore, the ordinary principles on burden of
proof are applied to the aforesaid matter, these requiring that the Tax Administration must prove major
incomes, whilst the taxpayer must submit evidence of the actual sustained costs.
By judgement of 13 October 2006, 22023 the Court of Cassation reaches the same result
through a totally different reasoning. Starting from the anti-avoidance nature of the transfer pricing
regulation, it underlines how the Tax Administration is in charge to prove the applicability of every
anti-avoidance clause. Therefore, the burden of proving the normal value relies on the Tax Authorities.
The dialectic nature of the judgement de facto within the arm’s length evaluation is also
highlighted in OCSE Guideline3s, which state that, in any case, and independently from the subject
responsible for the burden of proof in accordance with the relevant national regulation, both the Tax
2 Lupi R., The burden of the proof in the judgment de facto, p. 1212 3 OECD Transfer Pricing Guidelines, 1995, § 5.2; “ (…) both the tax administration and the tax payer should endeavour to make a good faith showing that their determinations of transfer pricing are consistent with the arm’s length principle regardless where the burden of the proof lies (…) The burden of the proof should never be used by either tax administrations or tax payers as a justifications for making groundless or unverifiable assertions about transfer pricing”,
21
Administration and the taxpayer must provide evidence in good faith of the consistency of the adopted
evaluation.
On an international basis this leads to a desirable renewed dialogue between the taxpayer and
the Tax Authorities on such matter, characterized by considerable amounts and an important
consequence on enterprises competitiveness.
From this point of view the introduction of the obligation to prove transfer pricing in Italian
tax regulation would support the desirable dialectic and collaborative relationship and would lead to
positive effects for both the enterprises and the Tax Authorities and could be introduced in the
European Community.
4. ARM’S LENGTH PRINCIPLE
On the basis of transfer pricing regulations the objective assumption is found in the principle
of free competition inferable from the combination of Article110, paragraph 2 and Article 9, paragraph
3 of the CITA (Consolidated Income Tax Act) as well as Article 9, paragraph 1, of the standard OECD
Convention.
Thus the OECD defines this principle as: “prices which would have been agreed upon between unrelated
parties engaged in the same or similar transactions under the same or the similar conditions in the open market”4
The arm’s length principle, as highlighted in the OECD Convention, controls the taxation
applicable to revenue from associated enterprises (parent and affiliated companies as well as associated
companies, or in other words, controlled by the same entity).
Paragraph 1 lays down that in the case of income generated by associated enterprises, taxable
income may also comprise income that could have been generated, but was not, if the two enterprises
had acted independently.
Point 2 of paragraph 1 of Commentary to Article 9 states that the Tax Authorities in a single
country are legally authorised, in those cases where associated enterprises have imposed particular
limitations and do not demonstrate the taxable income generated in a country, to change the book-
keeping of the aforesaid. Vice versa, book-keeping cannot be reconstructed when the relevant
4 OECD Report, 1995
22
transactions are deemed to have been carried out in conditions that can be defined as free competition
in accordance with the arm’s length principle.
In other words, subjects connected by a juridical or economic relationships and autonomous
enterprises should be subject to uniform standards of taxation in accordance with the same parameters.
The price agreed in the commercial transactions between associated enterprises must correspond to the
price which would have been established between independent enterprises for identical or similar
transactions, on the free market, or identified in the normal value for transferred goods or services.
The application of the principle of free competition to inter-group transactions has been
hindered in the past and currently is, by the low availability of external data on market patterns and on
independent enterprises.
The new OECD Report, which has replaced the one presented in 1979, intends to supply to
multinationals and to Tax Authorities new criteria for analysis of market patterns in order to make
methods of comparison between controlled transactions smoother (carried out by associated
enterprises) and transactions representing the market value (between independent enterprises).
In general, according to OECD, examination of methods of comparison for transactions in
order to apply the arm’s length principle must be based not only on analysis of the product’s physical
characteristics and services rendered but also on the analysis of actions undertaken by the parties, of the
share capital used to carry out the abovementioned actions and standard assumption of major market
risks5.
From the above it is clear that in order to reach an opinion on compliance of transfer price with
a free competition price and possibly make suitable adjustments it is still necessary that transactions are
comparable, i.e., there should be a certain similarity under the profile of goods and services exchanged
with the contractual and economic status in which the enterprises operate6.
In particular, the 1995 Report states that the functional analysis mentioned above cannot be
considered exhaustive on examination of comparison methods for transactions comparability unless
accompanied by a careful analysis of contractual and economic conditions of the markets in which the
associated and independent enterprises operate. Furthermore, comparability examination for controlled
and non controlled transactions may not be considered terminated until the host Tax Authorities agree
5 OECD Transfer Pricing Guidelines, § 36 6 OECD Transfer Pricing Guidelines, § 44; 46
23
to examine associated enterprises’ behaviour by the same standards as the commercial strategy adopted
by the multinational group7.
Certainly, the factors which the reliability of transfer pricing analysis depend on for a proper
identification and evaluation are:
- Characteristics of transferred goods and services; the market value of goods and services is certainly
influenced by their specific features and cannot be ignored when making comparisons. In the event
of transfer of material assets, the physical characteristics of the asset has to be taken into account,
as well as quality, reliability, availability and traceability on the market, volume of sales; for
intangibles assets, typology of transaction must be analyzed (e.g. selling or licensing contracts), the
type of goods (license, trade mark, know-how), advantages given or forecasted from use of goods,
duration and grade of protection; or in the case of services rendered the nature, extension and type
of service will be taken into examination. This subject will be dealt with more specifically later on.
- The functional analysis in the economic relations between independent enterprises, compensation
for the assignment or giving services reflects the actions which each enterprise is called upon to
carry out. As a consequence, in order to determine whether a controlled transaction is more or less
comparable to an independent transaction it is necessary to identify and compare the actions carried
out and the responsibilities taken on by enterprises. In particular the OECD Report deems
identification of the following actions to be relevant:
- planning;
- manufacture;
- assembly operations;
- R & D;
- services given;
- supplies;
- distribution;
- marketing;
- advertising;
- transport;
- finance;
- management
7 OECD Transfer Pricing Guidelines, § 47
24
As well as the identification and analysis of implemented actions there is the analysis of the risks
interested parties run when performing their functions; i.e., it is reasonable to assume that taking on
greater risks will correspond to an increase in forecasted output. These risks include, in particular,
market risks (for example, fluctuation in production costs or product price) risks of loss connected with
the investment and use of assets, equipment and machinery), risks connected to the success of failure in
research and development, financial risks, such as those caused by fluctuations in exchange rates and
interest rates and lastly, risks relative to credit.
Carrying out functional analysis is complex in that it involves understanding the structure and
organisation of the group. Analysts are especially involved in collecting all the data on the activity
carried out by associated enterprises and related to the operation subject to control. This is done
through arranging surveys and interviews with company management. After information has been put
together, a breakdown of the activities is performed and lastly their implementation for the performed
activity.
- Contractual conditions, examination of contractual conditions underlying the controlled transaction
are of great importance in that they allow for an assessment of the breaking down of
responsibilities, risks and benefits between the parties. It also allows for examining the effective
behaviour of interested parties and to what extent they are acting in line with contractual
conditions. Contractual conditions are to be analysed both taking into account existing contracts,
backed by relative documentation, and interested parties’ behaviour from which relevant elements
can be extracted to confirm the existing agreements.
- Enterprise strategy, is a relevant factor when fixing prices and therefore for comparability. It is also
the company strategy implemented by one or both enterprises. Enterprise strategy is represented in
fixing prices of goods, making decisions on innovation and development of a new product, in
choosing productive diversification and in expansion policies or defending market share. To the
ends of suitability in the context of free competition, the commercial strategy of the associated
enterprise must be compared to the one implemented by independent parties or which would have
been implemented in similar circumstances. On the subject of commercial strategies adopted by the
enterprises in the group, the OECD Report, 95:
recommends that the fiscal authorities evaluate the parties’ behaviour, taking into account the
commercial strategy adopted by the group;
25
reports that the price fixing and revenues for the group can differentiate over a short period
when compared with those established in the transactions between independent enterprises.
This happens because every enterprise adopts different commercial strategies: for example, a
group member which intends entering a new market or increasing penetration in a market in
which it already operates could establish, for a brief period of time, a lower price for its
products than those generally applied to comparable products;
it accepts that these policies of lowering prices can continue for limited periods of time and
only with the aim of increasing profits in the medium-long terms, so that if this commercial
strategy exceeds a “reasonable” length of time the host Tax Authorities could apply
recognition of the higher transfer price applied by the enterprise carrying out the transaction
being examined.
- The economic context; when determining comparability of transactions economic conditions play a
key role in that, under the same conditions prices for free competition vary according to the
market. The main economic conditions to consider when evaluating comparability in different
markets are geographic placing, size of market, level of competition, relative competitive positions
of purchasers and sellers availability or risk of substitution, levels of demand and offer, Tax
Administration regulations, transport costs and production costs, and date and duration of
transactions. As for definition of relevant market, the OECD market defines it in a generic way as a
reference market in which the transaction is carried out, whilst the Tax Authorities in circular
32/808 feel that the wording relevant market must be applied to the market where the goods which
are the subject of the transaction, are directed.
The OECD Report authorizes, in exceptional circumstances, Tax Authorities to make an
analysis of the aforesaid and ignore the contents of the transfer pricing analysis made at group level.
The circumstances are as follows:
- when assumptions in the analysis are significantly different from the economic substance of the
report;
- when the form and the substance of the transaction coincide but the conditions characterizing the
operation, or the form of these conditions, is such that if, in a similar situation, the two parties were
independent they would not have been willing to accept them.
8 Cfr. circular 32/80, Cap.3, § 1a
26
In the above cases the Tax Authorities have the power to change the contractual agreement,
breaking down risks and tasks between the involved entities in the transaction.
The OECD gives an example of the Tax Authorities discretional power with the transfer or
long term concession of a tangible asset when this has been just obtained without an estimate of value
and its capacity to generate income. Indeed, in a similar situation, the independent parties would have
drawn up a contract for the duration of a year in order to identify and estimate the tangible asset’s
potential before yielding it or drawing up a long term contract.
4.1 REITERATION OF ARM’S LENGTH PRINCIPLE AND REJECTION OF PROFIT SHARING METHOD
With regards to the reiteration of the arm’s length principle as a primary parameter for
evaluating transactions of enterprise group members, OECD’s Fiscal Committee firmly rejects the
United States approach of “global formulary apportionment” (profit sharing). This method, put forward, by
the IRS in Article 482 of the U.S. Tax Code is in contrast with the arm’s length principle as a general
condition in fixing intra-group prices. The profit sharing method is aimed at promoting the global
and consolidated income within a multinational group between the associated enterprises, using a
preordained and automatic formula, made up of a combination of costs, remuneration, assets and
turnover.
If the profit sharing principle were to be applied at an international level, the transfer of
goods and services between enterprises belonging to the same multinational group would no longer be
estimated on a market price basis; the companies’ consolidated profits would simply be divided
between all the companies in the group in accordance with the contribution made by each of them in
terms of turnover and invested capital.
The Committee’s greatest doubts over profit sharing address the difficulty in implementing
this system which calls for the coordination of an effective international consensus on the formulas to
be applied. The Committee feels that difficulties of application are so great that even the countries
which would in principle apply “global formulary apportionment” could dissent, considering that each
country would wish to highlight different factors of the formula in line with the predominant activities
in their jurisdiction. In order to achieve an increase in their revenue. Furthermore, the Committee
judges the method of profit sharing unjust because it would tend to create an arbitrary division of
intra-group income which, being based on a preordained formula, does not take into account particular
situations regarding the market and the enterprises.
27
It should be noted that the OECD’S rejection of the profit sharing method appears
unjustified insofar as this refusal involves enterprises being deprived of availability of instruments
similar to the United States advance pricing agreements which will be discussed later.
5. INTRAGROUP LOSSES
If an associated enterprise accumulates losses over several accounting periods in succession
whilst the group has shown a profit, it can be presumed that transfer pricing may not be in line with the
arm’s length principle. The enterprise showing a loss may not receive from the associated companies
an adequate cost contribution for its performance.
This happens, for example, when a multinational enterprise could need to diversify its product
range or services in order to stay on the market and generate global profits but some of its product
lines could regularly show losses. A member of the multinational could only show losses if it produces
exclusively the non-profit making products, whilst at the same time, other members of the group are
capable of making profits because they produce more remunerative assets9. The OECD Report states
that in this case the group member showing a loss should be compensated for producing exclusively
low profit-making products in the interest of the group, in the same way as what might happen in
similar conditions between two independent entities
It should be underlined that showing losses for a relatively long period of time could be justified
by variable cost recovery and by coverage, even partial, of fixed charges in those circumstances in
which closing down the activity would cause even greater losses.
Different reflections would emerge if losses were attributable to the start-up period, or the
attempt to enter a new market, or, perhaps, in unfavourable economic conditions. Other situations
which were not tackled in the OECD Report in which independent enterprises can show losses are:
- the plants becoming obsolete, if this is the cause of producing assets at equal costs or higher than
market prices. Losses can continue for a long period of time if the process of change in the
structure of the tangible fixed assets is not implemented by the enterprise.
- company inefficiency due to factors such as poor product quality or low quantities or high levels of
production waste, or perhaps high stock levels in the warehouse.
9 OECD Report,1995, §1.52
28
- element of risk, for example with the introduction of a new pr
- cycling of the market itself10.
6. INTRAGROUP CONTRIBUTIONS
The OECD Committee on Fiscal Affairs makes an important recommendation to the Tax
Authorities regarding contribution for benefits received and benefits accorded. The principle of
contribution is applied in that, if one member of the group grants to another a particular advantage the
price of this transaction should not be adjusted in the event of a reciprocal advantage being accorded.
There are two types of contributions which can take place when evaluating transfer prices:
intentional compensation and post-verification compensation.
Intentional compensation is when the enterprise group member makes a voluntary contribution
when performing relative transactions. This happens when an associated enterprise has brought a
benefit to another group member company and said benefit is balanced by reciprocal benefits received
from the other enterprise in the group.
For example, an enterprise can allow another company the use of a license in exchange for
supplying know-how relative to another sector and this exchange might not call for any further
adjustment between the parties.
Intentional compensations differ in quantity and complex nature. Contributions can start from
a simple balance in two transactions, for example a favourable selling price for raw material used in
manufacturing the products in question, so much so as to reach an agreement for a balance of benefits
enjoyed by both parties over a fixed period of time11.
The post-verification contribution comes into being even when not foreseen in the terms of the
transaction. It is implemented after an assessment which has produced an adjustment of taxable income
following transfer price assessment.
An example of this is represented by an enterprise which shows an increase in profits relative to
an intra-group transaction by the local Tax Authorities and in which case the same enterprise could
10 OECD Report, 1995, §1.50 11 OECD Report, 1995, §1.60
29
claim a post-verification contribution, if, for example, it receives interest from a loan made to its
counterpart with excessive interest rates12.
In order to prevent the parties from lacking incentive in trying to bring the transfer price close
to the free competition price, the OECD Report recommends that the Tax Authorities do not allow
this type of contribution to become a regular procedure.
7.DEFINITION OF TRANSFER PRICING
7.1. METHOD BASED ON THE TRANSACTION
Having performed the analysis on transaction comparability, the next step if to identify the
method used for determination of the free competition price in order to ascertain if, and to what
extent, transfer price agreed between associated enterprises has been influenced by rules that are
different for those in free competition conditions.
The price comparison method is used (Comparable Uncontrolled Price) to achieve such
objective. The possibility of applying aforesaid method is subject to the possibility of identifying
operations comparable to those applied at intra-group level. However, there are intra-group assets
which are very difficult to compare and sometimes even unique, such as trade marks, licenses, know-
how, innovative products which make use of price comparison impossible. To avoid these difficulties
other methods are employed, such as resale price (Resale Minus) or increased cost (Cost Plus).
In order to identify if, and to what extent, agreed transfer price has been influenced by rules
that are different for those in free competition conditions, one of the following methods can be used:
Traditional methods based on the transaction:
- Price comparison (CUP);
- Resale price method (Resale Minus);
- Increased costs (Cost Plus).
Methods based on profits:
- Comparison of net profits (Transactional Net Margin Method);
12 OECD Report, 1995, §1.64
30
- Division of global profits (Profit Split).
The Tax Administration circular 42/81 considers the price comparison method preferable for
the free competition price determination.
In the cases where the aforesaid method is not applicable, that is when identification of
comparable operations is impossible, the circular does not establish a strict hierarchy procedure, with
reference to the choice between the method Resale Minus and Cost Plus, but underlines that the
adequacy and suitability of the utilized method must be evaluated case by case.
With regards to OCSE, even if it insists on the priority of the price comparison method, it has a
more flexible approach, suggesting the adoption of the method that guarantees the “most complete, decisive
and easy to obtain evidences”.
In both national and international scenarios, the “ideal method” seems to be that based on price
comparison which, in case of incomparability of the operations and transactions (i.e. at a product level)
situations, can be replaced by traditional methods based on gross margins (Resale Minus and Cost
Plus), for which the comparability is verified at a functional level.
In case not even the comparison at a functional level is possible, non-traditional methods are
applied, based on the transaction’s net income (Transactional Net Margin Method) or on the profits’
distribution (Profit Split).
7.1.1 The method of price comparison
The method of price comparison is the: “the principle that compares prices of assets and of services
transferred in an operation between associated companies with the price applied to assets and services during a transaction
comparable on the free market with comparable circumstances”13.
In the method of price comparison, the consistency of the carried out transaction is evaluated
by comparing the price of inter-group sale with the price that would have been established for similar
transactions between independent companies in the same market conditions. The use, as per OCSE
13 OECD Report, 1995
31
definition, of the adjectives “comparable” instead of “same” leads to the comment that the condition
required in order to use the price comparison method is not the equality of the operations, considered
as the condition determined by the existence in two or more things of identical attributions,
characteristics or properties, but the comparability, considered as the opportunity of comparing. The
choice of a less selective principle, i.e. the comparability, is not accidental, as differently from the
equality condition, allows for an easier identification of the operations.
Even if the OCSE has voluntarily determined a principle which is, at least potentially, easier to
find in real situations, such principle actually is derogated for the difficulties in finding similar situations
that can be compared.
With regards to the comparability requirement, the OCSE Report identifies two conditions; if
one occurs, an operation on the open market is considered comparable with the operation occurring
between two associated enterprises:
- None of the differences (if there are any) can effectively affect in a relevant way the price in the
open market;
- Significant adjustments in economic terms can be carried out which remove the fundamental
effects of such differences.
In the national context, circular 32/80 specifies that the price of the transaction subject to
verification “must be equal to the price applied in a comparable sale, with reference to conditions and assets object of the
transaction, carried out:
- Between companies independent one from each other (external comparison) or;
- Between a company of the group and a third independent party (internal comparison)”.
Furthermore the Tax Department specifies that the internal comparison is preferable to the
external one, as the internal comparability makes it more likely to find similar transactions in spite of
the external one.
The reasons at the base of such preference are the executing difficulties that the Tax Authorities
meet in the research of objective data for the determination of the price in case the relevant market is
foreign, as well as the major chance to find similar operations in the case of internal comparison.
The circular 32/80 identifies a set of factors that must be considered in order to carry out a
correct application of the price comparison method. Such factors affect in a decisive way the economic
transactions and, as a consequence, they are potentially capable of affecting the comparability:
32
- The relevant market: for equal conditions of assets object of the transaction, the price is affected by
the different location of the receiver company. In particular, the market conditions and therefore
the comparability of the transactions and of the price are affected by:
- Competitive factors;
- The presence of regulations on prices established by the Tax Authorities of the state receiving the
product;
- The differences of the national laws on marketing;
- Exchange rate floating;
- Local distribution costs;
- The economic structure of the market;
- The quality of the product: the product of the transaction subject to verification must have the
same qualitative and category characteristics. The qualitative characteristics refer to the products’
physical identity as well as their exterior look, if it could affect the price. Also the saleability
requisites are important, in other terms those elements capable of affecting the satisfaction and the
attractiveness of the products for the customers. These are, as an example:
- Exclusivity of the brand;
- The packaging;
- The advertising;
- The distribution strategies;
- The presence of guarantees;
- The presence of promotional sales;
- The presence of discounts per volumes;
- The transportation;
- The possible inclusion of intangibles.
As previously mentioned other comparability factors are added to reference market factors and
product’s quality, such as, carried out functions, risks undertook by the parties, contractual terms,
economic circumstances and adopted commercialization strategies.
Exactly in consideration of the presence of numerous and considerable comparability factors,
and of the difficulties in comparing transactions subject to verification, the Italian Tax Administration
suggests to:
33
- Accept flexible comparisons, that allow for the use of the price comparison method even when
clear differences between the operations carried out are present, at least for the cases where such
differences can be objectively quantified in their impact on the transaction price;
- Prefer internal comparisons, giving importance to the external ones only in case there is an official
pricelists to deduce the normal value, which can be surveyed on the ruled markets or by
independent Authorities (for example the Chamber of Commerce) for specific types of assets. For
some differential elements, it is possible to reach an objective quantification, leading to the reliable
determination of the transaction price. These are the cases in which the differences in the
operations lead in the transportation conditions, in the custom rights, in the import drawings, in the
terms of payment or in the exchange risk. In case of differences in the characteristics of transacted
assets or services, it is very difficult and not much reliable, quantify the effect of price differences
and the relevant adjustment of it.
7.1.2. Resale price method
The resale price method is “the method to determine the transfer price based on the price at which the
product purchased from an associated enterprise is resold to an independent enterprise. The resale price is reduced by an
adequate gross margin. What is left after subtracting such margin can be considered, after adjustment of the costs
associated with the purchase of the product (for example custom duties, as a price in open market of the assets original
transfer between associated enterprises”14.
The Resale Price Method is based on the price at which the good, which has been purchased
by an associated company, is resold to an independent enterprise: the price is reduced of a gross margin
(resale price margin), which represents the amount with which the vendor of the good on the open
market intend to cover its sales costs, as well as the other managing expenses (administrative expenses,
transportation costs, marketing) and, as per the executed functions (considering the utilized assets and
the risks undertaken), achieve an adequate income.
What is left after subtracting the gross income margin, also considering the other costs
connected to the cost purchase ( such as, for example, custom duties) can be considered as a price in
open market of the assets original transfer between associated enterprises.
14 OECD Report, 1995
34
The resale method price is applied when, as is not possible to find verifiable operations in the
market, it’s necessary to compare other economic elements that characterize the operations between
associated enterprises and comparable operations surveyed in the open market: as a matter of fact, the
resale price method subject analysis is the gross margin generated by the compared transactions and not
the determined price.
Problems may arise if the analysed good is not object of a resale or if it is purchased by other
companies part of the group; in such case, the Tax Authorities suggests to “undertake, as a first data, the
price of a resale carried out by independent parties and relevant to products similar to those object of the sales under
verification. From the resale price an income gross margin should be detracted resulting in the normal transfer price”.
Therefore, the gross income margin can be determined:
- Considering the gross income margin gained by the purchaser/reseller following the comparable
transactions carried out with independent company and relevant to similar assets purchased by
enterprises out of the group;
- Considering the income margin gained by third independent parties through the comparable resale
of similar assets.
In case the income margin gained by third independent parties through the comparable resale
of similar assets, the circular 32/80 clarifies the conditions that may affect the level of prices both with
regards to similarity of the operation and to the percentage of gross income, underlining that “the
following factors must be considered when evaluating the transactions:
- Type of product object of the sale;
- Functions executed by the reseller with reference to the good object of the resale;
- Effect of particular functions on the resale price (such as the merger of intangible rights);
- Geographic market in which the functions are carried out also with regards to the commercial strategies of the
company.
The identification of the functions executed by the reseller with regards to the good object of the subsequent transfer
allows to gain for each function an income margin equal to that obtained in a similar resale”.
The aforesaid confirms that for the application of the Price Resale Method, the comparison
in terms of products is subject and gives space and importance to the functional analysis, in other
words at the survey on real executing conditions of the activity by the reseller, such as his position
within the group, the type and the importance of entrepreneurial risks it assumes, the level of
independence in the marketing strategies.
35
The adjustment methods of the margins on the basis of the estimated differences are two:
- arithmetical adjustment: the margin is increased or decreased in measure equal to the difference in
the costs structure;
- multiplicative adjustment: the margin is increased or decreased in measure equal to the difference in
the structure of costs to which an increase is added. The use of this method is suggested by circular
32/80 in the cases where the purchaser/reseller commercializes only the purchased assets;
otherwise the application of such method is thoughtless when, before the resale, the assets are
object of a transformation process or incorporated in a more sophisticated product that corrupts its
identity, and to oppose the identification of the final product value and that of its components.
With regards to OCSE, in the Report of 1995, suggests:
- consider possible differences in the way the subsidiaries and the independent companies conduct
the business. Such differences may affect the enterprise profitability, but they must not affect the
determination of the price the company purchases or sells assets;
- utilize such method preferably when the margin of the resale price has been fixed within a short
time form the assets purchase by the reseller. More time passes between the original purchase and
the resale, more other factors, such as market changes, modifications of exchange rates, costs, etc.,
must be considered at the moment of comparison;
- consider carefully the possibility that the reseller carries out a substantial commercial activity which
is added to the simple resale activity. In such case, a considerable margin on the resale price could
be included, especially if in the execution of its activities the reseller utilizes valuable and possibly
unique assets (for example reseller’s intangible assets). If the reseller owns considerable intangible
marketing assets, the margin of the transaction resale price on the free market could lead to an
underestimation of the income the reseller has the right during the transaction between associated
enterprises, unless the transaction comparable on the open market involves the same reseller or a
reseller with marketing intangible assets of equal value;
- foresee that the margin of the resale price can be changed according to the fact that the reseller may
have or not the exclusive right to resell the assets.
7.1.3 The cost plus mark up method
The Method of Cost Plus Mark Up is “the method for the determination of transfer pricing which
utilizes the costs incurred by the supplier of assets or services in a transaction between associated enterprises. An
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appropriate percentage of mark up relevant to the production cost is added to these costs, to make an appropriate profit in
light of the performed functions (taking into account assets used and risks assumed) and the market conditions. The result
after adding the cost plus mark up may be regarded as the price in open market of the original transaction between
associated enterprises”. (OCSE Report of 1995).
The Method of Cost Plus Mark Up is based on the costs sustained by the supplier of goods
and services during the controlled transfer of goods or services to a connected buyer. The total cost in
increased of a mark-up relevant to the production cost (the mark-up), which represents the appropriate
margin of profit to pay the functions carried out by the company and the sustained risks; such result
can be considered as the price of the controlled transfer in the open market.
This method is applied when the connected party purchases semi-processed products or when
the controlled operation consists of supplying services.
The real difficulty in obtaining specific information on the cost structure is why Tax
Administration circular 32/80 advises against application in the event of sales by foreign based
controlled companies to Italian based controlled ones.
The percentage of mark-up applied must be high enough to guarantee remuneration for jobs
performed and for market conditions. It must be comparable with:
- gross profit margin made by the same enterprise in connection with transactions performed with
independent subjects which deal in similar products on the same market, or with identical duties to
those relative to the controlled operation (internal comparison).
- profit margin made by independent competitors who carry out the same roles compared with
similar transactions.
The production cost, augmented by an adequate gross profit margin (cost plus mark-up) gives
rise to a free competition price of the controlled transaction.
As a result, when applying the cost plus mark-up method, two peculiarities are to be born in
mind: on the one hand the system for price determination and cost accounting, on the other,
identification of mark-up percentage.
It should also be underlined that the application of this method, just in the same way as other
methods examined in this document, is subject to checking transaction comparability on the free
market. Indeed, as foreseen by the OECD, the value of controlled transaction is established by
referring to the Cost Plus obtained by the supplier in operations performed on the free market, or for
comparable transactions, to that of an independent enterprise.
37
In this specific case greater importance should be dedicated to comparability factors such as
functions performed and economic circumstances when the profit margin depends only secondarily on
the product’s intrinsic characteristics and thus connected mainly to the above mentioned factors. The
aforesaid circumstances come about when the product involved in the transaction is not characterised
by specific qualities or features that distinguish it or make it different from other products.
In the event of their being substantial differences which effectively influence the Cost Plus
Method, relevant, for example, to the type of activities performed by the parties in the transaction,
modifications should be made in order to take these differences into account. The most important
qualitative and quantitative points in the difference connected to modifications is, however, prone to
invalidate the reliability and precision of results of the analysis carried out.
Much of the difficulty in application of cost mark-up is due to cost determination.
On this point, Tax Administration circular 32/80 states that, to the end of cost determination,
the Tax Authorities can:
- work from the cost accounting system adopted by the enterprise;
- make modifications to this system;
- use a completely different accounting system from the one adopted by the enterprise;
The circular also emphasizes which costs accountancy system enterprises have to be set up:
- standard costs: presumed cost founded on assumed production levels and equipment performance;
- marginal costs: differentiated value of total cost in relation to the increase of a production unit;
- full production cost: effective production cost including direct charges (raw materials, direct labour)
and indirect ones (industrial and commercial costs, overheads, R&D and financial onus).
The system recognised in circular 32/80 as being the most feasible and satisfactory is the full
production cost; the OECD is of the same opinion.
Use of the Cost Plus Mark Up method calls for a careful comparison of costs sustained by the
enterprise regards to controlled transactions and by the company regards to the free market transaction.
In this context it is necessary to identify differences of level and typology of expenses connected to
particular activities performed and risks taken by the enterprise involved in the comparison. The
aforesaid has the aim of making the necessary adjustments and corrections.
Examination of these differences can result in the following statements:
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- in the event in which expenses are connected to a difference in performed activities (taking into
account assets employed and risks taken) which were not taken into consideration in applying the
method , it might be necessary to make an adjustment to the gross margin;
- in the event in which expenses are connected to additional separate activities compared to those
seen with the Cost Plus Mark-Up, it may be deemed necessary to fix a separate compensation for
these activities. Similarly, expenses which are derived from a structure of capital which reflects non
free competition agreements might call for separate adjustments.
- In the event in which differences in the enterprises’ costs involved in the comparison are the result
of the enterprises’ efficiency or inefficiency (as in the case of supervision expenses, overheads and
administrative costs) probably adjustments to gross margin will not be necessary. Indeed, an
independent enterprise would not be likely to accept to pay a higher price as a result of inefficiency
by the other party. On the contrary, if the other party is more efficient than could be foreseen in
normal circumstances, then the aforesaid party should benefit from that advantage.
On the subject of comparability of the transactions, it is also necessary to take into
consideration the possibility of accounting procedures differentiating from one country to another. In
these situations arrangements should be made to amend data calculations and make the corrections
which ensure use of the same cost base. In this context, the OECD Report points out that although
accounting procedures may differ, an enterprise’s costs and expenses are generally broken down into
three categories:
- direct costs for the manufacture of a product or a service such as cost of raw materials;
- indirect production costs which, although strictly linked to the manufacturing process may be
common to numerous products or services (for example, maintenance costs in departments which
utilize machinery intended for the production of several products),
- operating costs of the enterprise as a whole, such as supervision expenses, overheads and
administration costs.
7.2 LIMITS OF TRADITIONAL METHODS
The basis of transfer pricing methods is the demand for pricing determination in the transfer
between associated enterprises, so that such price is reasonably and really the most possible close to the
price that would have been established between independent companies.
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The so-called “traditional methods” are identified: based on the transfer, these methods are
considered on both a national and international basis, preferable and more reliable in spite of methods
based on income.
However, the deep changes and evolutions of the economic scenario on a global basis force to
a punctual and accurate consideration; the changes regarding the business organization from the
multinational groups have determined a growing difficulty in the application of traditional methods.
Such difficulties are mainly due to the fact that the multinational groups place limits more and more
difficult to escape for the purposes of transfer price determination on the basis of traditional methods.
A breakdown of the factors leading to this situation are as follows:
- globalization: the progressive enlargement of the social, economic and financial relations, the
sudden and disruptive technological development, the new economic models imposing themselves
as well as the decrease of regulation barriers lead to a “worldization” of multinational groups which
tend to operate on a world scale, identifying the most efficacious location for the execution of the
activities included in the supply chain. The global relationships between enterprises, and moreover,
the increase of inter-company transactions, have determined an increasing interest of the Tax
Authorities in the issue of the transfer pricing. It follows that in the transfer pricing policy
worked out and set-up by the multinational enterprises that the policy must be as “global” as
possible, in order to be coherent with the transfer pricing regulation present in the several
countries in which the group is dislocated. Therefore, there is a necessity to fix a unique transfer
pricing policy, valid for all the bodies of the group involved in the inter-company transactions;
- intangibles: in the so-called knowledge economy, the creation of the value leads, in addition to
traditional tangible assets – which include both physical and financial assets, in the property of
intangible assets, often not appropriately pointed out in the balance sheets; the difficulty in
assigning a value to intangible assets defines the limits of the application of traditional methods, in
particular in the cases where both the bodies involved in the transaction have such typology of
assets;
- strategies: the characteristic of multinational groups is the fact that they carry out activities in
several markets and countries; to the ends of the managing and accounting coordination of such
companies, it became necessary to adopt an organizational model different from the traditional one,
which represents, in somehow, its natural prosecution; therefore the multinational groups are
structured in business units, not necessarily corresponding to a juridical body, specialized in the
production of a specific type of good resulting from a set of transactions integrated one to each
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other. This model is totally different from the model based on separated transactions carried out in
a certain geographic area or by a specific juridical body, which makes the application of the transfer
pricing regulation much more difficult, as it requires the separated analysis of each transaction.
7.3 THE NEW FRONTIERS OF TRANSFER PRICING POLICIES
The globalization process, which has involved multinational groups, imposes development of a
transfer pricing strategy which can be applied uniformly throughout the countries where the group
operates. There is therefore a necessity to identify the most suitable methodologies for every
requirement.
There is, however, a difference in points of view between the various countries regards to the
validity of the methodologies proposed by the OECD Report. Indeed, it is not uncommon for Tax
Authorities to contest use of methodologies applied in accordance with a host company’s regulation or
procedure whereby priority use of one method compared with another for a specific transaction is
obligatory. Therefore there is a necessity for convergence of country regulations in order to allow
multinational groups to adopt the most appropriate methodologies, bearing in mind the particular
economic circumstances and available information and on the condition that a documentation is
supplied which can demonstrate the logical pathway that has determined the choice of the
methodology and confirms the reasonability and reliability.
To this should be added the growing complexity of organization models which imply, when
using traditional methods, greater difficulty for identification and comparability.
One thinks, for example, about growth strategies based on the vertical and horizontal
integration which multinational groups apply. The aforesaid systems are based on relationships and
exchange of goods and services between associated companies and therefore exclude the possibility of
an internal comparison for the search and selection of comparable transactions. In similar
circumstances therefore, comparables must be made with independent enterprises which operate in
similar economic conditions.
With reference to the foresaid, however, availability of economic data often turns out to be
insufficient. Public data often does not go back to the items income or costs which were taken into
account in determination of the gross margin. Different enterprises can indeed classify the same cost
item in different ways, creating a low level of uniformity in the comparison between indexes which are
41
nominally equal. Whilst a comparison on gross margin applied using traditional methods greatly feels
the effects of this uncertainty and can lead to low reliability results, the application of profit methods
allows for a lower grade of approximation considering that all the cost items are deemed to have been
considered.
The availability of these factors refers to independent enterprises and the difficulty in going
back to the individual items in the balance sheet is a strong deterrent to the use of traditional methods.
Where there is no certainty on the comparability of available indexes the use of income methods could
turn out to be reliable.
Lastly, there are situations in which the use of the Resale Minus and the Cost Plus appear to be
unadvisable in consideration of the particular structure of functions and risks and assets of the entities
involved in the transaction. In particular cases in which the associated enterprises share availability of
intangibles is ever more frequent. Considering the particular characteristics of the uniqueness of the
assets in question these are difficult to assess. To this should be added the growing interdependency
between the single inter-company transactions.
7.4 PROFIT BASED METHOD
As I have already had the occasion to point out, the traditional methods represent the most
direct controlling tool whether joint transactions are in accordance with the free competition price
principle or not. However, where the operative difficulties in application of traditional methods are
such that they invalidate the reliability, it is possible to use the so called alternative methods based on
the profits resulting from the transaction.
These methods, both in the OECD environment and in the host country are, however,
secondary compared with those based on transactions: in other words, use of these methods is subject
to use of the traditional method in the exceptional cases in which the complexity of the real enterprise
activity creates practical difficulties in the ways of applying them.
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7.5 ALTERNATIVE METHODS IN ACCORDANCE WITH OECD:
The alternative methods or “methods based on profits from transactions” (the so-called profit based
method) contrast with those based on the transfer price of goods or services between associated
enterprises (so-called transactional methods); the former is based on operation’s profit sharing and the
latter on identifying an adequate price.
According to the 1995 OECD Report the only acceptable methods based on profits from
transactions are:
- the Profit Split Method;
- the Transactional Net Margin Method.
These methods, according to the 1995 OECD Report, may be used “in exceptional cases in which
the complexity of the company’s real business generates practical difficulties in applying traditional methods”. In these
case therefore, the possibility of employing alternative criteria should be verified. Said alternative
criteria will allow for carrying out determination of transfer price in accordance with the free
competition principle.
Use of income methods can therefore be considered feasible only in the following assumptions:
- non availability of sufficient information on independent transactions;
- available data are not reliable;
- the type of operations carried out by the associated enterprises does not allow for adoption of
traditional methods.
Therefore, in many countries application of profit methods has been limited to the Profit Split
Method only, as the criterion for the Transactional Net Margin Method is still considered experimental.
7.5.1.The Profit Split Method
The Method of Profit Sharing is “the method based on the transaction profit that identifies the combined
profit to be split for the associated enterprises from a controlled transaction and then splits those profits between the
associated enterprises based upon an economically valid basis that approximates the division of profits that would have
been anticipated and reflected in an agreement made at arm’s length”15 .
15 OECD Report, 1995
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In the Profit Split Method total profit for the transaction is identified. It is then attributed to
each party involved in accordance with economic break-down criteria so that it is in line with the
apportionment which would come about between independent operators on the free market.
At the base of this method there is an observation of how economic exchanges are so tightly
connected that they cannot be evaluated separately; therefore the enterprises, faced with transactions
which are not liable to autonomous evaluation draw up agreements for the apportionment of profit
they have made.
Profit split between every single company must bear in mind the functions performed by said
companies, risks taken on, operations used and every other available and reliable objective parameter
relative to the market, such as for example, performances seen between independent enterprises with
comparable functions, or the division of profits.
The OECD Report highlights two criteria in evaluating Profit Split:
- contribution analysis;
- residual analysis.
In accordance with the contribution analysis, the global profit realized by the controlled
transaction is split between the associated enterprises on the basis of value attributable to the functions
performed by each associated enterprise in the context of the transaction being examined. The analysis
should be supported as far as possible by external market data able to indicate how the independent
enterprises would have share profit in similar circumstances.
The method for surplus margin is, on the other hand, developed in two phases:
- in the first phase, to each of the associated enterprises a profit is attributed that represents a basic
remuneration similar to the one which would have been shown by an independent enterprise; this
remuneration does not take into account the share attributable to business carried out by
enterprises which are of a unique and incomparable nature (the so-called special functions);
- in the second phase the surplus profits, which derive from the division of the first phase, are split.
Attention is given in doing to take into consideration the division of profits which would have been
agreed between independent subjects and in particular, unique goods contributed by interested
parties and the relative contractual positions..
The Profit Split Method has the indisputable advantage that it can be applied even in the
absence of comparable transactions. Profit Split does in fact come about with reference to functional
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analysis, in other words taking into account the contribution made by each associated enterprise when
compared with overall profit realized.
As for the weak points in this method, the OECD Report underlines that one of the main
difficulties is represented by the fact that external market data are not very interrelated with controlled
transactions, so much so that “the weaker this relation is, the greater the split subjectivity will be”.
In the method of profit sharing, furthermore, the profits are determined in connection with the
involved transactions only; in actual fact though independent enterprises do not fix transaction prices
on the basis of global profit, unless in the event of joint ventures.
7.5.2. Transactional Net Margin Method:
The method based on the net margin of transaction is the “profit method that examines the net profit
margin relative to an appropriate base (e.g. costs, sales, invested assets) that a taxpayer realizes from a controlled
transaction”16 .
The Transactional Net Margin Method consists in determination of the net margin relative
to an appropriate base that the enterprise realizes via a controlled transaction..
This method therefore works in the same way as the resale price (Resale Minus) and the
increased cost (Cost Plus), even though they refer to gross profit from the transaction and not to net
profits.
Therefore the enterprise’s net profit, derived from the controlled transaction, must be
determined with reference to the net margin which the enterprise realizes during comparable
transactions on the free market (internal comparison), and, if this was not possible, referring to the net
margin realized in similar transactions by an independent enterprise (external comparison).
In order to determine the comparability of the transactions and possibly make the suitable
adjustments, a functional analysis of the associated enterprise is necessary (in the case of internal
comparison) or the independent enterprise (in the case of external comparison).
It should be underlined how the method based on the net margin, compared to traditional
methods and particularly with regards to the price comparison method manages to better support the
16 OECD Report, 1995
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possible operational differences which exist between controlled transactions and those on the free
market; this is due to the fact that net profit margins are less influenced by the differences which can be
picked up in the transactions and in the operations.
The margin in question though is particularly influenced by certain exogenous factors, such as
threats of fresh competitors, or replacement products, or by endogenous factors such as efficient
company management, variable pricing structure, differences in capital expenditure. Considering these
factors, the possibility of corrections and adjustments should thus be evaluated, as well as the impact
they have on the method’s reliability.
7.6. ALTERNATIVE METHODS IN LINE WITH THE ITALIAN TAX AUTHORITIES
As previously underlined by the OECD, also the Italian Tax Authorities clearly admit the
operational difficulties related to application of traditional methods, above all with reference to cases
which cannot be identified on the comparable transactional market. This is due to the impossibility of a
reliable comparison between the transaction being examined and another made between independent
enterprises.
In this kind of situation the Italian Tax Authorities, particular with regards to Tax
Administration circular 32/80, foresee use of the following alternative methods:
- global profit Apportionment;
- profits comparison;
- capital investment profitability;
- gross margins in economic area;.
Above methodologies should not be considered peremptory. Indeed the Tax Authorities have
explained that every other alternative method can be adopted as long as the base principle of free
competition price is applied.
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7.6.1. Global Profits Apportionment:
This method consists in dividing profits from a sale or a series of sales carried out by
interrelated enterprises. The profits are therefore split in proportion to costs sustained and the
operations performed by the two entities.
The Tax Administration circular identifies a series of circumstances which advises against use
because the method of apportionment of global profits:
- presents a high degree of relativity and arbitrariness in determination;
- does not take into account the market conditions and even less so the enterprise’s economic
situation;
- it would mean abandoning the principle - established in internal legislation as well - of the juridical-
tax independency of single companies and adopting the tax model on the basis of which, to the
ends of quantification of the associated enterprise’s income, the economic entity should be
considered globally.
Adoption of this method therefore remains limited to situations in which international
conventions, combined with a precise coordination between the resident based Tax Authorities and
those in the foreign based company allows for an equal division of global profits between the two
companies being examined.
Mention should be given to the way the Tax Department has identified, as the applicability
hypothesis of this criterion, the case in which, for one or more of the goods produced and sold by
different companies, agreements are reached for apportionment of global profits referring to fixed
percentage methods attributable to two different production and marketing stages of the goods. An
examination of these agreements is strictly necessary for value determination. The total amount of
profit agreed upon may be deemed fair in the case of the established percentage being connected to the
tangible business performed by every single enterprise involved. The Tax Department, would therefore
be faced with a case of suitability judgement in the case in which a percentage of at least two thirds of
the global profit were to be attributed to the company responsible for all the manufacturing process,
leaving the other third to the company responsible for marketing.
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7.6.2.Profit Comparison
In accordance with the criteria on profit split, the company’s global profits are compared with
those achieved by a third party performing in the same economic area.
With regards to this subject, the Tax Authorities have established that for each entity
comparison must be made by calculating the percentage rate of gross profit, compared to the sales
turnover or operating costs. Some particular suggestions have been made, in order to facilitate control
operations and must be applied in the implementation of profit comparison:
a) comparison should take into account only the profits made through sales of goods under
examination without being extended to the enterprise’s global profits. This way possible
distortion is avoided, for example in the hypothesis in which the profits deriving from
commercializing a line of products is able to compensate for losses made in the sales of others
products;
b) comparison should take into account the specific area where the enterprise operates:
comparison with several enterprises would obviously be preferable;
c) comparison should also consider profits realized by enterprises situated in other countries. All
information which can be gathered from foreign countries can be used for benchmarking
through the so-called exchange of information as established by the current international
conventions to avoid double taxation;
d) comparison should be extended to several tax periods in order to get a greater awareness of
fluctuation cycles which characterize each economic area;
e) enterprises subject to comparison should be of the same size and structure as the company
examined;
f) comparison should examine effective operations performed by the single companies involved
in the control.
Regarding the suitability and efficacy of the Profit Comparison Method, the Tax
Administration circular underlines that:
- considering the difficulties in controlling the many comparison factors independently, examination
of the dispute made by the taxpayer is fundamental when applying the criteria involved;
- it is obvious that two companies will always present differential factors, even though they are not all
able to justify not having applied the criteria subject to examination;
- in every case, the result of comparison supply useful elements for the research of the normal value
of the controlled operation.
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7.6.3. Return on Invested Capital
Return on Invested Capital identifies the percentage of return of invested capital in operations
performed in an environment of free competition. The application of this method is strongly
discouraged, above all in the light of the difficulties in quantifying the standard return, which changes
according to type of risks the company covers and the economic field in which the company
performs17.
7.6.4 Gross Profit Margins in economic sector
The method for Gross Profit Margins in the economic sector is only briefly mentioned in Tax
Administration circular 32/80.
Indeed, this Tax Administration regulation, after having mentioned that the Gross Profit
Margins calculated for the economic area can supply valid indications, just suggest the following
formula:
(percentage of gross profit) X = Returns – Costs divided by Returns
17 Cfr. circular 32/80, Cap. 3, § 4c
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8. INTANGIBLES
Intangible assets are one of the main assets of a company and are important to engage in
foreign direct investment. The unique character of an intangible asset should unable a foreign investor
to neutralize the initial home advantages of a local investor. However, this uniqueness makes it difficult
to determine an arm’s length price for transfer of an intangible asset between associated enterprises.
Firstly, an arm’s length price for the transfer of intangible property is dependent on the
characteristics of intangible property.
The characteristics of intangible property include:
- the form of the transaction (licensing or outright sale);
- the type of intangible property;
- the duration and degree of protection;
- the anticipated benefit from the use of the intangible property.
Transactions of intangible assets are by their nature more difficult to recognize compare to
transactions of tangible assets.
There are three main methods to transfer intangible assets between associated enterprises:
- outright sale;
- licensing;
- cost contribution arrangement.
In the case of outright sale, the ownership of the intangible asset is being transferred of which
the owner should receive an arm’s length price. The initial owner gives up ownership and control of the
intangible asset. The geographic right sold be broad or narrow. That is, the owner can sell the Dutch,
European or worldwide rights to the intangible asset.
Licensing is the most common method of transferring intangible asset rights. In the case of
licensing, the ownership of the intangible asset remains with the licensor/owner.
The owner grants certain rights to the licensee for a specified period. The rights granted to the
licensee can differ ( geographic rights, exclusive vs non-exclusive rights, sub-licensing rights) and
should be detailed in a licensing agreement. The compensation to be received by the licensor is usually
in the form of a running royalty, which is a periodic payment based on the output or turnover of the
licensee.
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In the case of a cost contribution arrangement, associated enterprises may agree to share the
costs and the risks of developing intangible assets.
Intangible assets often originate as a result of a past event that have the following features:
- non-physical in nature. However, there should be tangible the documentation of the intangible
asset existence, contract or trademark registration;
- future economic benefits are expected to flow to the owner;
- value of intangible assets arises from its intangible nature and not from its tangible nature;
- subject to property rights, legal existence and protection, and private ownership. The ownership
structure should be clear and separable and identifiable in order to determine and value of specific
intangible. The following two issues should be noted in this respect: in some cases, an intangible
assets may be hard to separated, because it is closely related to the underlying business. The value
of an intangible asset could be affected by other intangible asset, such as goodwill and reputation.
In certain instances, several intangible assets may be offered as a package contract, patents, know-
how and trade secret. In applying the arm’s length principle, it may be required to perform a
separated analysis of each intangible asset.
The OECD Guidelines focus on commercial intangibles (intangibles associated with
commercial activities, including research and development and marketing activities). Commercial
intangibles are usually not recognized on the balance sheet of a company, but may have significant
value.
Two types of commercial intangibles are distinguished: trade intangibles and marketing
intangibles.
Trade intangibles are the result of costly and risky research and development activities. An
example involves patents that are use to produce a good. Marketing intangibles, such as trade names,
trademarks and customer lists, are used in the commercial exploitation of a good or service.
Intangible assets that enjoy legal protection may have a higher value than intangible assets that
do not enjoy legal protection, because of the protection by law from unauthorized exploitation.
Intellectual properties, such as patents, trademarks and copyrights, are intangible assets that benefit
from legal protection as a result of a particular statutory authority.
Intellectual properties have a specified duration of protection and the owners enjoy more
opportunities to commercialize the asset.
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The OECD Guidelines refer to specific comparability factors in applying the arm’s length
principle on intangible asset transactions.
8.1 TRANSFER PRICING METHODS
The following transfer pricing methods could be applied in determining an arm’s length royalty
rate (OECD Guidelines):
- Comparable uncontrolled price (CUP) method;
- Transactional net margin method;
- Profit Split Method.
The US transfer pricing regulations18 mention the following four methods to determine arm’s
length price with respect to a transfer of intangible property:
- Comparable uncontrolled transaction method;
- Comparable profits method;
- Profit Split method;
- Unspecified method.
8.1.1 Cup Method
The CUP Method is the most direct and reliable method if comparable uncontrolled
transactions can be found. There are two types of CUPs: internal CUP and external CUP.
In case of an internal CUP, the price charged for a controlled transaction is compared to the
price charged for a comparable uncontrolled transaction between one of the associated enterprises and
an independent enterprise. A comparable uncontrolled transaction thus could involve a transaction in
which the related licensor has licensed a comparable intangible asset to an independent enterprise
under comparable circumstances, or a transaction in which the related licensee has licensed a
comparable intangible asset from an independent enterprise under comparable circumstances. In the
case of an external CUP, the price charged in a controlled transaction is compared to the price charged
18 Sec. 1. 482- 4
52
in a comparable uncontrolled transaction between two independent enterprises both of which are
unrelated to the associated enterprises.
In industries where every intangible asset is unique, the use of the external CUP method makes
little sense. Only in industries with general technology, it may be possible to find an external CUP. The
use of the CUP method is most applicable when one of the associated enterprises has licensed
comparable intangibles to third parties.
The above issues are also applicable to the Comparable Uncontrolled Transaction (CUT)
Method in the US Regulations. The US Regulation also know the CUP method for determining prices
for tangible goods, but apply the term of CUT method for transfers of intangible assets. The CUT
method is similar to the CUP method generally used in the Guidelines.
The CUT method evaluates whether the amount charged for a controlled transfer of intangible
property was arm’s length by reference to the amount charged in a comparable uncontrolled
transaction. In addiction, Sec.1.482-4 indicates that the amount determined under the CUT method
may be adjusted (periodic adjustments). The intangible assets transferred in the controlled and
uncontrolled transactions should be comparable (Sec.1.482-4), meaning that they should be “used in
connection with similar products or processes within the same general industry”, and “have similar profit potential”.
8.1.2 Transactional Net Margin Method
If the CUP method cannot be applied to determine an arm’s length royalty rate, the TNMM is
generally considered. The TNMM is used when one of the related parties does not own valuable
intangible asset. In case of a license of intangible asset, the TNMM is applied on the related party
licensee, the most simply entity. The operating profit of the licensee is thus analyzed. Benchmarking
analysis is carried out to search for independent enterprises that perform functions and incur risks
comparable to the related licensee. These comparables should no own valuable intangible assets. If the
operating profit of the related licensee, after the license payments, is within the range of operating
profits (based on a certain profit level indicator, for example, return on operating assets) earned by the
comparables, then the royalty rate paid by the related licensee is judged to be arm’s length. If not within
the range, then the residual profit earned by the related licensee is the additional royalty rate to be paid
to the related licensor. The residual profit is equal to the difference between the operating profit of the
related licensee and the “normal” profit earned by the comparables.
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8.1.3 Profit Split Method
The Profit Split Method is used when both parties to the transaction own valuable intangible
asset. The OECD Guidelines discusses the following profit split methods in more detail: contribution
analysis and the residual analysis. The residual analysis is used more often than the contribution
analysis. The residual profit split approach concerns a two-step approach. One example is as follows.
Assume that the license involves a patent. The related party licensee uses this patent and self-developed
valuable manufacturing know how to manufacture pharmaceutical products. In step 1, a “basic” return
is calculated for basic functions performed by the licensee (manufacturing function). In step 2, we
subtract this basic return from the operating profit of the licensee calculated before the license
payments. This results in the residual profit attributable to intangible assets, which should be allocated
between the licensor and the licensee based on the relative contribution of intangibles (market value of
the patent and the manufacturing know how). The OECD Guidelines indicates that the costs of
developing and maintaining intangible assets may be used to determine the relative contribution of each
party, although a cautionary note is that costs may not reflect the value of the intangible asset.
8.1.4 Other Methods
The US transfer pricing regulations discuss the use of unspecified method in connection with
the transfer of intangible assets (Sec.1.482-4). Similar to the specified methods, the unspecified method
basically considers the various options that are realistically available to the taxpayer. For example,
assume that a taxpayer could choose between licensing a trademark from its foreign parent and
developing a trademark for itself. The cost of developing this trademark forms the ceiling for the
payment to the foreign parent for licensing the trademark.
These approaches are not explicitly mentioned by the OECD Guidelines and should not be
used as primary methods to determine an arm’s length royalty rate, as these approaches may not reflect
the specific facts and circumstances of the particular case.
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9. COST SHARING AGREEMENT
The Cost Sharing Agreement (CSA) is an agreement between enterprises that share resources
and competences to finance and share costs and risks relevant to the technology for goods, services or
rights production, planning economic benefits proportional to the relevant contributions in money or
with regards to their nature and relation activities19. Usually this agreement form is utilized by
multinational groups for the development of intangible assets, or to obtain products, services or rights,
even if the possibility that the agreement’s subject matter is the performance of services, in order to
share risks associated to the activity foreseeing the contribution of each player proportioned to the
value of the rights it would obtain by utilizing the good object of the agreement is not excluded.
Also the CSA must fulfil the arm’s length principle, therefore the contribution of each player
should reflect the value of free competition, i.e. the contribution that a third party, in comparable
circumstances, would be willing to give.
The contribution amount paid by each player in relation to the total cost of the activity carried
out should be proportional to expected benefits.
Therefore an evaluation of expected benefits of each player and the proportional allocation of
costs is necessary. Such evaluation can be executed:
- estimating the additional income that each associate would receive;
- estimating the cost reduction that each associate would benefit of;
- using appropriate key allocation (sales, number of employees, invested capital).
If from the activity developed within a CSA specific rights or the creation of intangible assets
raises, all the players of the agreement should be assigned their juridical and economic ownership;
however it is possible that the juridical ownership is assigned to a unique player, whilst the economic
utilization is guaranteed to all. In no case the players will pay fees (royalties) for the use of the result of
the activity carried out within a CSA, nor can the contributions provided by each player of the
agreement be considered as royalties20.
The adhesion to or withdrawal from the agreement must be regulated by compensating
payments.
19 OECD Report, 1995, § 8.3 20 OECD Report, 1995, § § 8.3; 8.6
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In particular, if an enterprise aims at becoming part of a CSA at a time subsequent the
agreement stipulation, this shall pay an amount (buy-in payment) proportional to the possible result
already achieved. In the same way, an enterprise that decides to withdraw from the agreement must be
remunerated for the possible result achieved during the participation in the agreement.
No compensation, instead, should be due if the subject matter of the activity is connected to
the performance of services.
In any case, all the above mentioned indications must be analysed and applied considering the
actual case and the behaviour that an independent enterprise would have in comparable circumstances.
10. DISPUTES RESOLUTION
OCSE Report of 1995 analyses in particular the administrative procedures that the countries
part of the Organization can apply in order to prevent and settle a dispute on transfer prices matter and
minimize the risk of the double taxation phenomenon which occurs when, during the prices adjustment
phase, an income is taxed in more than one country involved in the transaction.
Therefore, to settle disputes on the transfer price matter, the following administrative means
can be applied, depending on the type of case:
- out of the court procedures, based on agreements between the Tax Administrations as per bilateral
Conventions against the double taxation, in accordance with art. 25 of OCSE Report;
- the advance pricing agreements;
- the safe harbours;
- the international ruling.
10.1 OUT OF THE COURT PROCEDURES
The out of the court procedures included in OCSE context consist in an administrative
collaboration between the Tax Administrations of the involved countries which may confer, if
necessary, to establish the reciprocal correspondent adjustments.
The procedure can be started exclusively for disputes regarding:
56
- measures adopted by one or both the involved Countries which lead or will lead to a taxation for
the taxpayer not complying with Convention provisions;
- difficulties or doubts regarding the interpretation or the application of the Convention;
- cancellation of double taxation in the cases not foreseen in the Convention.
Therefore the out of the court procedure has two functions: on one side it represents a defence
for the taxpayer, by cancelling or preventing a taxation not complying with the Convention; on the
other side it is a way for leaving to free consultation the Tax Administrations of the involved countries
in order to work out doubts and disagreements on application and interpretation of the conventional
regulation.
It is necessary to underline that such procedures do not impose any obligation, with regards to
relevant Authorities, to reach an agreement, but they are obliged to do their best effort to regulate the
submitted double taxation cases.
The absence of such obligation, as well as the impossibility for the taxpayer to be an active party
in the procedure, represent the limits of the above mentioned procedure which is, therefore, difficult to
apply in practice.
10.1.1 Advance Pricing Agreements
These are preventive agreements between the taxpayer and the Administration, of an average
duration of 3 to 5 years, on the basis of which, before the intra-group transaction is carried out, the
principles and technical modes that will lead to the definition and determination of transfer prices are
identified.
The taxpayer must send the APA21 request and justify the proposed method, highlighting
elements such as the profitability of the investments, the analysis of the economic functions carried out
in the relevant industry and issuing a detailed list of comparable transactions or enterprises.
The APA are an occasion, for both the Tax Administrations and for the taxpayers, to confer in
a favourable context, therefore it is recommendable that all the involved Administrations participate
actively.
21 OECD Report, 1995 “ (…) an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (…) for the determination of the transfer pricing for those transactions over a fixed period of time”.
57
During the APA validity period, the right-due to carry out controls on the taxpayer is assigned
to the Tax Administrations, in order to check if the taxpayer is complying or not with agreement
provisions. Such controls can be executed in two ways:
- the Tax Administration requests to the taxpayer to submit the annual reports proving the
compliance of transfer prices applied to the transactions at the conditions established in the
agreement;
- the Tax Administration checks initial data on which the APA proposal is based, establishing
whether the taxpayer as complied with the terms and conditions of the agreement or not.
10.1.2 Safe Harbours
Safe Harbours are provisions of law applicable to certain categories of taxpayers, and can regard
the technical rules for the determination of the right transfer price, a range of values within the price
can change, or the documentation to submit to the Tax Administration to justify the application of a
certain value.
However it is necessary to underline the limits of such procedure, which lead in the possibility
of originating phenomena of double taxation, due to the fact that the Tax Administration could
consider inconsistent the transfer prices previously fixed, re-determining the profits of the company
subject to its taxing power; along with such aspect, there also is a difficulty in pre-establishing adequate
methods for the preparation of a safe harbour, that could be inappropriate for the determination of
correct values, expressly in contrast with the arm’s length principle.
10.1.3. International Ruling
Art. 8 of Decree 269 of 30 September 2003, introduced an important innovation for enterprises
carrying out international activities, consisting in the possibility of requesting an “international ruling”,
which modalities are established by the provision of the Director of the Collecting Agency of 23 July
2004, with which “realize further forms of collaboration between the Tax Administration and the taxpayers, in
particular those that operate on international markets” with the objective “on one side to prevent future disputes and, on
the other side, to avoid that double taxation phenomena occur”.
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The international ruling is a special form of question offering the possibility to define the tax
treatment of the financial and profit elements of the company with the Tax Administration, in advance.
Only the enterprises with “international activities” are eligible to international ruling. The
provision of 23 July 2004 specifies art. 1 lett. a) that company with international activities means:
any enterprise resident in the territory of the country, qualifiable as such in accordance with
regulations in force about taxes on incomes, which as an alternative or in conjunction:
- is, as regards to non-resident companies, in one or more of the conditions indicated in Art.110,
paragraph 7 of the CITA about transfer prices;
- which patrimony, fund or capital is participated by non-resident subjects or participates in the
patrimony of non-resident subjects;
- has given to, or received by, non-resident subjects, dividends, interests or royalties;
or any non-resident enterprise executing its activity in the country’s territory through a
permanent establishment, qualifiable as such in accordance with provisions in force about taxes on
incomes.
The Decree 269/03 establishes that such procedure can be activated “with main reference” to
regulations:
- of the transfer prices;
- of the interests;
- of the dividends;
- of the royalties.
The above list is only illustrative and not absolute; this means that the ruling can be activated
for all the troubles regarding the relationships that the national company has abroad.
In accordance with Art.2 of the provision of the Director of Collecting Agency, the ruling
procedure starts when the taxpayer sends the application to the competent Office of Milan or of Rome,
via registered letter with return receipt.
The ruling procedure must be terminated within 180 days as per the application receiving;
however, in case the completing of the procedure requires the activation of international means of
cooperation at the Tax Administrations abroad, the provision, previously mentioned, foresees that such
term is postponed for a period of time necessary to obtain the necessary information. However, the
extension of the term risks to prolong in a unpredictable and undefined way the time of the procedure,
which must be, for the nature of the subject, rapid and simple.
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11. THE CRIMINAL ASPECTS OF THE TRANSFER PRICING
Before the reform applied by Decree 74/2000, currently in force, estimative evaluations were
not liable to punishment, as the regulation mentioned material facts, in this way excluding the criminal
relevance of all matters regarding values, which include those on transfer pricing.
On this subject the following provisions of Decree 74/2000 must be highlighted:
- art.4, which makes liable to punishment the false declaration, with no fraud characteristics;
- art.7, which punishes estimative declarations considered untruthful, over the threshold of 10% of
divergence, except for indication in balance sheet of “principles actually applied”;
- art.16, which states that the behaviour of the taxpayer complying with the advice released by the
anti-avoidance Committee only on some subject matters, which do not include the transfer pricing,
are not punishable.
Obviously, a possible criminal proceeding can arise as a consequence of a tax verification of the
Revenue Guard Corps or of the financial Offices, with subsequent complaint to the State Attorney, or
autonomously by this, by prosecution ex office or by anyone’s signalling. The Public Attorney, these
being technical matters, usually appoints his trusted consultant which conclusions can diverge from
those of the enterprise.
The new regulation on administrative sanctions has deeply modified the extent of the
responsibility of corporate bodies, as well as that of legal and tax consultants. The problem of verifying
if, and within what limits, such subjects can incur in responsibilities for the execution of transfer pricing
operations which may lead to the infringement of non- criminal tax provisions arises.
The Decree 472/1997, which reforms the administrative sanctions, applicable to tax offences, is
very interesting mainly as it introduces a set of criminal principles not considered previously, such as:
- principle of legality;
- principle of imputability;
- principle of guilt.
In the current system the subject incurring in tax infringement or participating in the tax
infringement is personally responsible, differently from the previous regulation which established that
the responsibility lead in the company, with possible condemnation of the legal representative.
The regulation also foresees the obligation of the company to pay an amount of money equal to
that sanctioned to the material author of the infringement. Furthermore the regulation foresees a right
for recovery by the company towards the material author of the infringement.
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With regards to transfer pricing operations possibly carried out, the administrators will be
responsible for them if such operations have been executed with the only purpose of evading the tax
provisions. The responsibility of such subjects also comes from the obligations the law assigns to them,
i.e. the obligation to manage the company so that shareholders, corporate creditors and third parties are
not damaged.
With regards to auditors, i.e. the body controlling capital companies, these have the obligation
to control company’s administration and to certify the regular management of the corporate
accounting; therefore these are responsible if they have not carried out such task with the necessary
care.
With regards to tax consultants, the sanction can be imposed to them only in case of serious
fault. The following responsibilities types can be assumed:
- opinion pro veritate: in case the technical suggestions or the establishment of non correct principles
for the determination of transfer prices are directly ascribable to the opinion expressed by the
consultant.
- arrangement of the income tax return: applicable only in case the consultant is not only the material
author of the declaration, but also the consultant totally aware of the examined trouble.
12. FORMULARY APPORTIONMENT AND SEPARATE ENTITY ACCOUNTING
The states of the United States have being employing FA for a long time, and the European
Commission22 recently raised the possibility of using FA within the European Union.
The problems of SA/ALP that FA aim at solving are as follows:
- economic interdependence between related entities can be difficult to reconcile with the basic
assumptions underlying SA/ALP;
- arm’s length prices for many transactions between related entities may not exist because there are
no comparable transaction with unrelated parties, for example about intangible assets such as
intellectual property;
22 See Commission of the European Communities, Report of the Committee of Independent Experts on Company Taxation, Luxemburg 1992
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- transfer prices for transactions between related entities, including finance charges and payments for
the use of intangible assets, may be manipulated to shift income to low-tax jurisdictions.
The formula apportionment is used to divide the net income of a corporation, or a group of
related corporations, doing business in more than one country among the countries where the
corporation, or group, operates.
We have to consider that FA is not lacking in problems:
- it does not attempt to determine precisely where income originates; it uses a formula to attribute
income to various jurisdictions; the result can be somewhat arbitrary and unreasonable;
- it has no clear theoretical foundation and is arbitrary.
There are also several political and administrative problems by shifting to the new system based
on FA from the one based on SA/ALP. Some countries may be reluctant to abandon the old system,
but if the shift is not universal, the result would be gaps in the tax base and it would create a system
more complicated than the old one.
The increased economic integration of the European Union has generated interest in replacing
SA/ALP with FA for the division of income derived from operations within the EU. In 2001 the
European Commission offered two possibilities for discussion.
HOME STATE TAXATION: under HST, each corporate group operating in the EU could, at
its option, be taxed by the participating Member States under the tax rules of the EU Member State
where the parent has its headquarters. The tax systems of the various Member States would continue to
be effective for corporate members of groups that do not opt for HST.
COMMON CONSOLIDATED BASE TAXATION: CCTB would also be optional for
corporate groups and for Member States. Under CCTB, corporate groups operating in the EU could
choose to be subject to tax based on a common tax base in the Member State belonging to the system.
Corporate members of groups that did not choose this option would continue to be taxed under the
tax laws of the various Member States. Groups opting for CCTB would use a formula, yet to be
specified, to apportion their income among the Member States.
There would be only one set of tax rules for the whole EU. There is a suggestion that the 15 tax
systems might evolve toward greater uniformity, based on CCTB.
Concluding, we note that the FA system does not solve the problems that motivate the
European Commission to make a proposal for harmonizing EU company taxation based on CCTB and
FA.
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13. TAX COMPETITION:
The GATT, General Agreement on Tariffs and Trade, in its first release, included a provision for
subsidies but its content was quite generic: it only foreseen a set of obligations purely instrumental to
contrast the assignment of subsidies and obligations of information exchange. In 1995 a new release of
the agreement introduces some “further provisions relevant to the export subsidies” which prohibit the
Members from assigning subsidies for the export of a product from which a sale price lower than that
applied in the internal market could derive. With regards to contrast of public subsidies, more incisive is
the Agreements on Subsidies and Countervailing Measures, SMC, finalized in 1994 and attached to the
constitutive Agreement of WTO. To be noticed, in any case, that the provisions included in such
agreement do not replace those included in the GATT, but are applied in conjunction.
In accordance with SMC regulation, a subsidy is present when a financial contribution of public
origin and such contribution gives a benefit to the beneficiary subjects.
With regards to the prohibited subsidies, the SMC Agreement establishes that the Members of
WTO cannot assign, for no reason, subsidies qualified by export results or by the preferential use of
national goods instead of imported products.
14. HARMFUL TAX COMPETITION
The regulation of the SMC Agreement can become considerable also for contrasting the
harmful tax competition, which has been, and still is, object of contrast at a EC level, but also within
the OCSE environment.
With regards to this issue, the systems aiming at attracting foreign investments, applied by extra-
community countries, could be significant. These are favourable tax regulations applied with the
objective of attracting investments from foreign, non-resident, subjects; therefore they generate unfair
competition scenarios. The aforesaid can be included in the range protected by the SMC Agreement
when such regulations aim at stimulating the production and exchange of goods, as usually they are
referred to as measures qualifiable as export subsidies.
The aforesaid leads to the deduction that the SMC Agreement could be a useful supporting
instrument to assign an even more incisive aspect to the contrasting operation of the harmful tax
competition already started, as we are aware, in OCSE context.
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It’s appropriate to underline that among the types of harmful tax competition, those that
diverge from the arm’s length principle are included. Reference is made to periods second, third and
fourth of note 59 of SMC Agreement’s Attachment; in particular at the second period the arm’s length
principle is reaffirmed – prices of goods object of a transaction between export companies and foreign
buyers should correspond to prices applied between independent enterprises. In the cases in which a
significant saving on direct taxes in export operations occurs, the Members call for instruments
foreseen by the bilateral conventions on the fiscal matter or for other mechanisms foreseen in the
international scenario23.
Such regulations could become a solid base to confirm the importance of the arm’s length
principle on a worldwide basis and to create a conformity obligation for all countries that at the present
time still have not adjusted their tax systems.
23 Cfr. footnote 59 lett. e “ The Members reaffirm the principle that prices for goods in transactions between exporting enterprises and foreign buyers under their or under the same control should for tax purposes the prices which would be charged between independent enterprises acting at arm’s length.(…). In such circumstances the Members shall normally attempt to resolve their differences using the facilities of existing bilateral tax treaties or other specific international mechanisms…”.
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BIBLIOGRAPHY
Ballancin, La disciplina italiana del Transfer Pricing in Rassegna tributaria, 2006, n. 6
Bierman H., Pricing Intecompany Transfers in The Accounting Review, 1959, n. 3, vol. 34
Chiesa G.; Cottani G., Supreme Court Decision on Transfer Pricing: Burden of Proof, Anti Avoidance
Interpretation and Abuse of Law Principle in International Transfer Pricing Journal, 2007
Cook P. W., Decentralisation in the Transfer Pricing Program in The Journal of Business
Crovato F. Passeri I., Il Transfer Pricing sui Beni Materiali in Corriere tributario, 1997, n. 48
Fuselli A., Transfer Pricing. I prezzi di trasferimento nelle operazioni internazionali: disciplina fiscale
nazionale, le nuove direttive OCSE, i principi vigenti nei maggiori paesi industrializzati in Il Sole 24 Ore, 2000
Hellerstein W.; Mc Lure C., Lost in Translation: Contextual Considerations in Evaluating the Relevance of
US Experience for the European Commission’s Company Taxation Proposal in International Bureau of Fiscal
Documentation, 2004
Kluver, AAVV Tax Treatment of Cost Contribution Arrangements, 1991
Maisto G., La qualificazione ai fini delle imposte sui redditi delle operazioni di fusione effettuate all’estero tra
soggetti non residenti in Rivista di Diritto Privato, 1985
Maisto G., The Italian approach to cost-contribution arrangements and possibile discrepancies with the US
White Paper on Transfer Pricing in Intertax, 1992
65
Maisto G., La disciplina del prezzo di trasferimento ed il regime impositivo delle royalties in Quaderni di
Rassegna tributaria, 1968
Marini G., In arrivo per le multinazionali ed il Fisco il nuovo rapporto OCSE sul Transfer Pricing in
Rassegna tributaria, 1995, n. 11, p. 1795
Mayr S., Rapporti internazionali e Fisco: Beni Immateriali e Servizi nel nuovo Rapporto OCSE sui prezzi di
trasferimento in Corriere tributario, 1996, n. 43
Mayr S.; Fort G., Normativa sul Transfer Pricing e utilizzazione dei nomi o marchi da parte dei distributori
in Corriere tributario, 2000, n. 5
Mayr S.; Fort G., I Cost Contribution Agreements: un’analisi comparativa in Corriere tributario, 2000, n.
40
Mayr S., In tema di valore normale nella cessione di beni ad una trading estera in Bollettino tributario, 1996
Mc Lure C., Replacing Separate Entità Accounting and the Arm’s Length Principle with Formulary
Apportionment in International Bureau of Fiscal Documentation, 2002
Persiani A., Organizzazione Mondiale del Commercio, disciplina in materia di sovvenzioni ed imposizione
diretta: alcune riflessioni in Diritto e Pratica tributaria, 2007, n. 2
Pisani M., I profili penali del Transfer Pricing in Corriere tributario, 2002, n. 47
Tabelloni G., Gli aspetti fiscali nei trasferimenti di tecnologie e di marchi in Diritto e Pratica tributaria,
1985
66
Uckmar V., AAVV Diritto tributario internazionale
Valente P., Convenzioni internazionali contro le doppie imposizioni, Ipsoa 2003
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EUCOTAX Wintercourse 2008
Budapest
Università LUISS – “Guido Carli” – Roma
Facoltà di Giurisprudenza
Cattedra di Diritto Tributario dell’Impresa
Cattedra di Diritto Tributario Internazionale e Comunitario
TAX PROCEDURES
Francesco Seccia
Matr. 063893
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1. Personal Income Tax Return
1.1. Ratio. Legal Nature.
Income tax return, according to traditional doctrine, is the fundamental act of collaboration
between the taxpayer and the tax office.24 With the income tax return, the taxpayer brings awareness to
the taxing body the qualitative and quantitative characteristics of the premise, for it resolves with the
indication of a taxable base and at times of the consequent tax.
The problem with the legal nature of the tax return has been debated for a long time in
doctrine. Over time, there is an agreement with the belief that the tax return is founded on a declaration
of knowledge.25 The effects of the tax return directly derived from the law, which considers it an act,
and result from the compliance or less of the actual cases with the legal cases, and these effects do not
derive from the will of the declaring individual which do not consider it as it is26. The tax return, within
the normal practice of the cases, is followed neither by an investigation notice nor by a preliminary
investigation aimed at the verification of completeness and fidelity, but constitutes the act intended to
complete the implementing scheme of the tax levy.27
1.2. Filing a Tax Return
Tax law deals with the administrative process to measure economic capacity, thus, according to
art.1 Decree 1998 n.322, the tax returns must be filed on forms approved by a provision published in
the Official Gazette, and otherwise it shall not be considered valid. The same rules are observed in
order to streamline the function of the collection and ordinance of the data declared in the computer
system of the Financial Administration: therefore, the uniformity of the forms is necessary. To make
the relative data immediately useable, the tax returns could be electronically transferred to the Revenue
Agency.28 The intermediaries qualified in the data transmission of the tax return (credit bureaus,
chartered accountants, general accountants and other professionals, associations, and tax assistance
1 A. MICHELI, G.. TREMONTI, Obbligazioni (dir. trib.), in Enc. del dir., Milano, 1979, vol. XXIX 25 A. MICHELI, Corso di diritto tributario, Milano,1989, pp. 175-176 26 A. FANTOZZI, Il diritto tributario, Torino, 2003, pp. 382 and following. 27 G. FALSITTA, Manuale di diritto tributario, Padova, 2005, pag. 333.
69
centres) must acquire and conserve a copy of the tax return signed by the taxpayer and they must
forward an electronic copy to the Financial Administration. These very subjects issue the tax return
submission certificate to the taxpayer. The Financial Administration therefore, will only receive an
electronic document with the attached identification code of the professional. The electronic
submission must take place by July 31st of the following year29.
1.3.Amendability
In case of clerical error or in case of a calculation error emerging from the tax return, the
Financial Administration has ex-officio the power and obligation to correct and eventually reimburse
the overpaid taxes (art. 36 bis Decree no 600/73., art. 38 paragraph 5 Decree no. 602/1973); and to
solicit the reimbursement , the person concerned can file a motion for it. Instead, as far as errors in
legal evaluation are concerned (including non-taxable or absent income, mistaken income
classification)it is valid the general law set by art. 21, second paragraph, Legislative Decree no.
546/1992, according to which the reimbursement must be requested within two years of the payment
with an appropriate application submitted to the qualified Tax Office. The institution of the tax return
amendability has found an explicit regulation in the positive law in art.2 paragraph 8 and paragraph 8
bis.
According to paragraph 8 bis of the mentioned article 2, in case the amendment is in favour of
the taxpayer (e.g. to correct the indication of an higher income, debt or of a minor credit) it is necessary
to submit the additional form by the end of the submission of the tax return of the subsequent year.30
Based on article 2 paragraph 8, in case the correction is in favour of the Revenue Agency (e.g.
considering income not declared in the previous tax return or lower income, debt or higher credit), the
submission of the additional form is required:
By the end of the submission of the tax return of the subsequent year in case an appeal for a
“voluntary correction” is desired; By December 31, of the fourth year following the submission of the
28 G. FALSITTA, Manuale di diritto tributario, cit., p. 328. 29 R. LUPI, La funzione della dichiarazione e le sue modalità di presentazione, in il Diritto, Enciclopedia giuridica del Sole 24 ore, Bergamo, 2007, vol.5, p 54, P.RUSSO, Manuale di Diritto Tributario, Milano, 2002, pp. 256-258. 30 G. FALSITTA, Manuale di diritto tributario, cit., pp. 330-338.
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tax return in case error or omission constitutes a higher tax debt: the sanctions will be those ordinary in
full extent (i.e. voluntary correction is not possible). 31
1.4. “Voluntary correction”
In accordance with the law regarding the so called “voluntary correction” (Art. 13 Legislative
Decree 472 of December 18th 1997) it is possible to regulate, within precise time limits and benefiting
the reduction of administrative sanctions, the omissions and mistakes of the tax return. This voluntary
correction can be attained by all the taxpayers (natural persons, juridical persons, withholding agents),
residents and non-residents.32
The law set a series of wide-spread expiration dates for regularization, which have as maximum
limit the term of submission of tax return of the second year following that of the regularization. This
term has been recently extended.
The most high sanction of pecuniary punishment is 1/5 of the minimum provided for the
irregularity of the return (omission, infidelity). However, the sanction is increased of the due interests
on arrears which have to be calculated at the legal rate with day-by-day maturation. The taxpayer can
perform the “voluntary correction” only provided that there are not verifications or inspections
underway, that the violation has not already been certified and that invitations or requests from the
offices have not arrived through a notification. As well, the correction has to be increased with respect
to the original return, i.e. it must determine the highlighting of a higher taxable income according to the
income taxes. 33
1.5. Non-residents
In accordance with the income taxes we consider “residents” those who are registered in the
Registrars Office of the resident population during the most part of the tax period, i.e. 183 days (184
during leap years), and which, according to the Civil Code, have their domicile (main site of affairs and
31 R. LUPI, La modifica della dichiarazione del contribuente, anche a proprio favore, in il Diritto, Enciclopedia giuridca del Sole 24 ore, cit. vol 5 , pp.57-60 32 Cfr. AGENZIA DELLE ENTRATE: La dichiarazione dei redditi dei residenti all’estero, Giugno 2007, p.28. 33 G. FALSITTA, Manuale di diritto tribuatrio, cit, pp. 337-338.
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interests) or their residence (fixed residence) on Italian territory. Therefore, those who do not fulfil
these prequisites are not considered residents. With regards to the juridical persons, in accordance with
art. 5 paragraph 3 letter d) T.U.I.R., we consider those societies and associations residents who during
the most part of the tax period have their registered office, administration office and main object on
Italian territory.34 The non-residents who have earned incomes or own goods in Italy are bound to pay
taxes to the Italian State, except for special cases provided by potential agreements between the Italian
State and that of residence, in order to avoid double taxations. All Italian citizens who reside abroad for
more than one year must make a request for the cancellation from the Registrars Office of the resident
population to the Municipality of origin, and consequently the transfer (A.I.R.E.) of the Italian
Municipality of last residence before expatriation within 3 months of their arrival in the foreign country
(law n°470/88), with the exception of temporary transfers, for a period not longer than one year, and
government employees sent abroad for service. However, we consider “residents”, unless otherwise
stated, the Italian citizens removed from the Registrars Offices of the resident population and
emigrated to States and territories with a privileged tax regime, identified by a Decree of the Minister of
Finances May 4th 1999. These class of citizens, to be actual residents abroad, must demonstrate that
they do not have a fixed address, nor the complex of relations concerning business affairs and
economic, domestic, social and moral interests in Italy.35
1.6. Filing the Individual Income tax return by non-residents
Anyone who has taxable incomes earned in Italy, included in those indicated in the article 23
T.U.I.R., even if he is resident abroad, he is bound to declare them through a form called “Modello
Unico”.
In order to avoid double taxations, both Italian law and treaties provide that the enterprise's
income achieved in the national territory by non-resident taxpayers is taxable in Italy only if it is
possible to assign it to a stable organization located in Italy, considering “stable” one with a directive
headquarter, a branch office, an office, a laboratory etc..36
The non-resident taxpayers who are not able to submit the return in Italy, can give it to the Post
Offices, to particular Banks, to the Revenue Agency and the authorized intermediaries and
34 L. TOSI - R. BAGGIO, Lineamenti di diritto tributario internazionale, Padova,2002, p. 36 35 AGENZIA DELLE ENTRATE, La dichiarazione dei redditi, cit., p. 2.
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professionals. In any case, the non-resident taxpayers have the opportunity to consign their Income
Tax Return abroad, sending it through certified mail or equivalent means, in which the postage date is
clear. The return can be directly submitted through Internet.37
The terms concerning the payment of taxes deriving from individual income have been
modified during the year 2007. All full payments resulting from the income tax return, must be settled
by June 16th, or by July 16th with a price increase of 0.40%. To pay taxes abroad, the most comfortable
way is to settle the payment through the F24 on-line electronic service. In order to perform this
operation it is necessary to own a pin code and a current account in one of the banks associated with
the Revenue Agency. Also, the non-resident taxpayers have the possibility to settle the taxes in any
bank of their city of residence, by transfer in Euro to a national Bank which has its main office in Italy,
including the declaring individual’s personal data, tax code, residence abroad, domicile in Italy, the
reason for payment and the referred year.38
2. Tax Investigation
2.1. Introduction to the Investigation
The fiscal reform of the seventies introduced the general duty to file a return for all the main
taxes in our tax system. Thus, the Italian tax system is based on the mandatory but voluntary
compliance by the taxpayer, which consists of the submission of the return. The tax compliance is
settled through this return, submitted by the taxpayer, and it is composed of three basic elements: the
abstract legal paradigm, whose actual fulfilment determines the tax presupposition (e.g. the possession
of certain income), the taxable base, the tax rate. The compliance represents the ensemble of the
activities operated by the Financial Administration in order to control the right compliance of the tax
obligation by the taxpayer. This control has a fundamental relevance in the Italian legal order, for it
allows the verification of the respect of the constitutional principle of contributory capacity.39
36 AGENZIA DELLE ENTRATE, La dichiarazione dei redditi, cit. pp.2-3 37 AGENZIA DELLE ENTRATE, La dichiarazione dei redditi, cit. p. 6 38 AGENZIA DELLE ENTRATE, La dichiarazione dei redditi, cit. pp. 24-25. 39 The Article 53 of the Italian Constitution ordains that “Everyone is bound to participate to the public expenses in accordance with their contributory capacity. The tax system is shaped upon progressive criterions”. Thus, the contributory capacity is the availability of means that are necessary to face the withdrawal, i.e. the capacity to contribute.
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With the word “investigation” we mean the ensemble of acts, functionally linked together,
whose function is to verify the right fulfilment of the tax compliance. In this sense, (i.e. as a series of
acts functionally linked in order to attain an ultimate goal), we speak of administrative verifying
procedure. The last moment of this procedure is the emanation of a formal act which notifies the
taxpayer of the investigation result. There are in doctrine two different schools of thought in the matter
of administrative investigation procedure: the first, minority (Ingrosso, Berliri, Allorio), which claims it
has a constitutional nature, for it's possible to consider the tax compliance existing only when the
investigation phase is over; the second, prevailing (Giannini, Pugliese, Tesoro, Vanoni) the so called
“declarative”, which claims that the procedure has a declarative nature, because the tax compliance has,
since the time of the declaration, all the elements necessary to be fulfilled, while the following
investigation phase has the mere purpose to verify its right determination and fulfilment.40
Between the several arguments which confirm the declarative nature of the procedure, we
remember the fact that Tax Office inspections are made mainly by sampling methods, and not over the
whole financial world of the taxpayers.
The administrative tax procedure is composed of different stages. The preparatory stage,
preliminary to the emanation of the final act of investigation, is constituted by two fundamental
moments: the initiative, which usually coincides with the submission of the return, but it can be made
also by the Financial Administration Office (e.g. in case of omission), and the preliminary investigation,
which aims at the collection of data, information and documents that, together with the analysis of
facts and circumstances, allow for the control of the preciseness of the tax return and the determination
of the actual contributory capacity manifested by the taxpayer. Instead, the final phase consists of the
emanation of the administrative act with the results of the proceedings and its following notification to
the taxpayer. Between these two basic stages, we find a third which has the character of a authentic
sub-procedure of investigation: the settlement. This has the sole aim of attaining the recognition of the
taxpayer's debt, depending on how much he has declared, without doing any investigation and bringing
about changes and/or integrations upon the original return, according to a simple mathematical
calculation. (Cfr. Normative Sources) 41
40 A. FANTOZZI, Il Diritto tributario, cit., pp. 244-245 41 The verification regarding the income tax is basically regulated by the Decree of The President of Republic of September 29th 1973, n. 600. In particular, by the IV title, intitled “verification and controls”, articles from 31 to 45.In particular, by the IV title, entitled “verification and collection”, articles from 51 to 66-bis.
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2.2. Tax settlement and formal control of the declarations
2.2.1. Tax settlement
They are preliminary activities compared with the real investigation activity. Through the
settlement of the due taxes and the formal inspection of the returns, the Tax Office (FISCO) can only
inspect the preciseness of calculations made by the taxpayer and if subtractions, deductions and tax
credit appertain to him, according to the probationary documentation he submitted. The tax settlement,
regulated by article 36-bis of the Decree of The President of Republic 600/73 (Decree of the President
of the Republic) regarding the tax income bis of the Decree of The President of Republic, has been
placed in a new juridical position with the so called “Visco's Reform” (legislative decree 241/97).
Today, the tax settlement is a sub-procedure of investigation, marked by its own functional
autonomy, which distinguishes it from the collection procedures, as from the ordinary administrative
procedure of tax investigation. With regards to the first, in fact, the settlement has preparatory value,
i.e. it permits the Financial Administration to acquire the executive title necessary to restore the right
fulfillment of the tax compliance; regarding the second, instead, it remains preliminary and in any case
is limited to the anomalies which could be noticed ictu oculi in the submitted tax return, in absence of
any legal evaluation, about merit and/or legitimacy. The tax settlement stage, in its renewed legal role,
becomes the first moment of the most complex inspection of the tax returns; a preliminary phase,
achievable on the base of the tax return's results alone, in order to verify the preciseness of the
calculations made by the taxpayer.
The tax settlement must be carried out within the beginning of the period of submission of the
return concerning the following year. It is right to remember that the above mentioned term has,
according to the Court of Cassation, ordering nature, it being the Financial Administration to correct
the return even after its expiry. The settlement activity is performed through automated procedures on
the base of data and information inferable from the submitted returns and of those held by the Tax
Register Office (Anagrafe Tributaria).
The sub-procedure of settlement should be performed by the Financial Administration upon
the data of the submitted returns, using automated procedures. The Financial Administration, through
the settlement procedure, can correct the clerical and calculation errors made by the taxpayer, reduce
the tax deductions mentioned in excess with respect to the one due, reduce the tax credits indicated in
excess of the measure established by law or not due on the bases of the information resulting from the
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return, inspect punctuality and preciseness of the payments. When a result which is different from that
mentioned in the declaration, appears from the automatic inspections, the Financial Administration
communicates this result to the taxpayer, by a specific act commonly called “avviso bonario”.
This communication has a double aim. First, it gives the taxpayer the opportunity to provide
explanations in order to demonstrate data ignored or mis-interpreted by the Financial Administration ;
secondly, it gives the taxpayer the possibility to correct his condition through a streamlined procedure
which also provides for the reduction of the inflicted sanctions. In fact, within 30 days following the
receipt of the communication, the taxpayer can give useful and/or necessary clarifications to correct the
calculation. 42
2.2.2. Formal control of the Declarations
This is the first act of the authentic administrative procedure of investigation. After the
settlement of the tax, according to the resulting data of the return, the Financial Administration
considers what is mentioned in it, beginning from the verification of the probationary documentation
which justify the legitimacy and recognition of the confiscated withholdings, of deductions and
deductibles, of tax subtractions and credits. Unlike the tax settlement which is performed on a central
level, the formal inspection is performed by the peripheral offices of the Financial Administration.
Moreover, while the settlement is a generalized activity, the formal inspection is made by sampling
techniques, on the basis of the selective criterions set by the Minister of Finances, considering also the
operative ability of the peripheral offices. The formal inspection of the return, that does not prejudice
the further investigation activity of the Financial Administration, should be performed by December
31st of the second year following that of the return's submission. Also concerning the above mentioned
term what we said about the settlement of the tax is valid, i.e. the term is considered of ordering nature,
not peremptory. For this reason, its violation doesn't determine the loss of the right in Financial
Administration's charge. Through the formal tax return inspection, the Financial Administration can
totally or partially exclude the detraction of deposit's withholdings, the tax subtractions and deductions
from the income, if they are illegitimate or not supported by the proper documentation, to determine
the legitimate tax credits in accordance with the data of the submitted returns and documentation, to
42 article 2, paragraph 2, Legislative Decree 18/12/1997, n. 462.
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settle the higher due tax on the basis of several declarations, and to correct the clerical and calculation
errors made by the withholding agents.
To perform the formal inspection, the offices can request from the taxpayer (or the withholding
agent) the probationary documentation concerning the data mentioned in the return, or invite the
taxpayer (even by telephone or e-mail) to provide clarifications regarding the data mentioned in the
return. The result of the formal inspection should be communicated to the taxpayer outlining the
reasons which had determined the correction of the return. In the 30 days following the receipt of the
communication, the taxpayer can give data and information which the office ignored or wrongly
evaluated, or, if he considers those corrections proper, to pay the due amount benefiting of the
decrease to 2/3 of the sanction.43
2.3. The different types of investigation
2.3.1. Attributions and powers of the offices
For the execution of the investigation, the Financial Administration has several attributions and
powers. The local Tax Offices control the returns submitted by the taxpayers and the withholding
agents, detecting their potential omission. They deal with the settlement of the taxes or the higher due
taxes, supervise the compliance of the duties concerning bookkeeping of the entries and IVA
operations and, more generally, of the duties on IVA and direct taxes. They inflict sanctions and
submitt their report to the Judiciary Authority with regards to the violations of penal importance. On
the side of the European Community, they cooperate with the Financial Administration of the other
member-states of the E.U., providing for the exchange of the information that are necessary to assure
the correct investigation of the income and wealth taxes. These attributions are the responsabilities of
the local Office of the district in which the tax domicile of the citizen it is located on the date in which
the return has been submitted (or should be submitted).
43 article 3, Legislative Decree 18/12/1997, n. 462.
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2.3.2. Principle of the so-called “riserva di legge”
The authority of the P.A. to perform checks for fiscal reasons finds the principle source of
legitimation in article 14 of the Constitutional Charter which, after having sanctioned the inviability of
the domicile and the impossibility to carry out inspections, searches, and seizures if not in the cases and
ways stipulated from the law depending on the guarantee prescribed for the protection of personal
liberty of the individual , establishes (paragraph 3) that “the investigations and inspections..with
economic and fiscal purposes are regulated by special laws”. The laws in tax matters, in the discipline of
exercising the abovementioned powers, have introduced a checking system ideally divisible in three
macro-issues:
• Powers that solidify in the direct intervention at the place in which the taxpayer performs their
entrepreneurial or professional activites, or rather at other places thereto mention, also if not
intended to the foretold activity (i.e. at the private residence);
• Powers that allow the person under investigation to forward information requested, documents,
and/or duces tectum for the purpose of supplying useful elements for the purpose of the
investigation in its regards;
• Powers that permit various persons under investigation to forward requests for information,
documents, and/or duces tectum for the purpose of acquiring useful elements for the purpose of
the investigation towards a certain taxpayer.
From the point of view of the place in which the instructive powers of exerted they
differentiate between those carried out in office, at the taxpayer or at the third-party and above all those
data transmissions regarding probes of a banking and financial nature. 44 The financial Offices and the
Finance Guards can proceed to the execution of accesses, inspections, and audits, can invite the
taxpayers, specifying the motive, to present themselves in person to supply personal data and/or
relevant information for the purpose of the investigation or to exhibit or transmit acts or relevant
documents for the purpose of the investigation. Moreover, they can send questionnaires to the
taxpayers to obtain relevant personal data and information of a specific nature for the purpose of the
investigation towards them or towards other taxpayers with which they have had relations and; to
request copies (or extracts) of the documents lodged at the notary and other public officials ; to request
personal data, information, and relative documents from the persons obligated to maintain the
accounts on relations kept with clients, suppliers, self-employment providers nominatively suggested; to
44 G..PEZZUTO, S. SCREPANTI, La Verifica Fiscale, Trento, 2002, p.27
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ask condominium administators for personal data and information regarding the management of the
condominium; to invite every other person to present or transmit proceeding and/or documents ,
fiscally relevant, pertaining to relations held with the taxpayer.45 The invitations and requests, notified
to the taxpayer are to be carried out by a deadline that cannot be less than 15 days or 30 days for the
banking investigations.
2.3.3. Tax Return inspection
The activity is not only conducted on the personal data of the taxpayers, but through selective
criterions set annually by the Ministry of Economy and Finance. The selective criterions system is
governed by Decree of The President of Republic 146/80. Alongside the selective criterions, the
possibility to perform so-called “pro-active” inspections on the part of the local Offices remains, in the
area of constraints posed from their operational capacity, also drawing on the “fiscal danger indices”
contained within the annual planning decrees. Inspections are classified in relation to characterization
criteria of individuals subject to inspection, in “centralized activity”, based on the fixed selective
criterion in the annual planning document and in “pro-active activity”, left at the discretion of the
Offices and founded, mainly, on indices that infer a potential “fiscal danger” of the taxpayer. Checks
and investigation are then conducted by the local Offices of the Revenue Agency, in close collaboration
with the Finance Guards, according to effective administrative criterions, and above all avoiding the
overlapping of the inspections.
A first “technical” classification of inspection distinguishes between:
• Adjustment of the tax returns, when the inspection is performed on tax returns validly
submitted by the taxpayer;
• Investigation ex officio, when the check is carried out towards persons who have omitted
the tax return submission or when the same tax return is considered void.
45 G. .PEZZUTO, S. SCREPANTI, La Verifica Fiscale, cit.,pp.32-35
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2.4. Modalities and Methods of Investigation
The modalities through which the Financial Administration can perform their investigations
are the investigation ex officio and the partial investigation while the types of investigation are generally
distinguished as analytical, inductive, and brief.
Article 43, Decree of The President of Republic 600/73 sets the deadline limitation for the
notification of investigation. The same term coincide with December 31st of the fourth year following
the submission of the tax return. The above-mentioned deadline is prolonged for one year in case of
omitted tax return.46
2.4.1. Partial Investigation
The partial investigation can be carried out towards the ensemble of the taxpayers, even if part
of the doctrine holds that the presence of new data would be the only prerequisite to launch an ulterior
investigation. It pertains to the single types of income and is not based on the committal preliminary
investigation conducted by the Offices, but instead on the signaling of inconsistencies between the
declared income and acquired information or those already in the possession of the Financial
Administration. According to article 41-bis, Decree of The President of Republic 600/73, partial
investigation can in fact be carried out on the basis of:
• Facts come to light during the accesses, inspections, and audits;
• signals issued from the Revenue Agency (Central Administration of Investigation,
Regional Administration, local Offices, other Tax Agencies), from the Finance Guards,
from public administrations and public bodies;
• personal information in the possession of the Tax Registry Department
In case the above-mentioned data, signals, or personal information result in the existence of:
• non-declared income;
• higher amount of income partially declared;
• deductions, exemptions, and tax breaks not totally or partially owed;
• non-paid taxes or higher taxes (except article 36-bis and 36-ter);
46 Law 289/2002 (article 10), in discipline of “condone” tax, has established the deadline extension of two years for investigation towards taxpayers who have not adhered to any procedure of facilitated definition.
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The Office can proceed to a limited investigation to the aforementioned entries. Partial
investigation does not entail bias for ulterior investigative actions. This characteristic distinguishes the
partial investigation from the additional investigation, which amends an act previously issued and is
considered admissible only when further knowledge of new data unknown at the time of the original
investigation emerges. Partial investigations are therefore established, to a great extent, on
computerized inspections of the data in the possession of the Tax Registry Department, and on a lesser
extent , on other kinds of signals issued by various Organizations and bodies (before all the Finance
Guards).47
2.4.2. Ex-Officio Method
The method of the so-called “ ex-officio investigation” is accepted only if the tax return has
not been submitted or rather if, even submitted, it is considered void. Office Investigation ex-officio
regards the ensemble of the taxpayers, including the obligatory contents to the estate of the entries. The
Office, in this case, determines the total income attributable to the taxpayer and, only as much as
possible, attributes the amount to the single types of income. The determination of income is carried
out on the basis of personal information and records collected or come to the knowledge of the Office,
with the power to also utilize presumptions void of prerequisites of gravity, precision, and concordance
and namely of the so called “ultra simple presumptions”.
In case of a submitted void tax return, the Office can choose not to accept the results of the tax
return, as well as ignore the bookkeeping entries of the taxpayer, even if properly maintained. The
office investigation corresponds, in fact, with the inductive investigation; its use is justified from the
absence or the voidance of the tax return, which make the implementation of the analytical
investigation impossible for the Office. The only exception is founded on land income that in any
event, is settled depending on the land registry investigations.48
47 G. FALSITTA, Manuale di Diritto Tributario, cit., pp.367-369 48 A. FANTOZZI, Il Diritto Tributario, cit., p. 464
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2.4.3. The Analytical Method
The analytical method regards the various types of income provided from article 6 of T.U.I.R.
(Decree of The President of Republic 917/86), individually considered , and with peculiarity dedicated
to the taxpayers that determine income on the basis of bookkeeping entries. In particular, reference is
made to business income, self-employment income, employment income, capital income, land income,
and other types of income. It represents the ordinary method of the reconstruction of the taxpayer’s
fiscal position in so far as establishing the procedure that pays better to the quantification of the actual
income with respect to the constitutional principal of contributory capacity, as it is the method with the
minor degree possible of approximation. The analytical method is applicable to the particulars of the
taxpayers, whatever type of income it is that they possess. For the taxpayers not subject to the
obligation of keeping bookkeeping entries the analytical method is disciplined from the first three
paragraphs of article 38 of Decree of The President of Republic 600/73. In particular, the amendment
is carried out when the total declared income results inferior to the actual one and when they are not
entitled to all or part of the deduction and the deduction indicated in the tax return. Towards persons
obligated to keep bookkeeping entries, indicated in article 2214cc (commercial entrepreneurs and
commercial businesses) instead, the analytical investigation is disciplined by article 39, paragraph 1,
Decree of The President of Republic 600/73. It assumes the denomination of “analytical-accounting
investigation” and is carried out when:
• the data indicated in the tax return do not adhere with those indicated in the balance
sheet and in “profit and loss accountability”;
• The rules on business income (or professional) have not been correctly applied;
• the incompleteness, falsity, or inaccuracy of the data indicated in the tax returns (or the
relative attachments) results certainty and directly from records, questionnaires, other
documents or registers exhibited or transmitted, emergend from audits, or from other acts or
documents in the possession of the Office;
• the incompleteness, falsity, or inaccuracy of the data indicated in the tax returns (or the relative
attachments) results from the inspection of the account books, from audits, or from checks of
the completeness, accuracy and truth of the account writings based on invoices and other
company's acts and documents, or from data collected by the Office while exercising its
instructive powers.
In this particular last case whereof letter d of the first paragraph of article 39, Decree of The
President of Republic 600/73, the existence of non-declared activity or the inexistence declared
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liabilities can be inferred also on the basis of simple presumptions, provided that they are serious,
precise and in agreement. In this case, we talk about an analytical-inductive investigation, which is
placed on an intermediate position between analytical and inductive investigation, and is characterized
by an appropriate specification regarding:
a. elements of practice, for the necessity that the incompleteness, falsity, and inaccuracy of the
data indicated in the tax return and the relative attachments result from the inspection of the
bookkeeping entries, from the other audits carried out, or from inspection of accounting and
the relative evidential documents, or furthermore from the data collected from the Office
while exercising their instructive powers;
b. evidence, in so far as the test of disloyalty of the tax return does not demonstrate in a clear
and defined way from the docuemtns checked but must be provided by the Financial
Administration in a presumptive way, reaching i.e. the unknown fact (evasion) starting from
a known fact.
The analytical-inductive investigation is characterized from the reconstruction of the income
level in relation to single elements, also through signs which go beyond the accounting documentation
(precisely the serious, precise, and agreed presumptions), without the necessity of declaring the
bookkeeping unreliable. The Office, consequently, can resort to this method of investigation also in the
presence of properly maintained account. The analytical-inductive investigation , for its peculiarity,
differentiates from the other methods of investigation. Within the analytical investigation, the income
reconstruction is carried out in relation to individual assets, many only on the basis of precise and typed
documental references (the bookkeeping entries and the justification documents), while within the
inductive investigation the reconstruction of the income level is carried out as a whole and based on
less strong signs and constrictions (very simple presumptions).
2.4.4. Inductive Method
The analytical method, like the analytical-inductive method, is founded on the formal reliability
and on the substantial documentation of the bookkeeping entries, as well as on the validity of the
submitted tax return. In doctrine, we speak of analytical investigation because it is related to disputed
single elemenats; analytical investigation is also defined as “bookkeeping” because it does not deny the
accounting as a whole (or the tax return), but in certain aspects it corrects; it does not dismantle the
accounting system but rather it certifies the formal reliability as means of proving. In other words, the
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analytical investigation solidifies in the requalification of the accounting findings on the basis of the
right reasons, for example the violation of fundamental laws and de facto situations.49
The inductive method is useful only towards persons obligated to maintain the bookkeeping. It
is established on the overtaking of the accounting findings and of the tax return, much to be also
defined, in doctrine, “extra-accounting investigation”.
The doctrine always deems that the “inductive” term is intended in the sense of “regulated from
presumption”, in so far as it is founded on assessments and is essentially based on exterior
characteristics of the company and on the normal conditions of exercise (business volume, types of
clientele, location, etc.). The ratio of a power in the hands of the Financial Administration that strong
resides in the necessity to protect the internal revenue, also compressing the rights of the taxpayer , up
against the conduct that does not observe the practice of the fundamental obligations in the matter of
maintaining the accounts and the income tax return. The inductive investigation, ascribing a privelged
position to the Financial Administration towards the taxpayer, is considered an exception to the general
rule on the matter of investigation, justified from the appeal of stipulated elements and conditions.
Nevertheless, the appeal of the inductive investigation remains a power at the disposition of the Office
and of certainly no obligation. The inductive investigation is regulated by article 39 second paragraph,
Decree of The President of Republic 600/73, and can occur only in specific and determined cases, all
characterized by the common element of the unreliability of the accounting writings and/or the return.
The conditions which authorize the appeal to the inductive investigation occur when:
A. the company income was not mentioned in the return.
B. the Balance with profits and losses has not been added to the return.50
C. it results, from the inspection's verbal, that the taxpayer didn't keep or subtracted from check,
totally or partially, the accounting books, or these are not available for causes of force majeur
(e.g. Destruction because of blaze, with the failure of the reconstruction of the ledger.
D. the verified omissions, falsities and errors trough inspection or audit, or the formal
irregularities, are so serious, numerous and continous to make unreliable the writings in general,
lacking of the guarantees proper of systematic accounting (classic ipotesys of the so called
unreliable accounting)
49 G. PEZZUTO, S. SCREPANTI, La Verifica Fiscale, cit., p. 108, P. RUSSO, Manuale di Diritto Tributario, cit., p. 299 50 This letter has been annulled by article 8,comma 1, lett c) del Legislative Decree 241/97
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D-bis. The taxpayer did not answer to the requests and/or the questionnaires of the Office (so
called investigation negligence)
The inductive investigation can occur towards the ensemble of the subjects bound to keep
accounting books, including those who adopt the regime of streamlined accounting and who exercise
arts and professions. The inductive method allows the Office to determine the income of a company or
professional on the basis of collected data and information, with the power to ignore, totally or
partially, the balance results and the accounting books (if they exist), also using presuptions (so called
ultra-easy) without requisites of seriousness, precision and concordance. The above mentioned
presumptions, however, should never materialize in arbitrary, imprecise and contradictory conjectures.
Therefore, the term “inductive” indicates the general nature of the argumentations used to
reconstruct the income, as an alternative to the term “analytical” which indicates, as we said, the
reference to single income elements.51
2.4.5. Method of the so called “brief investigation”
This way of investigation occurs towards the ensemble of the taxpayer. The main characteristic
of this method is the quantification of the income through its use for consumers and investments. The
brief investigation is usually called “redditometro”. It is regulated by article 38, paragraphs from 4 to 7,
Decree of The President of Republic 600/73.
The presumption on which the “redditometro” is founded is the following:
• the availability of goods and/or services, together with the increase of the patrimony, indicates
the existence of an income – and thus of a contributory capacity – higher then that inferable from the
tax return. The certain elements and circumstances of fact are, in accordance with paragraph 4:
a. availability of goods and/or services puntually mentioned by the attached table of the
Ministerial Decree 10/09/1992 (cars, boats and planes).
b. increases of patrimony, like, for example, the purchase or signing of corporate shares and
purchase of estates and companies.
51 G. PEZZUTO, S. SCREPANTI, La Verifica Fiscale, cit., pp. 109-112, G. FALSITTA, Manuale di Diritto Tributario, cit., pp. 361-367,P. RUSSO, Manuale di Diritto Tributario, cit., p. 304
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The use of this way of investigation is advised by the Revenue Agency, particularly towards
those taxpayers who:
• did not submitted the return;
• are involved in crimes of racketerring, usury and recycling;
• probably are owner of incomes through and interposed person.
The investigation through the “redditometro” can occur only when the income briefly
calculated exceeds by a quarter (25%) and for at least 2 year the declared income.
The burden of proof about the non-existence of the presumptively determined income
appartains to the taxpayer.52
2.4.6. Banking Investigations
The Financial Administration can request to the investigated taxpayer to issue a declaration
containing the indication of the nature, number and identification data of the relations had with the
banking system in general (after the authorization of the Regional Revenue Director or the Regional
Commandant of the Finance Guards) and request to the banking system data, information and
documents related to any relation or operation performed, including the given services, with their
customers, and related to the guaranteed given by a third party (after the authorization of the Regional
Revenue Director or the Regional Commandant of the Finance Guards). The “Bersani – Visco”
Decree, of July 2006 (article 37, paragraphs 4 and 5, Legislative Decree 4/7/2006, n. 223, L. 4/8/2006,
n. 248) provided the institution, in the Tax Register Office, of the so called “Register Office of the
Banking Relations”, to which the banking and credit system should submit, through Internet, any
information regarding the relations it had with the customers, yet existing on 01/01/2005. The Tax
Register Office had explained the size of this last laws with the recent Circular 32/E October 19th
2006. For the taxpayer who does not comply with invitations and requests, Art.32 of Decree of The
President of Republic 600/73 provides serious consequences, i.e. the impossibility to use in favor of
himself, during the investigation, information and data not produced, and acts, documents or registers
not exhibited or transmitted, except in case the taxpayer declare and prove, in the introductive act of
the judgment of first degree, his inability to observe because of force majeur, which is not attributable
52 P. RUSSO, Manuale di Diritto Tributario, cit., pp. 301-303
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to him, the experience of the brief investigation of the income and of the inductive investigation of the
income for individual bound to keep the the accounting writings.
The law 311/04 and the Legislative Decree 203/05 extended also to professionals the
presumption that, after an unjustified withdrawal which is not inferable from the accounting books,
there would be rewards and pay-off. This presumption works in case the taxpayer does not mention the
benefiting subject and it does not result from the accounting books.53 Therefore, if the taxpayer
indicates a relative or a friend between the income owners, he carried out his own burden of proof. The
burden of proof appartains now to the Office that, if consider false the circumstance, could invite the
income owner to explain reasons and title of the supply.54
2.5. Introduction on system of presumptions
The presumptions are regulated, in our legal order, by articles 2727 and following of the Civil
Code, which describe them as the consequences that the law or judge infer from a known fact to
reconstruct an ignored fact. The Presumptions which are directly provided by Law are called “legal”.
They are classified as absolute presumptions, also called iuris et de iure, if law do not accept and contrary
proof, and relative presumptions, also called iuris tantum, when law accept a contrary proof. Legal
presumptions are appropriate, in accordance with law provisions, to prove a unknown fact starting
from the known fact. The party in favour of which they are established is therefore dispensed from
giving any proof. The presumptions replaced in the careful evaluation of the judge, instead, are called
simple and are regulated by art 2729c.c... The simple presumption should have requisites of seriousness,
precision and concordance. In the tax right, therefore, another type of presumptions exists, which are
called “very simple”, which could be defined as simple presumptions that do not have requisites of
seriousness, precision and concordance. These presumptions, which are typical of the tax right and are
not regulated by the Civil Code, can be used in case of “extrema ratio”, i.e. only when there is not the
accounting or it is generally unreliable (inductive investigation) or when the tax return has not been
submitted (“ex-officio” investigation). The tax presumptions (or very simple) should observe only the
minimum limitation to be not based on arbitrary, imprecise or contradictory conjectures.
53 D. DEOTTO, Per la presunzione sui prelievi bancari è sufficiente indicare la generalità dei beneficiari, in Corr. Trib., 39/2007, pp3153-3154 54 Sent. 158/07, Commisione tributaria provinciale di Bologna. G. PEZZUTO, S. SCREPANTI, La Verifica Fiscale, cit., p. 106
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2.6. Investigation Notice
The investigation notice is the final act of the administrative tax procedure of investigation. It
is an administrative act, and for this reason it becomes definitive if it would not be challenged in
accordance with the terms set by law. Also, the potential invalidity cannot be decreed ex officio, but
only after a specific exception raised by the taxpayer. The justification is a substantial element,
necessary for the validity of the investigation notice, and it has to be considered on a double profile:
• presumptions of fact, i.e. to reconstruct and establish how the analyzed past events
occurred;
• juridical reasons, i.e. to apply the normative provisions to the reconstructed and determined
events.
The justification duty results from the law which commands the public administration to justify their
own acts that negatively intervene on the legal sphere of the recipient citizen.55
The jurisprudence is divided on the legitimacy of the investigation notices whose justification is
called “per relationem”, i.e. founded on the uncritical remand to the contents of another document which
the taxpayer already knows: some accept the opportunity to justify “per relationem”, others consider
such investigations invalid. The Charter of the Taxpayer intervened on this question, implementing the
duty of adding to the investigation act the document to which it remands “per relationem” (article 7,
first paragraph, L.212/2000).
The principle ratified by the Charter was later introduced in the provisions of law on the
investigation, establishing that “if the justification remands to another act not known nor received by
the taxpayer, it has to be attached to the remanding act, unless this reproduces its essential content”
(article 42, paragraph 2, Decree of The President of Republic 600/73; article 56, paragraph 5, Decree of
The President of Republic 633/72).
The basic constitutional elements of the investigation notice (article 42, second paragraph,
Decree of The President of Republic 600/73 e article 56, Decree of The President of Republic 633/72):
• determined taxable;
• applied rates;
• settled taxes (gross and net of deductions, withholding taxes, tax credit);
• justification according to the presumptions of fact and to the juridical reasons which
determined it;
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• reference to involved single income categories;
• reasons of the failed recognition of deductions and detractions;
• signing of the officer authorized to perform the investigation.
Moreover, it is necessary to declare if the investigation is inductive or brief, and to specifically
mention facts and circumstances that justify its use;
The respect of the above mentioned essential constitutional elements, in particular the duty of
justification, is provided by law, and without it the investigation notice shall not be considered valid
(article 42, paragraph 3, Decree of The President of Republic 600/73; article 56, Decree of The
President of Republic 633/72).
The notification of the investigation notice has to be performed in accordance with the law of
the Code of Civil Procedure, by a notifying municipal messenger working in the Office which issued
the act.
2.7. Assessment by consensus
The administrative nature of tax right does not exclude the possibility of agreements between
tax authority and taxpayer. The offices of Financial Administration can determine the investigation for
the tax on IVA income, with the adhesion of the taxpayer; in this way, a final investigation is carried
out, legally binding even for the Financial Administration, because the challenge by taxpayer and
integrations or modifications by the office are excluded . The legislative decree June 19th 1997 n° 218
article 2, reintroduced in our legal order the institution called “assesment by consensus”. This decree
makes it possible to find agreements in the initial stage of the controversy, before the sentence of the
inferior court.56 To facilitate the achievement of an agreement, a cross-examination is provided between
the tax office and taxpayer, in order to allow the consideration of the taxpayer's arguments. The
initiative can be taken by the office before making tax acts, summoning the taxpayer to appear to
determine with his adhesion the tax periods susceptible of investigation. If the taxpayer has suffered
55 article 3, Law 241/90 on the administrative transparency 56 Cfr R. LUPI, F. CROVATO, Imposizione fiscale e accordi amministrativi, in Il Diritto, Enciclopedia giuridica del Sole 24 ore, cit., vol.1 pp. 95-98 The fiscal reform of the 1973 suppressed the most part of the types of negotiation existing in the legal Italian order, which were defined as “fiscal agreement”. The abolition aims to fight the unlawful agreements between officers and taxpayers, with consequent corruptions phenomena, and to eliminate any margin of evaluation. It determined, therefore, a situation of
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accesses, inspections or verifications, they can request the office to formulate an investigation proposal
to which they could adhere. If an investigation notice, not preceded by an invitation of adhesion, has
been notified to them, they can submit the application for investigation with adhesion. This act has to
be edited in writing, signed by the taxpayer and the head of the office, mentioning elements and
reasons on which it is based. In order to perfect the definition, it is necessary to pay the amount due to
the adhesion within 20 years. In default of it, the ordinary proceeding resumes and the original tax act
looses power.57 As incentive for this institution, it has been established that, regarding the questions
determined through investigation with adhesion, the administrative sanctions shall be reduced to ¼ of
the minimum provided by law. The nature of the investigation with adhesion is debated. The doctrine
proposed several interpretations: some consider it a transaction, for the parties are not in a condition of
parity, or a bilateral non-negotiation act, but the prevailing opinion is that it is a unilateral act of
investigation to which the taxpayer’s adhesion is added, that remains however distinct from it. In this
sense, we remember Giannini's opinion who considers the agreement <<a unilateral act of public
measurement, where the two wills of the office and the taxpayer do not unify in contract, but remain
distinct, the first being the explication of a power, the second the “condicio iuris” for the issue of the
provision.58
2.8 Powers of Offices and of the Finance Guards. Accesses, inspections and verifications
With regards to the powers attributed to the Financial Administration for the tax investigation,
the possibility to perform accesses, inspections and verifications has great importance.59
paralysis, because the fiscal controversies were totally assigned to the judge, debasing the administration role as central body for the implementation of tributes. P.RUSSO, Manuale di diritto tributario, cit., p.322 57 G. FALSITTA, Manuale di dirtto tributario, cit., pp. 353-355 58 F. GALLO, La Natura Giuridca dell’Accertamento con adesione, in Riv. Dir trib., 2002, V ,435 59 Normative references: article 33, Decree of The President of Republic 600/73 (income taxes); article 52, Decree of The President of Republic 633/72 (I.V.A.).Complementary laws: article 12, L. 27/07/2000, n. 212 (Taxpayer's Charter); article 35, L. 07/01/1929, n. 4
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2.8.1 Access
With the word “access” we mean the power to enter a place and stay there, even without or
against the will of the owner, in order to do the operations necessary for the inspection.60 With regards
to the legal qualification, access is a real authoritarian act, for it does not operate as much towards the
individual, but rather towards his own places, and it can be considered as part of the preliminary
investigation stage of administrative proceedings of tax investigation. It forces the taxable subject to
suffer the active presence of the investigating body in the places of pertinence. The access operations,
in accordance with article 12 of the Taxpayer Charter (L.27/7/2000, n. 212), are subjected to certain
bonds for the safeguard of the verified individuals. For this cause, the access operations have to be
performed:
o on the basis of actual needs of investigation and checks on the place;
o during ordinary working hours, except extraordinary and pressing cases properly documented,
in ways which less hinder the taxpayer activity.
There are several types of access, according to the various places, which are different in nature
and function. The enforced law, in order to harmonize the necessity of safeguard of the individual
rights recognized by the Constitution, in particular the prohibition to violate domicile, and by the Law,
for example the right to keep the professional secret, with the collective and income interest to repress
the tax violations, also protected by the Constitution (article 53), provides several decrees of access in
accordance with the nature of the interested place. Article 52 Decree of The President of Republic
633/72, also referred by article 33 Decree of The President of Republic 600/73, distinguishes various
types of access :
1. access in places designed for the exclusive exercise of commercial or agricultural activities;
2. access in places designed for the exclusive exercise of artistic and professional activities;
3. access in places of mixed use for the exercise of economic activities and housing;
4. access in places exclusively designed for housing;
5. access in places different from the previous, not directly having reference to the taxpayer.61
60 G. PEZZUTO, S. SCREPANTI, La Verifica Fiscale, cit., p. 39 61 G. PEZZUTO, S. SCREPANTI, La Verifica Fiscale, cit., p. 41, P. RUSSO, Manuale di Diritto Tributario, cit., p. 299
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2.8.2. Inspection
The inspection can be performed in every space which is closed and delimited with respect to
the external world, at the individual's direct and exclusive disposal, even temporary, and subtracted to
the free entrance of other individuals. This notion is usually considered including, with regards to taxes,
not only of estates and outbuilding, but also of certain personal properties (cars, boats and planes), for
they are spaces subjected to the exclusive domain of a person, of which the free use of other individuals
is denied and can be designed to house working activities. The majority jurisprudence and doctrine
have constantly supported the legitimacy of the access in the above mentioned personal properties only
in case they are functionally linked to the economic activity carried out by the investigated subject. In
order to preserve his rights, there are several degrees of access in accordance with the type of place in
which it is performed. The system of authorization is defined as the following:
1. Places designed for the exclusive exercise of commercial and agricultural activities, in which the
access is allowed after the authorization of the overseer of the proceeding office (Office Head
for the Revenue Agency, Department Head for Finance Guards). The access order has to
mention the names of the officers in charge of carrying it out, the aim and the objective of the
visit and the places in which the activity should be performed. The access can be carried out in
any working hour. The act has to be exclusively aimed at the performance of researches,
documental inspections, verifications and any other probe which is considered useful for the
tax investigation and the repression of violations against financial laws.
2. Places exclusively designed for the exercise of arts and jobs, in which the access is allowed only
after the authorization of the head of the proceeding office. In this case, to preserve the
professional secret, the access can be performed only in the presence of the owner or of a
delegated person. Concerning the nature of this delegation, it should have the requirements of
the special proxy, bestowed in writing and resulting in the verbal process of access and
verification.
3. In places designed for the exercise of economic activities and housing, if access is performed in
places designed in a mixed way for the exercise of commercial activities and housing by the
investigated individual, the authorization system is regulated in function of the prohibition to
violate domicile, stated in article 14 of the Constitution. It follows that, while on one hand it is
not necessary the subsistence of particular presuppositions of legitimacy, being enough that
access would be aimed at the objectives of an ordinary tax inspection, on the other hand the
issuing of a specific and preventive authorization by the Public Prosecutor is ordered, in
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addition to the usual administrative authorization.62 As “housing” we mean the actual center of
the domestic life of the individual, the mere use in this sense not being enough, for occasional
overnight stay or eating meals, in some spaces and rooms of the estate.63 The Jurisprudence has
explained the value of the tax concept of housing over time, as the actual destination of a
certain place for the performance of activities belonging to the personal and private sphere of
the individual and his family.
4. In the places exclusively designed for housing, the access is allowed only after the authorization
of the Public Prosecutor, who can issue it only if there are serious signs of violation of tax laws,
which suggest the necessity to research and acquire a particular documentation (book-keeping
and not) and any other element considered useful to prove the existence of violations. It is,
therefore, an act of extraordinary nature, exclusively aimed at the research of documental
proofs which testify the existence of violations of the tax laws. The law does not explain what
we have to consider “serious clues of violation of the tax laws”. Doctrine and Jurisprudence
think that, with this word, the Legislator indicated all those situations in which, according to the
information that the Financial Administration has, there is the heavy suspiciousness that the
taxpayer made tax violations. The heavy suspiciousness should be supported by circumstances
properly justified and documented. The Legislator, in other terms, wanted to attribute
importance to an ensemble of actual and particularly relevant circumstances, which brings to
consider the existence of the violations well-founded, regardless of the quantitative size of the
evasive phenomenon.64 To perform the access in this case the authorization of the Regional
Director of the Tax Agency or the Regional Head of the Finance Guards is necessary.
5. In other places, which are different from the previous, we have a very sensitive problem when a
verification activity has been stated to research and acquire documentation concerning the
taxpayer in places which belong to other subjects. Apparently, there are no doubts about the
legitimacy of this kind of access.65
62 C. ALBANELLO, Accesso in abitazioni private: Ammissibilità della tutela giurisdizionale della libertà di domicilio.Riv. dir. Trib. 1991, II, pp. 338 and following. 63 Circular 1/98, General Command of the Finance Guards 64 The Finance Guards, regarding this matter, claim that “the faculty of access towards taxpayes who have incomes subjected to personal taxes, can be exercised even if these do not practice entrepreneurial or autonomous work activities, for the remand provided by article 32, paragraph 1, n.1), Decree of The President of Republic 600/73 and by article 52, Decree of The President of Republic 633/72, regards exclusively the way of exercise of the above mentioned faculty of access, and not the specification of the potential passive subjects”. (Circular 1/98) . 65 G. PEZZUTO, S. SCREPANTI, La verifica Fiscale, cit., pp. 41-50
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2.8.3. Research
With “research” we mean the series of activities aimed at the material finding of elements
necessary to perform documental inspections and verifications. These elements are composed,
generally, of account books, registers, writings and documents regarding the investigated individual.
The research is an (autoritativo) act, to be accomplished even against the taxpayer’s will. It is not aimed
at the simple collection of documentation, but the acquisition of all material which the comptroller,
after a brief examination, considers useful to the checks. The research should be performed in the
places in which the access has been authorized (including cars, boats and planes of the investigated
company), and also on means designed to transport goods on behalf of a third party.
In accordance with article 52, paragraph 10, Decree of The President of Republic 633/72, if the
account books and the fiscal documents are kept in different places, the taxpayer has the duty to show
an appropriate certificate with the specific description of the kept books, edited and signed by the
subject who has the documentation. If the certificate is not showed, the condition of the missed exhibit
occurs, with the consequence of the uselessness of the documentation in favour of the taxpayer. The
main consequence of this attitude is the impossibility to use the documentation which was showed in
favour of the taxpayer, not kept or withheld from the check.
The jurisprudence has considered possible the use, in favour of the taxpayer, of the
documentation which was not exhibited because of force majeur, temporary unavailability and other
reasons not depending on the taxpayer’s will .
The Supreme Court, united sections, with the sentence 08/10/1999, n.45 has provided that the
above mentioned consequences occur when we find two elements:
• objective element, which is the missed exhibition;
• subjective element, which is the intention to withhold documents from the inspection.
Also, the Cassation provided that the prohibition to use the non-exhibited documentation in
favor of the taxpayer should operate not only in case of voluntary refusal, characterized by taxpayer's
malice, but also when the investigated subject states to not have the documentation, because of simple
blame or negligence
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2.8.4. Documental Inspection
It is an activity constituted by the analysis of writings, books, registers and other documents
whose institution and keeping are obligatory. It is made through the comparison from the books'
content and that of the other documents found during research and verifications, as extra-account
documentation and the commercial correspondence.
The documental inspection is composed of several stages of check, aimed at the reconstruction
of the taxpayer's fiscal position. The check can be defined as an ensemble of activities oriented to verify
the formal and substantial respect of the tax law.
The documental inspection aims mainly to:
• verify the formal compliance of the taxpayer;
• evaluate the reliability of the overall accounting;
• verify the compliance of the substantial tax laws, i.e. the provisions regarding the
determination of the taxable base, the quantification of taxes and the correct payment of these. The
evaluation on the overall reliability of the accounting has great importance, because, in case the
accounting would be considered unreliable, it is possible to perform an inductive investigation,
regardless of the accounting results and the relative probatory documentation.
2.8.5. Verifications
The verifications consist of objective investigations performed, during the accounting
inspection, through the analysis of the verified management. Their targets are the accounting
documents and writings, and they aim to verify the correspondence between what is declared in the
account books kept by the investigated subject and the actual data which emerge from the
investigation. They could be direct, when the situations on which they are based are verified through
the direct observation of the comptrollers (stock in the store, employees etc.), indirect, when they aim
to reconstruct in presumptive way the actual size of the economic activity checked .
Instead, the audit is an administrative police investigation aimed to prevent, find and repress the
violations of the tax and financial laws, and to qualify and quantify the contributory capacity of the
investigated subject. The audit can be performed towards any natural person, corporation, company or
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body which had performed activities to which the financial or tax laws impose duties or prohibitions
whose violation is sanctioned in an administrative and/or penal way.66
2.9. Rights and guarantees of taxpayer subject to tax audits
(article 12, Law July 27th , 2000, n. 212)
The law July 27th, 2000, n.212, which is usually called “Charter of the Taxpayer Rights”,
regulated the way to exercise the tax audit providing a series of protections and guarantees for the
checked taxpayer. Article 12 of this law deals with this discipline. The paragraph provides that, in a
preliminary way, all the accesses, inspections and verifications in places designed for commercial,
industrial, agricultural, artistic and professional activities should be performed on the basis of actual
needs of probe and check on the place.
The investigative operations must take place, except for pressing and extraordinary well-
documented cases (and specifically reported in the verification minutes of the first day), during the
ordinary working hours and so as not to disturb the performance of the activities as well as the
commercial and professional taxpayer's relations.
Paragraph 2 provides that, when the audit begins, the taxpayer has the right to be informed
about the reasons which justify it and its objective.67 The checked taxpayer, also, should be instructed
about the opportunity to be assisted by a professional enabled to defend before the bodies of the
tributary justice (e.g. by a chartered accountant), and about the rights and duties acknowledged to him
during tax audits. Also this information must result from the reports of the opening operations of the
audit .
66 This definition is not contained in Laws but in the Circular 1/98, 20/10/1998, prot. 360000, issued by the General Command of the Finance Guards and entitled: “Instruction about the audit activities”. G. PEZZUTO, S. SCREPANTI, La Verifica Fiscale, cit., pp. 84-94 67 The Circular n. 250400 17/08/2000 of the General Command of the Finance Guards express, regarding this matter, that the respect of the right of information of the taxpayer should be balanced by the necessity to keep the maximum secret about the investigative activity, in particular for what concerns the safeguard of the Office secret, in order to not compromise the result of the intervention, providing in advance information about the investigative profiles of the audit. Also, the Guards of Finance remember that the reasons which justify the fiscal audit derive from the power-duty of the Financial Administration to check the right compliance of the tax duties by the taxpayers, without considering particular conditions and limitations.
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Paragraph 3 provides the possibility to examine the administrative and accounting documents
which could be performed, upon taxpayer's request, at the comptrollers' office or the office of the
professional which assists and represents him.
Paragraph 4 provides that the comments of the taxpayer or the professional should be
mentioned in the report of the audit's operations.
Paragraph 5 has a great importance with regards to the guarantees in favor of the checked
taxpayer. It provides that comptrollers can remain in the taxpayer's office for not more than 30 working
days, extendable for other 30 days in cases of particular complexity, identified and justified by the
executive of the Office or the Department Head of the Finance Guards. When this period is finished,
comptrollers can return again in the taxpayer's office only for specific reasons, after the justified
permission of the Office Executive, or to examine comments and requests made by the taxpayer after
the end of the audit's operations. Concerning this matter, the Finance Guards and the Tax Agency
explained, respectively with the Circular n. 250400 17/08/2000 and the Circular n. 64/E 27/06/2001,
that the provisions of paragraph 5 should be interpreted as a temporal limit applicable only to the
working days in which there is the physical presence of the comptrollers, excluding the days of
suspension and of those in which the investigations are performed in the comptrollers' offices. A
conclusion of this kind appears complying with the law ratio, aimed to limit, circumscribing them in the
time, the situations of discomfort and trouble caused by the fiscal verifications in the places in which
the commercial activity of the taxpayer is performed .
Instead, with regards to the opportunity to return to the taxpayer's office, it appears
circumscribed to the hypothesis in which, after the conclusion of the audit, it would be necessary to
proceed to specific documental data useful to further demonstrate the audit's results, or if new elements
emerge which suggest the integration of the activity carried out. This limit, however, should not be
applied to the possibility to put the taxpayer before further accesses, inspections and verifications,
when there is the necessity to perform an inspection for reasons which are different from those that
originated in the previous audit. Also, in this last case, the causes which justify the new access should be
communicated to the taxpayer, in accordance with paragraph 2.
Paragraph 6 contains another great change in matter of guarantees in favor of the checked
taxpayer. The latter can address, if it thinks that comptrollers do not proceed in accordance with the
law, to the Taxpayer Guarantor, provided and regulated by the following article 13.
Paragraph 7, finally, respecting the principle of collaboration, provides that, once the audit's
operations are completed , the taxpayer can communicate his comments and requests to the Office
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within 60 days. In order to safeguard the taxpayer and to allow the Office a careful evaluation of these
comments and requests, it had been stipulated that the investigation notice cannot be emanated before
the end of the mentioned term, except in cases of particular and justified urgency (perceived, for
example, in case of tax annualities near the limitation). 68
3. Tax Collection, Legal Procedures
3.1. TAX COLLECTION
The tax law, emanated in accordance with the constitutional principles, determines its effects
through the accomplishment of the fiscal withdrawal, or the tax obligation provided by law.
Considering the self-settlement of the tax, directly performed by the taxpayer, there is a further
and complex administrative activity which is performed by government bodies through the collection,
that it is attained with application acts aimed to enforce the tax authority’s patrimonial pretence.
In substance, the collection is based on some specific evidences as:
• the tax deposits, or the advance payments settled before the final due tax;
• withholdings to the source (withholding agent ect.);
• returns (Irpef, IVA ect. filed directly by taxpayers);
• investigation;
• jurisdiction decisions (executory value of Tributary Commitees sentences);
Through the abovementioned ways the patrimonial amount of the obligation will be identified
which, actually, will be the object of collection.69
In this context it is right to highlight the reform introduced by the Legislative Decree 203/2005,
through which a central service for tax collection has been established , that works on the national
territory through concessionaires and collection counters. The same reform, considering the
68 A. FANTOZZI, A. FEDELE, Statuto dei Diritti del Contribuenti, Varese, 2005, pp.648-378 S. STUFANO, Il Diritto di Partecipazione al Procedimento Tributario, in Corr. Trib., 2003, 5, p. 355 69 A. FANTOZZI, Il diritto tributario, Torino, 2003, pp. 241 and following., N. POLLARI - F. LORIA Diritto punitivo e processuale tributario, Roma, 2004, pp.243 and following.
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spontaneous payment which originates from self-settlement, had extended to all tributes the collection
through i ruolo. This document is edited by the office qualified to perform the investigation of the
relative tax and, once signed by its titular, it acquires character of executivity and it bestows the title for
the collection to the concessionaire qualified for territory. In fact, this will provide the collection notice
to any taxpayer and/or co-obliged towards who it proceeds, and, when necessary, within limits and
ways set by law, the forced execution.
3.2. Compulsory procedures for tax collection
Briefly, when the taxpayer does not spontaneously observe the tax compliance deriving from
self-settlement, investigation or other, the law provides the creation of an executive title which, in
addition to sending the invitation to pay within a determined time, in case of inobservance, allows for
the recourse to the compulsory collection. This occurs through a procedure analytically regulated by
law. The stages through which the procedure develops could be summarized in the intimation to
perform the duties and the following expropriation of goods. This phase develops through three basic
moments:
a) the foreclosure, through which the availability of the good would be denied to the debtor;
b) the forced transfer, selling the foreclosed good in public auctions;
c) the satisfaction of the creditor Body.
The law attributes to the described executive procedure a great efficacy through the limitation
of the proposable oppositions (artt. 615; 617 e 619 Code of Civil Procedure). The jurisdiction is of the
ordinary judge, who fixes the hearing in the presence of the parties before him with decree as postnote
of the appeal, ordering the concessionaire to deposit the statement of the register and the copy of all
the execution acts in chancellery, five days before the hearing (article 57, paragraph 2). With regards to
the registrations on the register (iscrizione a ruolo) concerning tributes for which the appeal to the
tributary judges is provided, there are some oppositions that are not admitted (article 57, paragraph 1):
a. the oppositions ex articolo 615 c.p.c., i.e. the protest against the right of the party to perform
the forced execution (or, to be more exact, the protests regarding the actual existence of credit, even
with opposition to the writ), except those concerning the possibility to foreclose goods.
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b. the oppositions regulated by the article 617 c.p.c., regarding the formal regularity and the
executive title notice.
The ratio of the exclusion of the oppositions, in accordance with articles 615 and 617 of the Code of
Civil Procedure, is to avoid that through the opposition to the execution before the ordinary judge, the
taxpayer would elude the jurisdiction reserve of the tributary judge and the brief term of the challenge
(60 days from the act notice).
The execution judge, in case of opposition to the executive acts, can suspend the collection only in thee
presence of serious causes, of founded danger and of serious and irreparable damage (article 60, Dpr
n. 602/1973 and article 29, paragraph 3, Legislative Decree n. 46/1999).
With Law n. 178/2002 it the faculty, attributed to the Revenue Agency, has been introduced to
define the amount of the registered tributes through a transaction. It is, in substance, a particular
negotiation activity aimed at avoiding the futile and unfruitful tributary debt; it is linked to the verified
cost-management and profitability for the administration to proceed to the agreement with respect to the
continuation of the ordinary action of the compulsory collection.70
3.3. Legal Proceedings
The State prerogative of taxation, aimed at achieving the purposes defined by the
Constitutional Charter, is balanced by the jurisdictional safeguard of the taxpayer's rights. This
safeguard expresses itself, also, through the tributary proceeding (contenzioso - argument), where positions,
rights and interests involved to perform the withdrawal are analyzed in accordance with the founding
intepretative elements of the substantial laws which regulate it.
In the Italian legal order, the management of the tributary argument has been resolved through
the creation of a special jurisdictional body, institutionally responsible to know and judge. Today, this
judging system operates through a structure basically constituted by two degrees of judgment, i.e. by
provincial71 and regional72 commitees. 73
70 A. FANTOZZI, Il diritto tributario, Torino, 2003, pp. 230 and following 71 The Provincial Tributary Committees are qualified for the controversies proposed against the Revenue Offices or the territory of Ministry of Finances, or the local bodies or the concessionaires of the collection service which have their main office in that district. If the controversy is proposed against a Center of Service, we consider qualified the Provincial Tributary Committee in whose district is situated the office responsible of the attributions on the controversial tribute. GIUSTIZIA TRIBUTARIA – online Journal of the Ministry of Finances – Department of Fiscal Policies.
100
Article 7 of Legislative Decree 546/1992 should be highlighted, for it bestows upon the
tributary judge the power to exercise “all the faculties to perform accesses, to request data, information
and explanations bestowed to the Tax Offices and the local Body by the tax law” (paragraph 1), and
also, when it is necessary, “to acquire information of particular complexity”, the power “to request
apposite reports to technical bodies of State Administration and to other public bodies, including the
Finance Guards, or to order technical consulting” (paragraph 2), and finally the power “to order the
parties to hand over documents which are considered necessary for the decision of the controversy”
(paragraph 3).
Instead, both the oath (decisory, suppletory and estimative) and the testimony are excluded as means of
proof.
The Tributary Commitee, jurisdictional special body, investigates what regards the controversial
tributary relations, and decides through sentences which could be of acceptance (total or partial) and
rejection. The sentence, with the issue, acquires juridical value and becomes binding for both parties.
In the context of general principles of the tributary argument, the special proceedings, i.e.
protect and preventive , should also be described.
In the precautionary proceedings, the jurisdictional safeguard entrusted to the Commitee, is to
verify the legitimacy of the tax claim which is the object of argument , in order to prevent a potential
situation of evident injustice. In this context the power to suspend the execution of the challenged act
exclusively appertains to the Provincial Commitee , also in the interpretation of the jurisprudence, is
clear . The institution of the legal conciliation is basically directed to the prevention of the argument,
through an instrumental process which selects the quarrels which could be resolved in an extrajudicial
way (tributary quarrels that time ago were managed through the institution of agreement).74
72 The Regional Tributary Committees are qualified for the challenges against the decisions of the Provincial Tributary Committees, whose main office is situated in the related district. 73 In this context it should be noted that the first degree judgment, for minor controversies (until 2,500 euro), is performed before a judge of monocratic composition and the claimant can defend himself without the appointment of an attorney. In any other case the Commitee composition is collegial. 74 A. FANTOZZI, Il diritto tributario, Torino, 2003, pp. 241 and following, N. POLLARI F. LORIA Diritto punitivo e processuale tributario Roma, 2004, pp.243 and following.
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3.4. Normative instruments to avoid judicial proceedings
In order to delimit the problem concerning the so called “fiscal argument”, it is necessary to
highlight that the Italian Legislatore elaborated a series of Administrative Institutes which permit the
drawing up of conciliation solutions and/or the prevention of tributary quarrels. These solutions are
economically useful both for the administration and the taxpayer. They are administrative institutions
which actually allow the stipulating of conciliation solutions susceptible of use in the ante or post
investigation phase , and that could summarized as:
o self-defence, i.e. the Administrations power to correct an illegitimate or unfounded act;
o judical conciliation, when an argument opened with the financial administration is closed before
the Provincial Tributary Committee.
The judicial conciliation is a real negotiation act, and can have as an objective in addition to the
taxable determination, the measurement of the tax which, thus, could be decreased. This is not an
authoritative act to which the taxpayer’s consent is inclined, with external adhesion but without uniting
with it. It is, instead, a real negotiation act instituted by article 48 of the Legislative Decree n. 546/92.
This is why the measurement of the tax, during the conciliation, could result differently, and so inferior.
After all, “the autonomy of the parties concerning the agreement entails the possibiity to concord a
final total result which reduces the size of the withdrawal originally requested by the Administration”.
This concept has been stated by the Court of Cassation, with sentence n. 21325 October 3rd,
2006.
4.The right of consultation and A.P.A.
4.1. General Introduction
The right of consultation is the main instrument to which the Legislator entrusts the actual
implementation of the collaboration principle stated by article 10 of the Taxpayer's Charter. Article 11
provides the generalization of the right of consultation, now applicable to the whole fiscal matter and
usable by any taxpayer. The fact that the Financial Administration is bound to answer, is the pecurial
characteristic of the renewed right of consultation. The real change introduced by the Taxpayer Charter
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thus, is not only the taxpayer's certainty to receive an answer from the Financial Administration, but
also the total confidence that he can place in this answer, considering it is abinding nature. One of the
main goals pursued through the generalization of the right of consultation is to perform an effective
work of prevention against the tributary argument. The high tendency of fiscal quarrels finds its
endemic origin in the enormous proliferation of tax laws, without the necessary activity of logic-
systematic and temporal coordination. To the wild growth of the number of taxes and tax laws
corresponded an high degree of doubt for the application of these. In order to thin out the already
existing tributary argument, and to prevent the birth of new controversies, the Legislature introduced
other juridical institutions in our legal order to more easily resolve the quarrels and to immediately
define the tax claim, as judicial conciliation, investigation with adhesion, self-defence by the Financial
Administration, as we have seen.
The constant and clever application of the mentioned institutions produced the expected result:
for several years we have seen, in fact, the slow, but unstoppable dip of the pending tributary
controversies stock. The right of consultation, in its structure and for the purposes that it proposes to
achieve, functionally completes the system of the juridical institutions for the prevention of the
tributary argument. Thus, the right of consultation represents the actual implementation of that
principle of collaboration between the subjects of tributary relation, inspired by the mutual good-faith,
which is one of the main pillars on which the whole building of the Taxpayer Charter is founded.
The right of consultation does not represent an absolute change for our tributary order. The
institution was introduced, in fact, by article 21 of Law 30/12/1991 n.413, and subsequently stated by
other tax provisions.
Compared with the general law provided by article 11 of the Charter, the other forms of
consultation are characterized by different operative modalities and have an area of application limited
to few and specific realities, duly provided by several laws and all marked by a serious risk of tax
evasion.75 The types of consultation enforced by article 11 of the law 212 /2000 are described below:
1. Ordinary consultation ex article 11 of the law 212/2000;
2. preventive consultation, ex article 21 of the law 413/91;
3. corrective (or dis-applicative) consultation , ex articolo 37 /bis, paragraph 8, Decree of The
President of Republic 600 /73;
4. consultation for DIT (Dual Income Tax), ex legge 466/ 97;
75 S.SEPIO, L’interpello, in il Diritto, Enciclopedia giuridica del Sole 24 ore, cit, Vol. 8, p. 116
103
5. consultation regarding C.F.C. (Controlled Foreign Compagnies), ex articolo 127/bis del Decree
of The President of Republic. 917/86 (Single Text of Income Taxes), introduced by law
21/11/2000 n. 342, the so called "Fiscal connected to the financial law 2000"
6. special consultation for non-residents, regulated only in an administrative non-circular way Min.
Finances 18/5/ 2000 n.99/E.
4.2. Ordinary Consultation
Law 27/7/2000 n.212, article 11, provides that “every taxpayer can submit in writing to the
Financial Administration specific and circumstantial requests of consultation, concerning the
application of the tax laws to actual and personal cases, if there would be objective conditions of doubt
about the correct interpretation of those provisions".
The right of consultation can be exercised:
• by any taxpayer, both on his own and with the help of a professional;
• on every tax provision;
• without limitations regarding the nature of the case or the type of tax.
In order for the request of consultation to be considered by the Financial Administration, it has
to respect some requisites.
In particular, the request must:
1. be circumstantial and specific;
2. regard actual and personal cases;
Also,the existence of the following is necessary:
3. objective conditions of doubt about the correct interpretation of the tax laws.
The request of consultation doesn't affect the deadlines provided by the tax law. The answer of
the Financial Administration does not have, moreover, a general value. It is binding, in accordance with
the provisions of paragraph 2 of article 11:
• with exclusive reference to the question that is the objective of the consultation request;
• only with regard to the requesting taxpayer.
Being circumstantial and specific requests, concerning actual and personal cases, the prudence
of the Legislator to consider the answer appears right, because it is by nature original and subjective,
104
not susceptible to extensive applications and analogical interpretations. The following 4th paragraph
attributes the power to give answers to the most general and recurrent requests, however, to the
Financial Administration , through “mass” instruments, as circulars and resolutions.
If the taxpayer obtains the approval of the Financial Administration, in case it has been
expressed or it has been reached as consequence of tacit consent, observing the obtained judgment and
performing the acts mentioned in the request, he will be safe from any negative consequences. In fact,
it has been clearly stated in the last sentence of the second paragraph, that “any act, even with an
impositive or sanctionatory content, not issued in accordance with the answer, even if it is infered by
the tacit consent, shall be considered void. The request of consultation, of course, should be submitted
to the Financial Administration in writing. The submission of the request does not allow, in any case,
the suspension of terms: similarly, it can determine the postponement of deadlines and compliances
provided by tax law. Always in writing, within 120 days, the Financial Administration should answer the
taxpayer with a justified judgment. In order to simplify the procedure and to stimulate its use by
taxpayers, but mainly to conclusively state the binding nature of the consultation, it has been clearly
provided by the second paragraph that the missed answer by the Financial Administration within the
fixed term would produce the legal effect of the “tacit consent”.
Thus, in case of missing answer within 120 days, it is believed that the Financial Administration
agrees with the interpretation or the behaviour proposed by the applicant. The taxpayer should submit
his request, concerning any kind of question, to the qualified office in the territory:
1. Revenue Office, where it has been instituted;
2. District Office of Direct Taxes;
3. IVA Office;
4. Register Office.
The consulted office shall give an answer, if the question will be of easy solution, as directly
deriving from a law or an official sentence of the Financial Administration (circulars, resolutions,
directives). In case the office could not directly and autonomously answer, because the question is too
complex and doubtful with respect to its responsibles competences, it will immediately submit the
question to the qualified Regional Revenue Direction, inclining its proper judgment.
The submission will be communicated to the taxpayer in order to grant the absolute
transparency of the procedure.
Even the Regional Revenue Direction disposes of two possible results for the submitted
question:
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• To give an answer communicating it directly to the taxpayer and to the peripheral offices, if
it does not deem appropriate to involve the central structures of the Department in relation
to the questions complexity;
• To submit the question to the Central Direction of juridical affairs for the tax argument, in
case the question is particularly difficult or regards general problems.
However, the Regional Revenue Direction has the duty to communicate to the taxpayer the
submission of its question to the above mentioned Central Direction.
The questions which appertain to the Peripheral Offices, even if they were submitted to the
Regional Direction, will be returned to these offices, after communicating it to the taxpayer. The
Central Direction for juridical affairs and for tax argument represents, in the functional re-organization
of the Ministry of Finances, the body in which the activities of legal consulting and the function of
interpretation of income tax laws are centralized. In this office all questions which did not find a
solution in the peripheral structures will be centralized .
4.3. Consultation for the application of anti-avoidance rules. Abolition of the Advisory Committee.
The Advisory Committee for the application of anti-avoidance rules was established by Article 21,
paragraph 1, of Law No. 413 of 30 December, 1991, which left to the Advisory Committee the
responsibility for issuing opinions on taxpayers requests pertaining to the application of specific cases
ruled by the provisions referred to under paragraph 2 of the above article.
Law Decree No, 223 of July 4, 2006 converted by amendments of Law No. 248 of August 4, 2006,
provides - inter alia - ex Article 29 that, to reduce expenditures incurred by the public Administration
for Collegiate Bodies and other agencies carrying out relevant activities with the above-mentioned
Authorities, to proceed to the "… restructuring of the said bodies, … also by means of closure”.
In particular, pursuant to paragraph 3 of Article 29, non-Governmental Authorities shall provide to
meet the aforesaid requirements by regulatory deeds foreseen by the respective regulatory systems.
Paragraph 4 of Article 29, as amended by Law Decree No. 300 of December 28, 2006, converted by
amendments of Law No. 17 February 26, 2007, has ruled that the bodies not identified by the measures
foreseen under paragraphs 2 and 3 of the aforesaid Article, by May 15, 2007, be "closed".
In view of its not being identified by the measures referred to ex paragraph 4 of Article 29 of Law-
Decree No. 223 of 2006, the Advisory Committee for the implementation of anti-avoidance rules shall
106
be closed .
With the closing of the Advisory Committee shall be deemed implicitly repealed the provisions set
forth under Article 21 of the Law 413 of 1991 governing the activities of the Advisory Committee and
the effectiveness of the opinions thereof.
In particular, the repeal refers to provision of Article 21, paragraph 10, first paragraph of Law No. 413,
December 30, 1991, which states “In case of no response from the Directorate General, after sixty days
from taxpayer’s request, or if the answer given the taxpayer, the latter does not intend to comply, the
same may seek the opinion regarding the case in point to the Advisory Committee for the
implementation of anti-avoidance rules” as well as the following case at issue: “The lack of response
from the Advisory Committee within sixty days of taxpayer’s request, and after sixty additional days
from the serving of a formal notice requesting taxpayer to comply is equivalent to tacit assent".
In essence, the “silent assent” principle that the rule repealed strictly referred to the inertia of the
Advisory Committee is null and void.
The repeal of the provisions relating to the activities of the Advisory Committee contained in Article 21
of Law No. 413, 1991 also involves the abrogation of enactments included in the Ministerial Decree
No, 194 of June 13, 1997 (regulation on the internal organization, operations and budgets of the
Advisory Committee on the application of anti-avoidance rules) and the Ministerial Decree December
20, 1999 (storage, collection, preservation and publication of opinions resolved by the Advisory
Committee).
It is still effective article 21 paragraph 9 of the Law no. 413. In accordance with paragraph 9 the request
of judgement can be submitted to the Revenue Agency everytime the taxpayer thinks that a contract, an
agreement and an act which he is signing could produce potential elusive effects. The taxpayer is bound
to indicate in the request all the information and data usuful for a correct tributary qualification of the
relative reality.
In sustance, the taxpayer is able to pre-emptively request a judgement by the Revenue Agency with
regards to actual cases included in the anti-avoidence rules mentioned in article 21 paragraph 2 of law
No. 413, 1991.76
76 Circolare N. 40/E, Agenzia delle entrate
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4.4. Special Corrective or Disapplicative Consultation (ex art. 37-bis, paragraph 8, Decree of The President of Republic 600/73)
A particular type of special consultation and regulated by paragraph 8 of article 37-bis of
Decree of The President of Republic 600/73.77
Article 37-bis, generally, deals with “provisions against the evasion”. Paragraph 8, in particular,
deals with “the tax laws which, in order to fight elusive behaviours, limite deductions, detractions, tax
credits or other subjective positions otherwise accepted by the tax order”. The above mentioned laws
could be disapplied, through the institution of the special corrective consultation, in case the taxpayer
would demonstrate that, in the analyzed fact, elusive effects cannot occur. Through the corrective
consultation, the possibility to demonstrate that a specific case (a determined behaviour) does not
produce elusive effects concerning taxes is recognized to the taxpayer. Such demonstration allows, in
favor of the taxpayer, the disapplication of the tributary laws which limit:
• deductions,
• detractions,
• tax credits,
• other subjective positions otherwise accepted by the tax order.
A principle of equal opportunity between Fisco and taxpayer, regarding the implementation of
the tax laws against the evasion, is stated through this provision. The laws against evasion are
introduced with the specific aim to extend the taxable base or to anticipate the payment of a
determined tax. They work as a “safeguard clause” towards behaviours through which the taxpayer tries
to use gaps and shortcomings of the tax law in his own favour , so that he can gain benefits that the
fiscal system does not approve. The law against evasion introduces, therefore, a “legal presumption of
elusivity”, with regards to well-identified operations and tax cases. To this function (which could be
defined as general preventive) adds a repressive function towards determined cases, punctually
identified by the tax law, which show elusive content and were frequently used by taxpayers.78
Thus, the taxpayer, through the institution of the disapplicative consultation, can see the
legitimacy of presumptively elusive operations, acts and behaviours recognized. Can constitute the
object of the disapplicative consultation the tax laws which provide:
• the impossibility to deduct totally or partially certain negative components of the income;
77 Introduced by the Legislative Decree October 8th 1997, n.358
108
• the missing recognition of detractions;
• the missing concession of tax credits;
• the missing safeguard of other subjective positions otherwise accepted by the tributary law.
For the exercise of the corrective consultation , in particular it is provided that the request
edited in unstamped paper would be submitted to the Regional Revenue Director, which is responsible
for the territory, through the peripheral office qualified for the investigation in accordance with the
fiscal domicile of the taxpayer.79 The office which receives the application is bound to express its own
judgment about the case represented by the taxpayer. The determinations of the Regional Director
should be communicated to the taxpayer within 90 days after the submission of the application through
postal service, in certified parcel with a receipt notice.
The judgement expressed by the Regional Director should be considered, in fact, ultimate and
unappealable.
4.5. Consultation on CFC - (Controlled Foreign Companies)
With regards to the foreign participated companies, in accordance with article 127 bis of the
Testo Unico in matter of income taxes, the law, introduced by the covering provisions of law
November 19th 2000, n. 342, constitutes a normative system with declared against-evasion aims. Even
if it is a provision against evasion, and although the law provides the appeal to the Institution of
corrective consultation (article 37 meno bis, paragraph 8, Decree of The President of Republic 600/
73), the proceeding for the exercise of the right of consultation chosen by the Legislator is that
described by article 11 of the Taxpayer Charter, i.e. the rules of the ordinary consultation. With this
provision a law aimed at avoiding very common elusive practices is introduced, performed through the
detention of participation to companies which have their main office in States and Territories with a
privileged fiscal regime.
78 One should think, although without the opportunity to completely understand the problem, about the law regarding business car, frige benefits, cell expenses, representation expenses, loss report etc. 79 It is, usually, the Revenue Office or, if this is not instituted, the district Office of Direct Taxes.
109
4.6. Special consultation for non-residents
The taxpayer who does not reside in Italy and wants to make investments in our country, could
submit a specific application to the Ministry of Finances (in particular the Central Direction for the
juridical affairs and the tax argument) in order to obtain “any form of qualified and well-timed legal
consulting” on every problem regarding the Italian fiscal system. In particular, the possibility to use the
several types of tax breaks and incentives provided by our legal order should be described to the non-
resident investors in a clear and precise way, . This kind of consultation, with declared promotional
aims, was born with the goal to reassure the foreign taxpayers about the reliability of Italian tax law,
and, consequently, to encourage the influx of foreign capitals in Italy. The special consultation for non-
residents does not derive from a provision of law. It has been introduced by the circular May 18th,
2000 n.99/E, “considering the need to stimulate the investments in Italy”. In the above mentioned
circular a specific and punctual proceeding for the exercise of the consultation is not provided .
However, it is legitimate to think that it is necessary to observe the procedure for the ordinary
consultation, provided by article 11 of the Taxpayer's Charter. Even for this type of of consultation
only one level of intervention is provided. The Central Direction for the juridical affairs and the
tributary argument is the ministerial structure qualified to receive and evaluate the requests, and to
express the consequent judgments.80
4.7. Advanced Pricing Agreements
In addition to the legislative provisions above mentioned should be also considered certain
juridical institutions, which aim to prevent and cushion future argument between taxpayer and
Financial Administration:
80 G. FALSITTA, Manuale di Diritto Tributario, cit., pp. 308-360, G.. GROSSI, A. PARDI, A. RUSSO, Statuto del Contribuente e diritto di interpello, Arzano (Na) 2001, pp.93-139, A. GIORGIANNI, L’evoluzione dei rapporti di collaborazione tra Amministrazione finanziaria e contribuente:l’interpello alla lce dello statuto del contribuente, in Riv.dir. trib. , 2004 first part, pp.216-283
110
I. Advanced Pricing Agreements (Apa)81. The Italian tax authorities on July 28 2004
released details of the country's new advance pricing agreement (APA) programme.
APAs are advanced agreements with Tax authorities on the acceptance transfer pricing
methodology on a bilateral or multilateral basis. The APA can be used to resolve
complex transfer pricing issues where it is difficult to determine a suitable method for
establishing an arm's length price or the transaction is so complex that the principles set
out in the OECD model are not relevant to establish arm's length prices. The APA
application by a company sets out its understanding of how the transaction(s) is taxed
leading to the negotiation with the relevant tax authorities to enter into a binding
agreement. Such agreements can provide greater certainty to taxpayers.82
II. The Arbitral Agreement 90/436/Cee (arbitral procedure), means of resolution of
controversies in matters of international fiscality related to the transfer of prices, ratified by
Italy in 1993, and enforced the January 1st 1995 in order to compensate for the lacks of the
friendly procedure provided by the “Ocse Model”.
III. The article 8 of the decree law no. 269/2003, entitled “international ruling” sets down an
appropriate tax ruling for companies doing international business with regard to transfer
pricing, interests, dividends and royalties regime. On July 23 2004 the Italian central tax agency
issued the explanatory notes envisaged by article 8 paragraph 2 of law decree 269 of September
2003 necessary to allow certain enterprises that carry on an international activity to apply for the
international ruling procedure established by article 8 of same decree 269. By duly fulfilling the
international ruling procedure, an international enterprise can execute an agreement with the
Italian tax authority. Such an agreement would be be binding for the Italian tax authority and
the international enterprise for a period of three fiscal years, with the possibility for the
international Enterprise to file for an extension within 90 days from the above deadline.
The explanatory notes give details of the international ruling procedure.
In particular article1 defines international enterprises as:
81 In order to overcome double tax problems and to grant uniformity, the Ocse provided precious suggestions for the implementation of the sa called Mutual Agreement Procedure (friendly procedure), a mechanism used by Fiscal Administration to resolve the controversies related to the implementation of the Agreements aimed at avoiding double tax. This procedure or mutal agreement, described and authorized by the article 25 of Ocse model of agreement against double tax, could be used to eliminate double taxation, deriving from a primary adjustment of transfer pricing, made by the Fiscal Administration of the first jurisdiction, through a corresponding adjustment made by the Fiscal Administration of the second jurisdiction, in order to consider the first adjustment. 82 P. ADONNINO, Considerazioni in tema di ruling internazionale, in Riv. dir. trib., 2004, IV, pp.62-67
111
• Any resident enterprise that controls, is controlled by, or is controlled by the same entity
that controls ,a non resident company, pursuant to applicable Italian transfer pricing
rules.
• Any resident enterprise that either participates in the capital or equity of (or is
participated by) a non resident subject;
• Any resident enterprise that has paid to (or received from) a non resident subjects
dividends or interest or royalties;
• Any non resident enterprise that carries on a business activity in Italy through a
permanent establishment located therein.
Pursuant to article 8, the competent Italian tax authority office shall invite the
representative of the relevant international enterprise to discuss the filed request and shall
control whether the filed documentation is complete or if additional documentation is
required. The Italian tax authority shall complete such review process within 180 days from
the date of filing, unless the cooperation of the tax authority of a foreign country is required,
in which case the above term would be extended for as long as it is necessary to obtain the
information so requested Once an agreement is reached, a copy of it is sent by the Italian tax
authority to the tax authorities of the relevant foreign country involved. In the event the
relevant facts and circumstances will change, the Italian tax authority will invite the
international enterprise to start a new hearing in order to amend the agreement consistently to
the changed facts and circumstances. If the Italian tax authority and the international
enterprise fail to agree on the changes to be made to the agreement, the same will become
ineffective as of either the date when the circumstances have changed or the date when the
Italian tax authority invited the international enterprise to amend the agreement.
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TABLE OF AUTHORS
AGENZIA DELLE ENTRATE: La dichiarazione dei redditi dei residenti all’estero, 2007
ALBANELLO C., Accesso in abitazioni private: Ammissibilità della tutela giurisdizionale della libertà di
domicilio, in Riv. dir. trib., 1991
ADONNINO P., Considerazioni in tema di ruling internazionale, in Riv. dir. trib., 2004
AMBRIANI N., I segni distintivi, in Trattato di diritto commerciale, diretto da G. Cottino, Padova,
CEDAM, 2001
DEOTTO D., Per la presunzione sui prelievi bancari è sufficiente indicare la generalità dei beneficiari, in Corr.
Trib., 2007
FALSITTA G., Manuale di diritto tributario, Padova, 2005
FANTOZZI A., A. FEDELE, Statuto dei Diritti del Contribuenti, Varese, 2005
FANTOZZI A., Il diritto tributario, Torino, 2003
GALLO F., La Natura Giuridica dell’Accertamento con adesione, in Riv. dir. trib, 2002
GIORGIANNI A., L’evoluzione dei rapporti di collaborazione tra Amministrazione finanziaria e
contribuente:l’interpello alla luce dello statuto del contribuente, in Riv. dir. trib. , 2004
GROSSI G., PARDI A., RUSSO A., Statuto del Contribuente e diritto di interpello, Arzano (Na), 2001
113
LUPI R., La funzione della dichiarazione e le sue modalità di presentazione, in il Diritto, Enciclopedia
giuridica del Sole 24 ore, Bergamo, 2007
LUPI R., La modifica della dichiarazione del contribuente, anche a proprio favore, in il Diritto, Enciclopedia
giuridica del Sole 24 ore, Bergamo, 2007
LUPI R., CROVATO F., Imposizione fiscale e accordi amministrativi, in Il Diritto, Enciclopedia Giuridica
del Sole 24 ore, Bergamo, 2007
MICHELI A., TREMONTI G., Obbligazioni (dir. trib.), in Enc. del dir., Milano, 1979
MICHELI A., Corso di diritto tributario, Milano,1989
PEZZUTO G., S. SCREPANTI, La Verifica Fiscale, Levio, Trento, 2002
POLLARI N., LORIA F., Diritto punitivo e processuale tributario, Roma, 2004
RUSSO P., Manuale di Diritto Tributario, Milano, 2002
SEPIO G., L’interpello, in il Diritto, Enciclopedia giuridica del Sole 24 ore, Bergamo, 2007
STUFANO S., Il Diritto di Partecipazione al Procedimento Tributario, Corr. Trib., 2003.
114
EUCOTAX Wintercourse 2008
Budapest
Università LUISS – “Guido Carli” – Roma
Facoltà di Giurisprudenza
Cattedra di Diritto Tributario dell’Impresa
Cattedra di Diritto Tributario Internazionale e Comunitario
HOLDING COMPANIES AND PREFERENTIALLY TAXED ENTITIES
Federica Pitrone
Matr. 072293
115
I DOMESTIC LAW
Italian tax system does not contemplate a specific discipline for holding companies and neither
do provide a preferential tax regime for particular entities.
For these reasons, holding companies follow the same tax regime apply to other companies.
1. General
1.1. Definitions
The notion of holding company is not clearly defined in Italian law, since there is not an explicit
regulation concerning holding companies.
Anyway, the most important case law concerning this argument is the Supreme Court (hereinafter
Court) Decision No. 1439, of 26 February 1990.83
In this case law the Court distinguishes two kinds of holding: a mixed holding and a “pure holding”.
The latter, according to the Court, performs a merely instrumental function and through the holding
of the shares carries out the direction and the control of the group.
The Court does not define the mixed holding, but according to Italian scholars84 it is considered an
holding which carries out not only a company control but also a business function.
The problem that has been pointed out by the Court is whether the “pure holding” is a merely
economic entity, or whether the “pure holding” itself could be a company.
The conclusion of the Court has been that the “pure holding” could be a company not because of its
control and direction activity, but because of the subsidiaries activities, which holding carries on in a
mediate and indirect way. 85
83 Corte Cost. 5 February 1990, n. 1439, in Giur. It., 1990, I, 1, c.713. 84 E. GLIOZZI, Holding e attività imprenditoriale in Giur. comm., 1995, fasc.4, p. 522. 85 Corte Cost. 5 February 1990, n. 1439, cit.; F. GALGANO, La holding e l’impresa di gruppo, in Contratto e impresa, 1990, Cedam, p. 401 ss.
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Anyway, the Court conclusion is not a common accepted principle in Italian scholars. In fact, part of
the scholars86 underlines that the keystone is which economic activities are carried on by the holding.
From this perspective, the capitalistic function that holding carries on is nothing more than a financial
function, and for this reason holding companies can be classified as finance companies.
In conclusion, it’s necessary to point out that in Italian tax law there are not concepts that could be
applied to preferentially taxed entities.
1.2. Residence of corporations
In accordance with articles 5, par. 3 and 73, par. 3 of the Presidential Decree No. 917 of 22
December 1996 (hereinafter T.u.i.r), resident companies are those which for the greater part of the
financial year have, alternatively, their a) legal seat, b) place of management or c) main business purpose
in the Italian territory.
The place of incorporation is not relevant for tax law purposes.87
Even if the legal seat certainly has the advantage of being easily ascertainable, sometimes, this
formal criterion is used in an artificial way, attributing to the company a different residence from the
effective one.
Therefore, in an anti-avoidance perspective, the other two criteria which are written down in
the T.u.i.r. are considered much more suitable to guarantee a link between the person and the Italian
territory.88
The place of management is identified89 with the place where key management and
commercial decisions are effectively made, in other words, the place where the direction of a company
is actually organized and managed. Reference have also been made by the Supreme Court to the place
86 E GLIOZZI, Holding e attività imprenditoriale cit., p.529; V. BUONOCORE, L’imprenditore società, in Manuale di diritto commerciale, Giappichelli Editore, Settima edizione, 2006. 87 C. GARBARINO, Manuale di fiscalità internazionale, Ipsoa, 2005, p. 93 ss.; G. MELIS, La residenza fiscale dei soggetti Ires e l’inversione dell’onere probatorio di cui all’art. 73, commi 5-bis e 5-ter in Dir. prat. Trib. Int. n. 3, 2007; F. NANETTI, Riflessioni in tema di “oggetto principale”, ai fini dell’art. 73, c. 3 del T.u.i.r. in Il fisco n. 26, 2 July 2007. 88 M. PISANI, Profili sanzionatori della presunzione di residenza delle holding, in Il fisco n. 44, 3 December 2007. 89 Corte Cost. 30 January 1998, n. 959.
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where the general meetings are held, where the corporate bodies necessary to carry on the business are
situated or where the accounting books are maintained.90
Italian scholars and case law point out the necessity of looking at the actual administrative
activity carried on, and not at the formal title of a person as a director of a company. So, the place of
management has been identified as the place where the will has been created91.
With respect to day-to-day management, there is no clear answer in Italian case law and tax
literature. The decisive criterion should be the nature of the decisions taken and their impact on the
business of the company. Thus, an analysis on a case-by-case basis is unavoidable92.
However, the place of management is the criterion used by OECD Model Convention
(hereinafter OECD Model) for solving residence conflicts between States. Some authors93 consider
that the place of management doesn’t “keep up with times”. In fact, nowadays, decisions are made by
telephone or by e mail, and it could be not clear the effective place where decisions are taken.
Last but not least, main business purpose is defined, according to art. 73, par. 4 of T.U.I.R., as
the purpose determined by law and indicated in the articles of incorporation94.
But when articles of association are not in the form of public deed or private authenticated
deed, the main business purpose is determined by the activity of the company that is effectively
performed within the Italian territory. For non resident entities, regardless of the articles of
incorporation, the decisive criterion is the activity effectively performed by the company within the
Italian territory.
The legal seat, place of management or main business purpose must be present in the Italian
territory for the greater part of the taxable year (at least 183 days).
Italian scholars agree there is no hierarchy among these criteria; nor should one criterion
prevail over another.95
90 Corte Cost. 10 December 1974, n. 4172, in Dir. Prat. Trib., 1975, II, 948 ss.; Corte Cost. 16 June 1984, n. 3604. 91 Corte Cost. 10 December 1974, n. 4172, cit., 948 ss.. 92 C. ROMANO, The evolving concept of “Place of effective management” as a Tie-Breaker rule under the OECD Model Convention and Italian Law, in European Taxation, September 2001. 93 P. BERTOLASO and E. BRESSAN, Le “esterovestizioni” alla prova della presunzione di residenza. Alcune considerazioni con particolare riguardo alle holding “statiche”, Il fisco n.36, 2 October 2006. 94 F. NANETTI, Riflessioni in tema di “oggetto principale”, ai fini dell’art. 73, c. 3 del T.u.i.r., cit. 95 C. ROMANO, The evolving concept of “Place of effective management” as a Tie-Breaker rule under the OECD Model Convention and Italian Law, cit.
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This requirement prevents a foreign company or entity from being subject to tax in Italy on its
worldwide income if it has had, only for a short time, its legal seat, place of management or main
business purpose within the Italian territory.
These rules also apply in order to determine the residence of holding companies.
However, it’s necessary to analyze, a new Italian anti - avoidance rule to counter the
phenomenon of foreign holding companies that have no real tax residence abroad, that was introduced
by Law Decree No. 223, of 4 July 2006 and converted by Law No. 248, of 4 August 200696.
This Decree added to art. 73 of the T.u.i.r. two paragraphs (5-bis and 5-ter), introducing a
rebuttable presumption of residence for foreign holding companies.
In fact, par. 5-bis states that, unless otherwise proved, it is considered to be in Italian territory
the place of management of companies which control the entities indicated in art. 73, par. 1 letters a)97
and b)98 if, alternatively:
- they are controlled, directly or indirectly, within the meaning of Art. 2359, par.1 of the Italian
Civil Code, by companies or individuals resident in Italy; or
- they are managed by a board of directors or other equivalent management body, the majority of
whose members are resident in Italy.
Ministerial Circular No. 28/E of 4 August 2006 (hereinafter Circular) interpreted the new anti-
avoidance rule affirming that companies resident in Italy control of the foreign holding companies can
be direct or indirect, but that the foreign holding companies control of companies resident in Italy can
only be direct. But the Circular also refers to Art. 235999 of the Italian Civil Code, which contemplates
both direct and indirect control, so there is an interpretation problem that has not been solved yet.
96 P. BERTOLASO and E. BRESSAN, Le “esterovestizioni” alla prova della presunzione di residenza. Alcune considerazioni con particolare riguardo alle holding “statiche”,cit.; G. CAMPOLO, Deemed Italian Residence for Foreign Holding Companies, in European Taxation, January 2007; G. MELIS, La residenza fiscale dei soggetti Ires e l’inversione dell’onere probatorio di cui all’art. 73, commi 5-bis e 5-ter in Dir., cit.; M. PISANI, Profili sanzionatori della presunzione di residenza delle holding, cit. 97 Joint stock companies (S.p.A.), limited liability companies (S.r.l), partnerships limited by shares, cooperative and mutual insurance companies, which are resident in Italian territory. 98 Public and private entities (other than companies) and trusts, resident in Italian territory, whether their exclusive or main business purpose is the exercising of business activity. 99 According to Art. 2359(1) of the Italian Civil Code, controlled companies are companies in which another company has a majority of the votes exercisable at a regular meeting, or has sufficient votes to exercise a dominant influence at a regular meeting, and companies which are under the dominant influence of another company due to particular contractual bonds with it. Par. 2 includes the votes of controlled companies, fiduciary companies and an interposed person in the calculation of control ( in other words: indirect control).
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Art. 73, par. 5-ter states that, for verifying the existence of the control according to par. 5-bis, it
is considered the situation existing at the end of the accounting period of the controlled foreign
company.
If a foreign entity, falling under one of the two categories, is defined as an Italian resident for
tax purposes, it is subject to taxation as for any other resident entity, according to world wide income
principle.
In order to disprove the assumption, taxpayers have to present convincing evidence that the
residence of the holding company is not in Italy. In particular, taxpayers have to demonstrate that
company’s place of management is abroad.
In other words, the foreign entity has to demonstrate that fundamental decisions for the
company have not been taken in Italy100.
According to the Circular, proof of foreign residence is evaluated on a “case-by-case” basis101.
In Italian tax system, resident and non resident companies are subject to corporate income tax
(called IRES).
Resident companies are taxed on their worldwide income. Non resident entities are subject to
Italian tax only on income derived from Italy.
Companies are also subject to a regional tax on productive activities (called IRAP). This tax is
levied only on the net value of production derived in Italy.
2. Relevant national tax provisions
It is worth noting that, on December 2003, the Italian Government published the Legislative
Decree No. 344, introducing significant changes to the Corporate Tax Regime. The declared intentions
of the tax reform is to harmonize Italian legislation with those of the other Member States of the
European Union, to simplify the existing tax regime, and to homogenize the treatment of domestic and
foreign-source dividends and the one of capital gains102.
100 G. MELIS, La residenza fiscale dei soggetti Ires e l’inversione dell’onere probatorio di cui all’art. 73, commi 5-bis e 5-ter, cit., p. 868. 101 G. CAMPOLO, Deemed Italian Residence for Foreign Holding Companies, cit. 102 S. SERBINI and P. FLORA, New Dividend and Capital Gains Regime, in European Taxation February/March 2004.
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Broadly speaking, under current legislation a wide range of restrictions apply to transactions
with companies and entities located in tax haven jurisdictions falling within the scope of either the CFC
Black list or a second Black list concerning outbound payments to non-EU foreign entities.
Restrictions may include an increased burden of proof on the latter payment, CFC income
pick-up for entities controlled or related located in black listed locations and regimes, denial of capital
gains and dividends participation exemption, as well as increase of withholding tax from 12.5% to 27%
on outbound interest payments.
Under the 2008 Budget Law, this system has been changed. In fact, only entities and locations
included in a White List103 may qualify for participation exemption, exclusion or low withholding taxes,
ordinary deduction of expenses, and so on.
A five-year grandfathering provision will qualify as white listed all companies and entities
currently not included in the applicable black lists.
2.1. Inter-company dividends
Under the former Corporate Income Tax regime, dividends were governed by the imputation
system. The economic double taxation of companies profits, taxed as business income for companies
and as dividends for shareholders, was avoided by granting resident shareholders a tax credit104.
In contrast, a dividend tax credit was not granted to non resident shareholders.
The reform completely overrode the former treatment of dividends by introducing a
“participation exemption” regime into Italian legislation for the first time.
According to art. 89 T.U.I.R., dividends derived by resident companies from other resident
companies and from non resident companies or other legal entities involved in business activities105
are exempt from corporate income tax for 95% of their amount106.
103 M. MANCA, Finanziaria 2008: art.168-bis del Tuir – Le nuove white list, in Il fisco n. 4, 28 Jenuary 2008. 104 C. GARBARINO, Manuale di tassazione internazionale, cit., p. 355 ss.; R. LUPI, Diritto tributario, parte speciale, Giuffrè, 2005, p. 131 ss. 105 Art. 73, par.1, letters a), b), c) and d) T.U.I.R. 106 C. CAMOUNT CAIMI and R. FRANZE’, Participation exemption for inbound dividends and Anti-tax haven rules, in European Taxation, May 2001; C. GARBARINO, Manuale di Tassazione internazionale, cit. p. 355 ss.; S. SERBINI and P. FLORA, New Dividend and Capital Gains Regime, cit; R. LUPI, Diritto tributario, parte speciale, cit. p. 132 ss.
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Under the participation exemption regime, 5 % of the dividend distributed is still taxable at
27,5 % - this is the current corporate tax rate107- in the hands of receiving company. The effective tax
burden connected with the dividend is therefore equal to 1,375%.
If dividends are received through a permanent establishment in Italy they are taxed as if
received by an Italian resident company.
The same regime provided for domestic-source dividends applies also to foreign-source
dividend, except for dividends deriving from companies located in tax haven countries as indicated in
the black list issued by the Minister of Finance108.
These dividends in fact are fully taxable in the hands of the resident shareholders, unless a
positive ruling109 has been obtained, based on the proof that the participation in the foreign entity
does not achieve the localization of income in tax haven countries or territories.
Non exempt dividends are included in taxable income on a cash basis.
In the light of above, dividends distributed by non resident companies to resident companies
are 95% exempt from any taxation. The remaining 5% is subject to taxation, but double taxation is
avoided through a foreign tax credit110.
In fact, Art. 165 of the T.U.I.R. states that if income earned abroad is included in the
computation of the total income, taxes definitively paid abroad upon such income shall be allowed as
credits against net tax in an amount equal to that part of the Italian tax which is proportional to the
ratio between foreign-source income and total income. Total income is considered without taking into
account losses possibly carried forward from previous financial years.
The rationale of this provision is to grant and, at the same time, to limit the foreign tax credit
in respect of Italian tax paid on the domestic-source income.
Thus, if a resident company receives foreign-source dividends qualifying for the 95%
participation exemption, the foreign tax credit should be used to reduce the Italian tax due on the
taxable 5%. If the resident company also receives domestic-source income, the tax credit should not be
used to reduce the Italian tax due on this income.111
107 It was changed by the 2008 Budget Law. The former corporate tax rate was 33%. 108 The 2008 Budget Law has introduced a “White List”. 109 This ruling follows the procedure of the ruling requested for the non-application of the CFC rules. 110 C. GARBARINO, Manuale di tassazione internazionale, cit. p. 381 ss.; L. TOSI – R. BAGGIO, Lineamenti di diritto tributario internazionale, Cedam, 2007, p. 10. 111 C. CAMOUNT CAIMI and R. FRANZE’, Participation exemption for inbound dividends and Anti-tax haven rules, cit.
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If income is derived from more than one state, the per country limitation applies.112
The tax credit must be claimed in the fiscal year in which the foreign tax becomes final.
Dividends paid by resident company to other resident companies are not subject to
withholding tax.
On the contrary, according to art. 27 of D.P.R No. 600 of 29 September 1973, dividends
distributed to non residents companies without a permanent establishment in Italy are subject to a final
withholding tax of 27%. For dividends on saving shares the rate of withholding tax is 12,50%113.
Anyway, if the non resident entity can show that it has paid a final tax on the same dividends in
the country of residence, a refund up to four ninth of the withholding tax may be claimed114.
Follow the implementation of the EC Parent Subsidiary Directive by Legislative Decree No.
136 of 5 March 1993, dividends paid to qualifying EU parent companies are not subject to withholding
tax115.
To qualify for the exemption from withholding tax, the parent company must meet the
following requirements:
- it must be a member on tax purposes of an EU Member State;
- it must be qualified as a company under the Directive;
- it must be subject to one of the taxes listed in the Directive;
- it must hold at least 15% (10% from 2010) of the capital of the subsidiary for at least 1
uninterrupted year.
It is worth noting that the parent-subsidiary regime is not available for dividends received by
companies controlled by persons who are not residents of an EU member State, unless the recipient
can prove that the company was not established for the only purpose of benefiting from the special
regime for EU outbound dividends.
From 2005, EU Member States must exempt dividend payments to companies resident in Switzerland
under essentially the same conditions as those laid down in the EC Parent-Subsidiary Directive116.
112 The credit is calculated separately with respect to income derived from each foreign state. 113 C. GARBARINO, Manuale di tassazione internazionale, cit. p. 370. 114 C. GARBARINO, Manuale di tassazione internazionale, cit., pag. 369 ss. A. SFONDRINI, Dividendi e Plusvalenze su partecipazioni in Manuale di fiscalità internazionale, Ipsoa 2004; 115 G. CHIESA, Corporate Taxation, in European Taxation, 2007; C. GALLI, Corporate taxation, in European Taxation, 2007, p. 45; C. GARBARINO, Manuale di tassazione internazionale, cit., p. 382 ss. 116 C GALLI, Corporate taxation, cit. p. 45.
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On December 24 2007, the Italian Parliament approved the 2008 Budget Law. Among many other
provisions, the legislator has changed the tax treatment applicable to outbound dividends paid to
entities resident of other EU or European Economic Area (hereinafter EEA) Member States, in order
to comply with the request of the European Commission117 to end the discriminatory treatment so far
applied in those cases where the “Parent-Subsidiary” Directive is not applicable (i.e. when the
shareholding is below the 15 per cent threshold). In particular, the 27 per cent withholding tax rate
provided by domestic legislation (which can be reduced pursuant to the applicable double taxation
conventions) has been replaced by a 1.375 per cent tax rate which corresponds to the same economic
double taxation of dividends in the hands of a recipient company residing in Italy. The new provision
will only be applicable starting from the distribution of dividends out of profits realized in fiscal year
2008118.
2.2. Capital gains
In relation to capital gains, the new regime is generally more favorable than the old one. In fact,
whilst capital gains were fully subject to tax under the old regime, the new regime provides for their
exemption. In certain specific situations, capital gains are in any case fully taxable also under the new
regime119.
In particular, capital gains are included in taxable income for corporate income tax purposes if
they are:
- Realized by a sale;
- Realized as indemnities for property loss or damage, including insurance payments;
- Assigned to the shareholders or used for purposes other than business.
On contrast, according to art. 87 T.U.I.R., capital gains realized by resident companies or by
Italian permanent establishment upon disposal of domestic or foreign participation are exempt from
117 On 25 July 2006, the European Commission announced that it had sent Belgium, Italy, Luxembourg, the Netherlands, Portugal and Spain a formal request to end their discriminatory taxation of dividends paid to foreign company. 118 A. COTTO and G. VALENTE, DDL Finanziaria 2008: analisi delle principali novità, in Il Fisco, n. 37, 13 October 2007. 119 C. GARBARINO, Manuale di tassazione internazionale, cit. p. 812 ss.; S. SERBINI and P. FLORA, New Dividend and Capital Gains Regime, cit., p.127 ss.; P. SAGGESE, Finanziaria 2008: le novità relative alla Participation exemption, in Il fisco, n. 4, Jenuary 2008.
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tax for 95% of their amount120 (91% before 2007 and 84% in 2007) when the following conditions are
satisfied:
a) The participation must be owned, without interruption, from the first day of the twelfth month
(eighteenth month in 2007) preceding the one in which the transfer takes place;
b) The participation is classified in the fixed financial assets category in the first financial statement
closed during the period of the holding;
c) The participation refers to a company resident in a country other than that with a privileged tax
regime, unless a positive ruling121 has been obtained, based on the proof that the participation
in the foreign entity does not cause the localization of income in tax haven countries or
territories;
d) The company must carry out a business activity122, as listed in Art. 55 of the T.U.I.R. This
article states that business activity is the habitual exercise, even if not exclusive, of commercial
activities specified in Art. 2195 of the Italian Civil Code123.
The third and fourth requirements must be fulfilled by the company at least from the third
fiscal year preceding the one in which the disposal takes place.
Exemption is denied for participations held as stock in trade, for participations held for less
than 12 months, for participations relating to companies that do not carry out a business activity, and
for participations relating to companies resident in tax privileged countries. In these cases, capital gains
are fully subject to IRES and, as a consequence, capital losses realized on such participations may be
deducted under the ordinary rules.
With regard to participations held in companies whose exclusive or predominant activity is the
acquisition of participations (in other words the activity of a holding company) the c) and d)
requirements must be verified with respect to the subsidiaries; and participation exemption apply when
the above two requirements are met by the subsidiaries that represent the greater part of the holding
companies’ assets.
According to Italian scholars124, this special provision for holding companies is an anti-
avoidance rule.
120 The percentage of the exemption has been modified by the 2008 Budget Law. 121 This ruling follows the procedure of the ruling requested for the non-application of the CFC rules. 122 The business activity test is not required to be met by companies whose shares are listed in regulated markets and for companies whose shares are the object of a public offer for sale (Art. 87, par. 4 T.u.i.r).
125
The new regime modifies the treatment of non-resident companies who realize capital gains
upon the disposal of Italian participation in the sense that they are now subject to the same regime
described so far.
Non residents generally avoid Italian taxation by virtue of treaty and domestic exemption,
which remain unaltered under the reform.125
Double taxation on capital gains is avoided through the foreign tax credit described for
dividends (Art. 165 T.u.i.r.).
2.3. Losses
Ordinary losses
According to art. 84 of the T.u.i.r126, losses may be carried forward for 5 years following that
in which they are incurred. Anyway, if a loss is derived in the first three fiscal years from the beginning
of the company’s business activity, it may be carried forward indefinitely, proving that the losses are
generated in a new activity. Losses may not be carried back.
Losses may not be carried forward if:
- The majority of the voting rights of the company is transferred; and
- In the tax year in which the transfer occurs or in any of the two preceding or following periods,
the activity of the company is changed from the one that originated the losses.
This limitation does not apply if the transferred company has had in the fiscal year preceding
the transfer at least ten employees, and produced an amount of gross receipts and incurred costs for
employment higher than 40% of the average of the two former fiscal years.
If a company has exempt income, the loss available for carry-forward is decreased by an
amount equal to that part of exempt income which exceeds non-deductible costs.
123 A business activity, pursuant to art. 2195 of the Italian Civil Code, is as follows: production of goods or services, broking in the circulation of goods, passenger and goods transport by land, water and air, banking and insurance activities, auxiliary activities for the above. 124 G. FERRANTI, La “participation exemption” per le società “holding” in Corr. Trib. n. 39, 2004, p. 3047. 125 This aspect is going to be explained in the second part of the paper. 126 G. CHIESA, Corporate taxation, cit. ; C GALLI, Corporate taxation, cit., R. LUPI, Diritto tributario, cit. p.157.
126
Capital losses
According to art. 110 of the T.U.I.R., capital losses are included in taxable income, so they are
treated as ordinary losses.
Capital losses on participations that qualify for the participation exemption are not deductible
for tax purposes.
2.4. Costs relating to the subsidiary
As a general rule, costs and expenses may be deducted only if they are incurred for the
production of income. This rule does not apply to certain deductible items, such as interest paid, certain
taxes and social security contributions127.
The deduction of business expenses is allowed on an accrual basis. According to Art. 109 of
the T.U.I.R, costs and other expenses are deductible in the fiscal year in which they are certain or
ascertainable.
The general rule is that, to be deductible for tax purposes, expenses must be entered in the
profit and loss account pertaining to the relevant fiscal year. Expenses that are imputed directly to the
balance sheet under the International Accounting Standards are regarded as entered in the profit and
loss account for the purposes of the general rule. Expenses are also deductible if:
- they are entered in the profit and loss account of a previous financial year if the deduction was
postponed in compliance with the law;
- their deduction is allowed under tax law.
Dividends paid are not deductible128.
The 2008 Budget Law has introduced many changes to the deduction of interest expenses.
In fact, in the former legislation the deduction of interest was subject to a number of
limitations, and in particular to the thin capitalization129 and the “equity pro rata”.
The latter was a limitation introduced in connection with the participation exemption.
127 C. GALLI, Corporate Taxation, cit., p. 19. 128 G. CHIESA, Corporate Taxation, cit.; R. LUPI, Diritto tributario, parte speciale, cit., p. 151 ss. 129 See part 2, par. 2.6
127
In fact, the “equity pro rata” regime determined the non-deductibility of interest expenses in
the event that a company owns a participation, classified in the fixed assets category, which benefited
from the participation exemption and the book value of which exceeded the net equity of the company
holding participation130.
These two instruments have been repealed by the 2008 Budget Law and they have been
replaced by a general limitation.
According to the new art. 96 of the T.u.i.r, interest expenses and similar charges are deductible
in every fiscal year within the bounds of interest and similar income. The excess is deductible within the
bound of the 30% of the gross operating result131, which is equivalent to the difference between the
value and the costs of production, without taking into consideration depreciations and amortizations of
fixed assets. Banks, insurance, and financial companies are exempted from the new regime, but holding
companies with participations in companies carrying out a different activity from credit or finance
activity are subject to this provision132.
2.5 Tax rulings
Different kinds of tax rulings are established in Italian tax regime133.
A system of advance rulings was introduced by Art. 21 of Law No. 413 of 1991.
This ruling can be issued with respect to:
- the application of the anti avoidance provision;
- the application of the provision on fictitious interposition;
- the deductibility of advertisement and entertainment expenses;
- the application of the anti-tax haven legislation;
- the non application of the minimum tax on non-operating companies.
130 The rationale behind the regime was to prevent companies from purchasing holdings that qualify for the participation exemption. F.LEONE and E. ZANOTTI, Italian domestic tax consolidation: New opportunities for Tax Planning, in European Taxation, p.187 ss.; R. LUPI, Diritto tributario, parte speciale, cit., p. 152 ss. 131 Concept similar to EBITDA (Earning Before Interests, Taxes, Depreciation and Amortization). 132 R. MORO VISCONTI, Finanziaria 2008: reddito operative lordo (ROL) e deducibilità degli interessi passive nel Ddl Finanziaria 2008, in Il fisco, n. 44, 3 December 2007. 133 F. CAVALLINO and P. ZUIN, Il Ruling internazionale: problematiche applicative,in Il fisco, n. 7, 14 February 2005; F. M. GIULIANI and M. BIANCHI, Interpello: strumento utile o dannoso, in Il fisco, n. 27, 5 July 2004; A. RUSSO, New advance Rulings Regime, in European Taxation, October 2001.
128
The taxpayer must file a ruling request with the Department of Revenue of the Ministry of
Finance134. The request must contain a detailed description of the actual case whose tax regime is
uncertain and a proposed solution.
Till the 2007135, if the Department of Revenue did not reply within 60 days or rejected the
solution proposed by the taxpayer, the taxpayer could file a request with the special Advisory
Committee. If the taxpayer received no answer within 60 days, he could file a formal notice. If the
Advisory Committee did not reply within 60 days from the formal notice, the solution proposed by the
taxpayer was considered accepted. The reply bound only the parties of the ruling.
According to the Ministerial Circular No. 40/E of 27 June 2007, now the taxpayer has the
possibility to require only the advice of the “Agency of Revenue”.
A more general system of advance rulings applicable to all tax issues not covered by the old
system, was introduced by Art. 11 of the Law No. 212, of 27 July 2000. Accordingly, if there is
objective uncertainty regarding the correct interpretation136 of tax provisions, a taxpayer may obtain a
private ruling by a written request directed to the tax authorities. The application must be filed before
the relevant provision is to be applied.
The tax authorities must answer with a written and reasoned reply within 120 days. This reply
binds the tax authorities only for the specific case and in respect of the requesting taxpayer. If no reply
is given within 120 days, it is assumed that the tax authorities agree with the interpretation or the
behavior proposed by the requesting taxpayer and no penalties can be applied.
A procedure for international rulings was introduced in Italy with effect from 1 January
2004137.
The scope of these rulings includes interpretation issues involving companies with an
international activity. The main area of application of these rulings is transfer pricing, in particular
advance pricing agreements, but it concerns also the application of tax treaties to dividend, interest and
royalty flows.
International rulings are issued by special offices in Rome and Milan. Within 30 days of the
receipt of the application, the special office must invite the taxpayer to
134 Now “Agency of Revenue”. 135 The Advisory Committee has been abolished by the Law N. 17, of the 26 February 2007. 136 The interpretation is considered objectively unclear if the Ministry of Finance has not yet issued an interpretation trough a circular or other official document. 137 F. CAVALLINO and P. ZUIN, Il Ruling internazionale: problematiche applicative, cit.
129
discuss the documentation provided and to schedule the meetings. The entire process must be
completed within 180 days from the receipt of the application.
The procedure ends with an agreement between the taxpayer and the tax administration.
This agreement binds on the taxpayer and the tax administration for the financial year during
which they are issued and for the following two years. If the factual circumstances change the
agreement becomes invalid.
2.6. Anti-abuse provision
Italian tax system in order to counter avoidance and/or evasion by taxpayers has stated
different and specific types of anti-abuse provisions.
- Transfer pricing
Under art. 110 par. 7 of the T.U.I.R., transactions between resident companies and non
resident companies must be valued at their arm’s length price if the non-resident company is
controlled, directly or indirectly, by the resident company, or it controls, directly or indirectly, the
resident company, or it is controlled by the same person which controls the resident company.
The arm’s length price is the average price or consideration paid for goods and services of the
same or similar type, in free market conditions and at the same level of commerce, and at the time and
place at which the goods and services were purchased and performed.
Economic double taxation caused by a transfer pricing adjustment can be mitigated under
Italy’s income tax treaties. Within the European Union, cases of double taxation caused by a transfer
pricing adjustment can also be dealt with under the Arbitration Convention.138
- Thin capitalization
Thin capitalization rules have been repealed by the 2008 Budget Law.
138 C. GARBARINO, Manuale di tassazione internazionale, cit., 943 ss.; G. CHIESA, Corporate taxation, cit.; C. GALLI, Corporate taxation, cit.
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Anyway it’s important to take a brief look at these provisions, which applied to companies
whose turnover exceeds EUR 7,5 million and always to holding companies139.
The application of these rules results in the limitations to the deductibility of interest and other
remuneration paid on related-party financing in excess of a certain threshold.
Related party debts includes all loans and other financial transactions directly or indirectly
granted or guaranteed by a “qualified shareholder” or a “related party”.
For thin capitalization purposes, qualified shareholder is a shareholder directly or indirectly
controlling the borrower, or holding directly at least 25% of the capital of the borrower.
A company is regarded as a “related party” if it is controlled by a qualified shareholder under
Art. 2359 of the Italian Civil Code.
The safe harbor ratio is 4:1. However, the thin capitalization rules did not apply if, on the
aggregate basis, the related-party debt does not exceed four times the equity attributable to all qualifying
shareholders and their related parties.
- Controlled foreign company
It must be pointed out that the Budget Law of 2008 has introduced a change to Italian
Controlled foreign company (hereinafter CFC) legislation, but this variation is not entered into force
yet.
For this reason, it’s necessary to analyze the current CFC legislation and consequently to take a
look at the change, which will come into force in future.
In general, the CFC legislation consists of several rules designed to ensure that resident entities
are subject to current taxation on income derived abroad by their controlled companies located in
jurisdictions that are presumed to be tax havens.
Broadly speaking, the prevailing purpose of the CFC rules is to eliminate any possible tax
deferral which may result from locating income in countries having a particularly advantageous tax
regime140.
Italian CFC legislation is contained in Articles 167 of the T.u.i.r., which provides that if an
entity resident in Italy controls, directly or indirectly, also through trustee companies or any other
entities, an enterprise, a company or other entity which is resident or located in a country or territory
139 C. GARBARINO, Manuale di tassazione Internazionale, cit., p. 875 ss.; R. LUPI, Diritto tributario, parte speciale, cit., p. 152 ss.
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having a preferential tax regime, the income derived by the foreign entity is imputed to the resident
entity in proportion to its participations.
Control is defined with reference to art. 2359141 of the Italian Civil Code.
The CFC regime also apply to profits of foreign persons not resident in a tax haven earned
through their permanent establishment situated in a tax haven.
The profits of a foreign entity are attributed to an Italian person on the last day of the financial
year of the foreign entity.
Regarding the territorial requirements, preferential tax regimes are those applied in countries or
territories identified in the Ministerial Decree of 21 November 2001, as amended on 27 December
2002. The black list of tax haven for CFC purposes has been done considering the countries or
territories which have:
- A considerably lower level of taxation than the level of taxation in Italy;
- The lack of an adequate mechanism for exchanging information; or
- Other equivalent criteria.
According to art. 167 of the T.u.i.r, from a chronological standpoint, profits of the non
resident entity are attributed to the resident entity on the last day of the financial year of the foreign
entity. The income is subject to separate taxation at the average rate applied to the resident entity’s
aggregate income. This average rate cannot, however, be lower than 27%. A resident entity is granted a
credit for the taxes paid abroad against the Italian taxes levied on the CFC income.
Dividends subsequently distributed by the foreign entity are taxable only up to the amount
exceeding the income that has already been taxed in the hands of the Italian percipient under the CFC
regime.
Foreign taxes definitively paid on the part of income of which, under this provision, is
excluded from the taxable base in Italy are creditable against Italian taxes up to the amount exceeding
the taxes already credited under the CFC regime.
The application of the CFC rules can be avoided if the resident company proves that the
foreign entity carries on an actual industrial or commercial activity as its main activity in the country or
territory in which it is established. The application of the CFC rules can also be avoided if the resident
proves that the participation in the foreign entity does not achieve the localization of income in tax
haven countries or territories.
140 C. GARBARINO, Manuale di tassazione Internazionale, cit., p. 1393 ss.; L. TOSI and R. BAGGIO, Lineamenti di diritto tributario internazionale, cit. 61 ss.
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In order to ascertain whether the conditions for exclusion from the CFC legislation are met,
the taxpayer must apply for an advance ruling following a procedure that is similar to the procedure
under art. 11 of Law 212 of 27 July 2000.
According to art. 168 of the T.u.i.r., the CFC legislation is also applicable where an Italian
resident entity directly or indirectly holds 20% or more of the capital of an entity resident or established
in a state or territory having a privileged tax regime. This extension, however, does not apply to income
derived by companies resident in states or territories not having a privileged tax regime through
permanent establishment in states or territories having a privileged tax regime.
The 2008 Budget Law, as it has already been said, has introduced a change to the discipline
explained so far. In particular, it adds to the T.u.i.r. the article 168-bis, which provides a new “white
list” that is going to take the place of the “black list” of tax haven142.
The white list will be effected with a decree of the Ministry of Finance, and it will contain the
list of States and territory which consent an adequate exchange of information and in which the level of
taxation is not considerably lower than the level of taxation in Italy.
In the light of above, States or territories with a privileged fiscal regime will be identified as
which that are not included in the “white list”143.
The choice of these criteria has been done in line with OECD conclusions. In fact, at an
international level the adequate exchange of information is the most important instrument to counter
tax evasion and tax avoidance.144
These rules will come into force from the first taxable period following the period in which the
Decree of the Ministry of Finance will be published in the Official Gazette.
- Anti tax-haven legislation
Another effect of the anti-tax-haven legislation is, according to Art. 110, par. 10 of the T.U.I.R,
that costs and expenses arising from transactions between resident companies and companies resident
in a non-EU Member State with a preferred tax regime are not deductible. The deduction is allowed if
141 See part I, par. 1.2. 142 The Italian Black list makes a distinction among: (i) privileged tax regimes under any circumstance; (ii) countries regarded as having a privileged tax regime, with the exception of certain specific activities; (iii) countries and territories without privileged tax regime but deemed to be tax havens with regard to specified low-tax activities (offshore legislation or other tax incentives). 143 A. COTTO e G. VALENTE, DDL Finanziaria 2008: analisi delle principali novità, cit. 144 M. MANCA, Finanziaria 2008: art. 168-bis del Tuir – Le nuove White List, cit.
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the resident company can prove tat the non-resident company actually and mostly carries on a business
activity or that the transactions had a business purpose and have been concluded145.
In art. 110 of the T.u.i.r. there is a provision in order to harmonize the anti-tax-haven rules
with the CFC legislation. Accordingly, the anti-tax-haven rules do not apply to transactions between a
resident enterprise and a non-resident enterprise to which the CFC legislation applies.
- The rebuttable presumption of residence for foreign holding companies
Art. 73 par. 5-bis146 of the T.u.i.r. is considered an anti-abuse provision.
II DOUBLE TAX TREATIES
1. General
Under the treaties concluded by Italy, the residence of companies for tax purposes follows the
rule of art. 4 of the OECD Model Convention.
Accordingly, companies are deemed to be resident in the state in which their place of effective
management is situated.
The Paragraph 24 of the OECD Commentary states that the place of effective management is
the place where key management and commercial decisions that are necessary for the conduct of the
entity’s business are in substance made.
The place of effective management will ordinarily be the place where the most senior person or
groups of persons makes its decision, the place where the actions to be taken by the entity as a whole
are determined; but, no definitive rule can be given and all relevant facts and circumstances must be
examined to determine the place of effective management.
145 The 2008 Budget Law have introduced the “white list” also in this case (see CFC legislation). 146 See part. I, par. 1.2.
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In other words, the OECD reiterated that the determination of the place of effective
management is a question of fact.
Anyway, Italy issued an observation on the definition of the place of effective management
given by the Paragraph 24 of the OECD Commentary. In fact, Italy does not adhere to the
interpretation given in par. 24 concerning “the most senior person or group of persons” as the sole
criterion to identify the place of effective management of an entity. In Italian’s opinion the place where
the main and substantial activity of the entity is carried on is also to be taken into account when
determining the place of effective management.147
In conclusion, it’s important to underline that the criteria used are far from offering a
straightforward solution to the issue of dual resident companies.148
2. Relevant double tax treaty provisions for holding companies and preferentially taxed entities
2.1 Inter-company dividends
Tax treaties stipulated by Italy are in line with OECD Model and in particular with its Article
10 concerning dividends, in order to allow, but with some limitations, the withholding tax levied by the
Source State.
In fact, according to Art. 10 of the OECD Model, the withholding tax cannot exceed:
- 5 per cent of the gross amount of the dividends if the beneficial owner is a company, other than
a partnership, which holds directly at least 25 per cent of the capital of the company paying the
dividends;
- 15 per cent of the gross amount of the dividends in all other cases.
As it has been said, in Italian tax system dividends distributed to non residents are subject to a
withholding tax of 27%, but this percentage is subject to reduction under tax treaties provisions.
147 C. GARBARINO, Manuale di tassazione internazionale, cit. p. 260. 148 C. GARBARINO, Manuale di tassazione internazionale, cit., p. 261.
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In fact, tax treaties concluded by Italy follow the OECD model regarding the limit of the
taxation on dividends distributed to non residents, disposing in most of the cases a withholding tax of
15%.
But when dividends are distributed by qualified company149 Italy did not negotiate
withholding tax of 5%, as OECD model suggests. In most of the cases the withholding tax is 10% or
15 %. A 5% withholding tax apply only towards strong commercial partners, such as France, U.K.,
USA.150
Under the tax treaties signed by Italy, Italy normally provides for the avoidance of double
taxation in accordance with the OECD Model. The general method for avoiding double taxation is the
credit method, which is quite similar to the domestic foreign tax credit151.
However, there are some important differences between the foreign tax credit system provided
for by Art. 165 of the T.u.i.r and the tax credit system provided by Italian tax treaties. In fact, Art. 165
of the T.u.i.r. generally suffers from more strict requirements than those embodied in the treaties. For
example, the treaties do not require, for granting the credit, that the foreign taxes must be definitely
paid abroad.
2.2. Capital gains
Also regarding capital gains, tax treaties concluded by Italy follow the indications of OECD
Model, and in particular of its Art. 13, par.5, which states that capital gains shall be taxable only in the
state of residence. According to OECD model, there is an exception to this general rule: capital gains
realized from the transferring of shares deriving more than 50 % of their value directly or indirectly
from immovable property situated in a State may be taxed in that State. This exception is adopted in
many tax treaties signed by Italy.
Anyway, in some tax treaties concluded by Italy, i.e. with Israel and Vietnam, capital gains are
considered taxable in the state of source.152
149 When the beneficial owner is a company which hold directly at least 25 per cent of the capital of the company paying the dividends; 150 A. SFONDRINI, Dividendi e plusvalenze su partecipazioni (Inbound e Outbound), in Manuale di fiscalità internazionale, cit., pag. 435 ss. 151 See part I, par. 2.1..
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2.3 Anti-abuse provisions
The treaties concluded by Italy with Belgium, Kuwait, Malta, Sri Lanka and the United States
set forth an indirect formula of the beneficial ownership clause153.
This clause serves the purpose of denying treaty benefits in a contracting state if the taxpayer
residing in the other state is not the beneficial owner of the income derived in the first state.
The treaties do not generally provide a definition of “beneficial owner”. As a result, in order to
determine its scope, it is necessary to define its meaning in accordance with the domestic legislation of
each country.
Several treaties include specific anti-abuse clauses in the articles governing the taxation of
certain income categories. These provisions aim at disallowing the application of the treaty in
connection with the relevant income categories if the sole or main purpose of the person receiving the
income is to take advantage of the treaty benefits. Examples of such anti-abuse clauses may be found in
the Italy-United States tax treaty.
Such anti abuse clauses are based on the “substance over form” principle according to which
the benefits of a treaty do not apply if it is proved that the formal appearance is not consistent with the
“economic substance” of the transaction and that such appearance is adopted for the sole or main
purpose of taking advantage of benefits which may be obtained under the treaty.
In addition, these provisions are one possible application of the “bona fide business purpose
test” according to which the operation involving the application of the treaty must have a business
purpose justifying the existence of a company residing in one of the contracting states154.
Limitation on benefits (hereinafter LOB) clauses are included in Italy’s 1984 and 1999 treaties
with the United States. LOB clauses constitute an attempt to counter treaty shopping by disallowing
some or all of the treaty benefits to persons that do not satisfy several tests155 designed to reveal the
presence of a sufficient link with the contracting State.
It’s worth noting that the anti-abuse provisions provided by Italian domestic tax law are
considered fundamental rules of the national legislation, which cannot be repealed by tax treaties.
152 A. SFONDRINI, Dividendi e plusvalenze su partecipazioni (Inbound e Outbound), in Manuale di fiscalità internazionale, cit., p. 473 ss. 153 G. CASERTANO, Clausole anti-abuso nei trattati contro le doppie imposizioni, in Rass. Fisc. Int., n. 1, 1999; P. VALENTE, M. MAGENTA, Analysis of Certain Anti-Abuse Clauses in the Tax Treaties Concluded by Italy, in Bullettin, January 2000, p. 42. 154 P. VALENTE, M. MAGENTA, Analysis of Certain Anti-Abuse Clauses in the Tax Treaties Concluded by Italy, cit., p. 43. 155 i.e. “the ownership test” and the “base erosion test”.
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However, if tax treaties include anti-abuse provisions the application of national anti-abuse
provisions is possible within limits that are established by the tax treaty itself156.
In respect of the rebuttable presumption of residence for foreign holding companies, the
problem is to understand if this provision is compatible with tax treaties concluded by Italy.
According to Italian scholars157, it’s necessary to distinguish the two criteria that have been
used by the legislator for determining the existence in Italy of the seat in which is created the effective
will of the foreign holding.
In fact, concerning the residence in Italy for tax purposes of the majority of directors or other
equivalent management body no problems arise. This criterion seems to indicate that the effective will
of the foreign entities has been formed in Italy.
According to the author158, on the contrary, in the event that the foreign company is controlled,
directly or indirectly, by companies or individuals resident in Italy, it doesn’t seem there is compatibility
with tax treaties.
In the light of above, when there is a tax treaty tax administration can use this anti-abuse provision only
when the majority of directors are resident in Italy159.
156 C. GARBARINO, Manuale di tassazione internazionale, cit., p. 743 157 G. MELIS, La residenza fiscale dei soggetti Ires e l’inversione dell’onere probatorio di cui all’art. 73, commi 5-bis e 5-ter, cit., p. 872 ss. 158 G. MELIS, La residenza fiscale dei soggetti Ires e l’inversione dell’onere probatorio di cui all’art. 73, commi 5-bis e 5-ter, cit., p. 872 ss. 159 P. BERTOLASO, E. BRESSAN, Le “esterovestizioni” alla prova della presunzione di residenza, cit., fasc.1, 5617 ss.
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III EUROPEAN COMMUNITY LAW
1. Primary European Community Law
1.1. Discrimination of relevant fundamental freedoms/ justifications
The presumption of residence for holding companies laid down by Art. 73 par. 5-bis of the
T.u.i.r160 is surely a provision made for putting off Italian taxpayers to place holdings in other Member
States161.
In fact, to avoid the presumption of residence, the foreign company has to demonstrate that
the place of effective management is abroad and not in Italy and that there is an actual connection of
the effective management in the foreign country.
In other words, the burden of the proof that a foreign company is not resident for tax purposes
in Italy is shifted to the foreign company, whilst in general the burden of proof is assigned to tax
administration.
It is worth noting that Ministerial Circular No. 28/E of 4 August 2006 (hereinafter Circular)
states that the new anti-avoidance rule is in line with the case law of the European Court of Justice,
according to which any member State is free to determine the “connecting factor” with its territory162.
Moreover, according to the Circular, in terms of double taxation, the close link between the
new anti-avoidance rule and the principle of “the place of effective management” is in line with tax
treaties, as, in most cases this principle is the most important one in determining tax residence.
Despite these conclusions, Italian scholars163 think that Article 73-bis, par.5-bis is a restriction
of the exercise of the EU law freedom of establishment, laid down in Articles 43 and 48 of the EC
treaty.
160 See part. I, par. 1.2. 161 G. MELIS, La residenza fiscale dei soggetti Ires e l’inversione dell’onere probatorio di cui all’art. 73, commi 5-bis e 5-ter, cit., p.875. 162 ECJ, 27 September 1988, Case 81/87, The Queen v. H.M. and Commissioners Ireland Revenue.
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In order to ascertain whether such a restriction is justified, it is necessary to consider the
rationale of this provision.
According to Italian scholars164, the function of this provision is to avoid fictitious residences
abroad.
Freedom of States to adopt provisions with the specific goal to exclude from tax benefits
fictitious entities has been confirmed by the European Court of Justice (hereinafter ECJ) in two
judgments: Marks & Spencer165 and Cadbury Schweppes166.
According to the Court, as to freedom of establishment, it has already provided that the fact
that a company was established in a Member State for the purpose of benefiting from more favorable
legislation does not in itself suffice to constitute abuse of that freedom167.
It is also evident from case-law that the mere fact that a resident company establishes an
holding in another Member State cannot set up a general presumption of tax evasion and justify a
measure which damages the exercise of a fundamental freedom guaranteed by the Treaty168.
On the other hand, a national measure restricting freedom of establishment may be justified
where it specifically relates to wholly artificial arrangements aimed at circumventing the application of
the legislation of the Member State concerned169.
Moreover, in Cadbury Schweppes case-law the Court states that the resident company, which is
best placed for that purpose, must be given an opportunity to produce evidence that the holding is
actually established and that its activities are genuine.
In the light of the evidence provided by the resident company, the competent national
authorities have the opportunity, for the purposes of obtaining the necessary information on the real
situation, of resorting to the procedures for collaboration and exchange of information between
national tax administrations introduced by legal instruments in Community Law170.
163 L. DEL FEDERICO, Società estere e presunzione di residenza ai sensi del D.L. n. 223/2006: artt. 43 e 48 del trattato ce, convenzioni contro le doppie imposizioni e disapplicazione della norma interna di cui al comma 5-bis dell’art. 73 del Tuir in Il fisco, n. 41 6 November 2006; G. MELIS, La residenza fiscale dei soggetti Ires e l’inversione dell’onere probatorio di cui all’art. 73, commi 5-bis e 5-ter, cit., p.875. 164 G. MELIS, La residenza fiscale dei soggetti Ires e l’inversione dell’onere probatorio di cui all’art. 73, commi 5-bis e 5-ter, cit., p. 876 165 ECJ 13 December 2005, C-446/03. 166 ECJ 12 September 2006, C-196/04. 167 See, to that effect, Centros, paragraph 27. 168 See, to that effect, ICI, paragraph 26; Case C-478/98 Commission v Belgium [2000] ECR I-7587, paragraph 45; X and Y and Case C-334/02 Commission v France [2004] ECR I-2229, paragraph 27. 169 See Cadbury Schweppes, paragraph 51 and Marks & Spencer, paragraph 57. 170 See Cadbury Schweppes, paragraph 71.
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In conclusions, according to ECJ case-law, art. 73 par. 5-bis of the T.u.i.r. is not a breach of
community law.
It’s worth noting, however, that this provision can’t state an excessive burden of the proof for
taxpayers171.
A potential breach of community law case concerning Italy was the infringement procedure
IP/07/66172, dealing with taxation of outbound dividends.
Under the former legislation, a quasi exemption applied domestically, whereas outbound
dividends were subject to a withholding tax, reduced under tax treaties.
This difference in treatment could infringe the free movement of capital.
As it has already been said, the 2008 Budget law has changed the tax treatment applicable to
outbound dividends paid to entities resident of other EU or European Economic Area (hereinafter
EEA) Member States173.
In light of the new legislation, the withholding tax applicable on dividends paid from Italian
companies to entities resident in other EU or EEA Member States174 until 2008 is implicitly
acknowledged as discriminatory by the Italian Legislature itself.
1.2. The influence of previous ECJ case-law
Changes in anti-tax avoidance legislations were driven from a decision of the European Court of
Justice (hereinafter ECJ): in the Lankhorst-Hohorst case175, the ECJ held that German thin capitalization
171 G. MELIS, La residenza fiscale dei soggetti Ires e l’inversione dell’onere probatorio di cui all’art. 73, commi 5-bis e 5-ter, cit., p. 876 ss. 172 Commissions’ case reference number 2004/4350. 173 See part II, 2.1. 174 The list of these States will be contained in the “White list” (see CFC rules). Till the publishing of the new Decree of Finance Ministry, these states are those included in the Decree of Finance Ministry 4 September 1996: Algeria, Argentina, Australia, Austria, Belgium, Byelorussia, Brazil, Bulgaria, Canada, China, South Korea, Ivory Cost, Croatia, Denmark, Ecuador, Egypt, United Arab Emirates, Russia, Philippine, Finland, France, Germany, Japan, Greece, India, Indonesia, Ireland, Israel, Yugoslavia, Kazakhstan, Kuwait, Lithuania, Luxembourg, Macedonia, Malta, Morocco, Mauritius, Mexico, Norway, New Zealand, The Netherlands, Pakistan, Poland, Portugal, The United Kingdom, Czech Republic, Slovak Republic, Romania, Singapore, Slovenia, Spain, Sri Lanka, United States, South Africa, Sweden, Tanzania, Siam, Trinidad e Tobago, Tunisia, Turkey, Ukraine, Hungary, Venezuela, Vietnam, Zambia. 175 The case of Lankhorst-Hohorst GmbH vs Steinfurt Finance Authority (case C-324/00 of 12 December 2002) concerned the tax treatment of interest that a German company was paying on a loan from its Dutch parent company. The borrower was clearly thinly capitalized. According to the German statutory provisions, interest paid by a German subsidiary on a loan provided by a foreign parent company was taxed as a deemed dividend at a rate of 30%, whereas, in the case of a German subsidiary with a German parent company, interest paid would have been treated as expenditure. The EJC judged the
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rules, which applied only to non-resident companies, violated the freedom of establishment provision
in Art. 43 of the EC Treaty.
After the ECJ decision, it became clear that several EU Member States’ thin capitalization regimes
would not be considered legitimate: the rules typically treated companies owned by non-resident
shareholders differently from companies owned by resident shareholders with respect to the
deductibility of interest paid on loans. This is, according to the Court, a restriction that may make
cross-border economic activities within the EU less desirable than purely domestic activities176.
It is worth pointing out that the draft version of Italian thin capitalization rules only applied to non-
resident shareholders.
However to ensure compliance with EC Law and the principles set out in the Lankhorst decision, the
Government extended the provisions to include loans granted by Italian entities177. To avoid
economic double taxation in cross-border transaction it has been proposed to limit the application of
the thin capitalization rule to non-EU resident shareholders or those not included on the “white list”.
Nevertheless, this proposal has not been included in the final thin capitalization provision.
2. Secondary Community Law
The Parent-Subsidiary Directive178 aims at harmonizing tax rules governing the relations
between parent companies and subsidiaries in different Member States. It does so by eliminating
juridical and economic double taxation of profits obtained by a subsidiary on a Member State that are
distributed to the parent company in another Member State.
To attain this goal, the country of the parent must refrain from taxing dividends or must give
an indirect foreign tax credit, ad the source state must in addition refrain from levying a withholding tax
on profits distributed to the parent.
incompatibility of the German thin capitalization rules in s. 8 of the Corporate Income Tax Act with the freedom of establishment principle in Art.43 of the EC Founding Treaty. Difference in treatment may not be justified by the risk of tax evasion since the foreign parent company will in any event be subject to tax in the state in which it is established (Lankhorst-Hohorst, C-324/00, 2002, ECJ, at. par. 37). 176 C. GARBARINO, Manuale Di Tassazione Internazionale, cit., p. 881 ss. 177 C. GARBARINO, Manuale Di Tassazione Internazionale, cit., p. 881 ss. 178 Council Directive 90/435/EC of 23 July 1990.
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For the Parent-Subsidiary Directive to be applicable, the parent must hold a 15% of the capital
of another Member State’s company179.
As we have already explained, Italian legislation, as modified by 2008 Budget Law, is in
conformity with the EC directive
The Interest and Royalty Directive180aims at abolishing taxation on interests and royalties in
the country where it arises.
According to the EC Interest and Royalty Directive the source state is prohibited from
imposing any tax on the interest payment. This means that the source state may not levy any
withholding tax on the interest paid, eliminating only the juridical double taxation not also the
economic one181.
Under Italian law implementing the provisions of the EC Interest and Royalty Directive,
outbound interest and royalties are exempt from any withholding tax, provided that the recipient is an
associated company of the paying company and is resident in another Member State or such a
company’s permanent establishment situated in another Member State.
Two companies are “associated companies” if:
- one of them holds directly at least 25% of the voting of the other; or
- a third EU company holds directly at least 25% of the voting rights of the two companies.
The relevant companies must have a legal form listed in the Directive and be subject to a
corporate income tax. Moreover, a 1-year holding period is required.
Italy has implemented the EU Merger Directive182 regarding the tax ramifications arising from
mergers, divisions, transfers of assets and exchange of shares between EU-resident corporations.
In line with the EU Merger Directive, Italian tax law specifies the conditions under which
income, profits and capital gains from the above indicated business reorganizations - occurring between
Italian and other EU-resident corporations - are deferrable.
Under the implementing regime, qualifying merger and divisions do not give rise to capital
gains or losses on the assets of the merged companies; the value of the assets recognized for tax
purposes is rolled over to the company resulting from the merger, provided that, if an Italian company
is merged, the assets remain part of the Italian permanent establishment. Tax-deferred reserves and
179 C. GARBARINO, Manuale di tassazione internazionale, cit., p.355 ss. 180 Council Directive 2003/49/EC of 3 March 2003. 181 C. GARBARINO, Manuale di tassazione internazionale, cit., p. 411 ss. 182 Council directive 90/435/EEC of 23 July 1990.
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provisions must be reinstated in the accounts of the Italian permanent establishment resulting from the
merger.
Qualifying contributions of assets do not give rise to capital gains or losses on the assets of the
contributed business. The value of the contributed business recognized for tax purposes is rolled over
to the shares received from the contribution.
The transfer of a foreign permanent establishment by an Italian person is taxable, but a tax
credit is granted.
A qualifying exchange of shares does not give rise to capital gains or losses on the shares
exchanged. The value of the shares exchanged is rolled over to the shares received. The regime applies
only if at least one of the person exchanging shares is a resident of Italy.
This last requirement might be in conflict with the Directive183.
3. Human rights conventions / Constitution
First of all, it’s necessary to write down a brief introduction concerning the connection
between Human Rights conventions and Italian legislation.
The European Convention on Human Rights (hereinafter ECHR) was signed by Italy on 4
November 1950 and ratified by Law No. 848, of 4 August 1955.
Italy is also part of the International Covenant on Civil and Political Rights (hereinafter
ICCPR), which was ratified on 15 September 1978.
The ECHR provisions are now recognized as “general principles” of the Italian legal system.
So, they are a source of rights and obligations for all persons and they cannot be derogated from by
domestic law184.
It’s worth noting that most of the principle contained in the ECHR are also contained in the
Italian Constitution, in particular the non-discrimination principle is laid down in Article 3 of the Italian
Constitution185.
183 C. GALLI, Corporate taxation, cit. p. 58.; C. GARBARINO, Manuale di tassazione internazionale, cit., p. 654. 184 C. CAMOUNT CAIMI, Italy, in European Taxation, December 2001, p. 532. 185 Article 3 of the Italian Constitution states that: “All citizens have an equal social status and are equal before the law, without distinction as to sex, race, language, religion, political opinions, and personal or social conditions. It is the duty of the Republic to remove all economic and social obstacles which, by limiting the freedom and equality of citizens, prevent
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Because of the wide protection guarantees by the Constitution, taxpayers have generally
invoked Constitutional principles, rather than ECHR principle.
In particular, Italian scholars186 observes that the limited application of Article 14187 of the
ECHR to tax cases is due to the broad protection against tax discrimination that is guaranteed by
Articles 3 and 53 of the Constitution.
However the ECtHR jurisprudence on Article 14 of the ECHR should influence the domestic
courts in the application of the Constitutional principle of non-discrimination.
Moreover, the application of Art. 26 of the ICCPR188 is not limited only in relation to the
rights which are provided for in the Covenant. Consequently, the provision can also be relied on in the
field of discriminatory taxation of income from capital189.
It’s worth noting that not every differentiation of treatment will constitute discrimination. In
particular, according to the Human Rights Committee, there is not discrimination if the criteria for such
differentiation are reasonable and objective and if the aim is to achieve a purpose which is legitimate
under the conventions.
In respect to the tax regimes, the problem is whether direct taxation measures that distinguish
between purely domestic situations and cross-border situations may constitute an unjustified
discrimination.
In my opinion, it is necessary a case by case approach.
In respect to the presumption of residence of holding companies laid down in art. 73 par. 5-bis
of the T.u.i.r., it’s worth noting that the Italian Constitutional Court has claimed that the “absolute
presumptions”190 are generally illegitimate.
On the contrary, a rebuttable presumption of residence is considered legitimate when it is
reasonable, according to art. 3 of Italian Constitution, and it respects taxpayers right of defense191.
the full development of the individual and the actual participation of all workers in the political, economic and social ornanization of the country”. 186 A. DI PIETRO, The principle of equality in AA.VV. European taxation – Italy in The principle of equality in European taxation, edited by G. Meussen, p. 115 ss. 187 Article 14 of the ECHR states that: “The enjoyment of the rights and freedoms set forth in this Convention shall be secured without discrimination on any ground such as sex, race, language, religion, political or other opinion, national or social origin, association with a national minority, property, birth or other status.” 188 Article 26 of the ICCPR states that: ”All persons are equal before the law and are entitled without any discrimination to the equal protection of the law. In this respect the law shall prohibit any discrimination guarantee to all persons equal and effective protection against discrimination on any ground such as race, colour, sex, language, religion, political or other opinion, national or social origin, property, birth or other status”. 189 D.S. SMITH, Capital movement and direct taxation: the effect of the non-discrimination principles, in EC Tax Review, n. 3, 2005. 190 Presumptions which disallow to disprove an assumption.
145
In the light of above, according to Italian scholars, art. 73, par. 5-bis is legitimate because it is
considered reasonable.
4. State Aid/ Harmful Tax Competition
4.1. State Aid
The ground for expansion of state aid control provided by art. 87 of the EC Treaty in the tax
area was defined by the 1998 Commission’s Notice on the application of state aid rules to measures
relating to direct business taxation192.
Already in 1974193 the Court of Justice refused to consider that cross-border differences in
taxation were a justification to grant state aid.
According to the Court, unilateral relief of a specific factor or cost of production, such as
taxation for a given sector of the national economy disturbed the existing competitive equilibrium and
accordingly fell under the scope of state aid review.
The fiscal aid Notice clarifies that in applying state aid rules, it is irrelevant whether the
measure is a tax measure.
In order to be termed aid, a tax measure must meet four criteria. First, the measure must
confer on recipients an advantage. Secondly, the advantage must be granted by the State or through
state resources. Thirdly, the measure must affect competition and trade between the Member States.
Lastly, the measure must be specific or selective, in that it favors certain undertakings or the production
of certain goods.
Selectivity is a distinct notion from advantage. While the latter relates to a derogation or
exception from the tax system not-justified by its inherent logic, the former identifies an unreasonable
discrimination between comparable business situations, being incompatible with the scope of a tax
scheme applying to certain distinct situations.
191 G. MELIS, La residenza fiscale dei soggetti Ires e l’inversione dell’onere probatorio di cui all’art. 73, commi 5-bis e 5-ter, cit., p. 869 ss. 192 Commission Notice on the application of state aid rules to measures relating to direct business taxation, OJ, C 384, 10 December 1998. 193 Judgment of the Court of 2 July 1974, Italy vs. Commission, Case 173/73.
146
A distinction must be made between new and existing aids under the Procedural State aid
Regulation194. In general, existing aids are those which were into force before the EC Treaty became
applicable, and the ones already approved by the Commission. All other state aids are new aids.
With respect to new aids, Art. 88, paragraph 3 of the EC Treaty requires Member States to
notify the Commission of all their plans to grant or alter aid; it provides that none of the proposed
measures may be put into effect without the Commission’s prior approval.
With respect to existing aids, Art. 88, paragraph 1 states that the Commission shall, in
cooperation with Member States, keep under constant review all systems of aid existing in those states,
including state aid in the form of tax measures.
To allow any such review to be carried out, the Member States are required to submit reports
to the Commission every year on their fiscal state aid systems and provide an estimate of budgetary
revenue lost195.
Italian tax regime196 described so far cannot be regarded as State aid under Art 87 EC Treaty,
nor there is an holding regime which is a State Aid approved by the European Commission as required
under art. 88, paragraph 3 of the EC treaty.
4.2. EC Code of Conduct/OECD Report on Harmful Tax Competition
The Code of Conduct197 requires Member States to “roll back” existing tax measures that
constitute harmful tax competition and refrain from introducing any such measures in the future
(“standstill”).
The Code was devised to cover the tax measures which may affect in a significant way the
location of business activity in the Community.
194 Council Regulation No. 659/1999 of 22 March 1999 laying down detailed rules for the application of art.93 (now art. 88) of the EC Treaty. 195 P. ROSSI-MACCANICO, The specifity criterion in fiscal aid review: proposals for state aid control of direct business tax measures, in EC Tax Review, n. 2, 2007; P. ROSSI-MACCANICO, Fiscal state aid goes global, in EC Tax Review, n.3, 2007; AA.VV. Aiuti di Stato in materia fiscale, edited by L. SALVINI, Cedam, 2007. L. SALVINI 196 However, it’s worth noting a recent Commission decision of 16 March 2005 ( C 8/2004) on the tax incentives in favor of newly listed companies in Italy, which clarified the application of the proportionality criterion to determine the specificity of a tax measure; in P. ROSSI-MACCANICO, The specificity criterion in fiscal aid review: proposals for state aid control of direct business tax measures, cit. p. 97. 197 Set out in the conclusions of the Council of Economics and Finance Ministers of 1 December 1997.
147
The Code is sometimes referred to as the Primarolo Committee Code, because it involved the
establishment of a Committee, originally under the chairmanship of Dawn Primarolo, to examine
harmful tax practices within the EU Member States and their dependent and associated territories.
That Committee, in 2000, published a list of sixty-six potentially harmful tax regimes.
For Italian tax system the only one measure condemned was the Trieste Financial Services and
Insurance Centre scheme. The scheme creates a Centre of financial and insurance services in Trieste
area.
Financial, insurance and credit companies (both residents and not) established in the Centre
and operating with central and eastern European countries benefited of tax incentives. The incentives
consisted of:
- an exemption from the IRPEG income tax, for the profits produced in the Centre which arise
from operations with countries of central and eastern Europe or of the former Soviet Union, or
destined to such countries; and
- a reduction of the indirect taxes on business (registration, mortgage and cadastral taxes are due
on a fixed basis).
Incentives were given for five years starting from the opening of the Centre and must respect
two limits: the total amount of the aid cannot exceed the threshold of ITL 65 billion, and the total
amount of the loans and investment in eastern countries cannot exceed EUR 3,5 billion. Companies
operating in the Centre were not obliged to collect withholding tax198. It’s worth noting that the
Trieste regime has never been implemented.
In April 1998 OECD published the first of four reports, entitled “Harmful Tax Competition:
A Global Issue”.
There are two aspects of the OECD campaign. One aspect focuses on the thirty OECD-
member countries, and entailed a process of identifying potentially harmful preferential tax regimes,
and there were some forty seven identified by 2000. The other aspect of that campaign was the listing
of tax havens and the obtaining of commitments from these tax havens. For that, some forty-seven
jurisdictions were originally examined to see whether they were tax havens. To date, of the forty-seven,
nine have been excluded and are ruled to be non havens;
thirty-three are havens which have made commitments to the OECD; there remain five
uncooperative tax havens that have still not made commitments to the OECD.
198 G. MELIS, Coordinamento fiscale nell’Unione Europea, in Enciclopedia del diritto 2006, Giuffrè; P. VALENTE, Concorrenza fiscale “dannosa”: il rapporto provvisorio del Gruppo di lavoro “Codice di condotta” e le raccomandazioni OCSE, in Il Fisco n. 23, 7 July 1999; F. SPINOSO, “Società holding” comunitarie e “rapporto Primarolo” in Corr. Trib. n. 17, 2001, p. 1267.
148
Italy, through not having implemented the Trieste regime, has not had a particular problem.
However, it is worth noting that under the OECD’s report of harmful tax competition the lack
of effective exchange of information is one of the key factors in identifying a harmful tax policy.
Countries may be unwilling or unable to exchange information due to administrative policies, limited
access to banking information, or other practices that allow an investor to shield the financial account
from potential examination by tax authorities interested in preventing fiscal evasion and avoidance199.
In regard to this conclusion, the 2008 Budget Law, as it has already been said, has provided a
new “white list” that is going to take the place of the “black list” of tax haven.
The “white list” will contain the list of States and territory which consent an adequate exchange
of information criteria and in which the level of taxation is not considerably lower than the level of
taxation in Italy200.
4.3. WTO Agreements
The World Trade Organization was established on 1 January 1995 as a result of the Uruguay
negotiations and currently consists of 150 Members201.
All participating countries are bound by both the WTO Agreement itself and the international
trade agreements and associated legal instruments as annexed to the WTO agreements202.
WTO agreement is established in order to develop and integrated, more viable and durable
multilateral trading system.
It is worth noting that the Agreement on Subsidiaries and Countervailing Measures, stipulated
in 1994, can be utilized for countering harmful tax competition practices and in particular the so called
production tax havens and headquarters tax haven203.
199 J. M.WEINER, H. J. AULT, The OECD’s report on harmful tax competition, in National Tax Journal, V. 51, n. 3 p. 601 ss., (http://ntj.tax.org/wwtax/ntjrec.nsf/67295626C4BF3A3D85256AFC007F06F5/$FILE/v51n3601.pdf). 200 P. BAKER, The world wide response to the harmful tax competition campaigns, in GITC Review, V. 3, n. 2, (http://www.taxbar.com/documents/world-wide_response_000.pdf); J. M.WEINER, H. J. AULT, The OECD’s report on harmful tax competition, cit., p. 601 ss. 201 A. PERSIANI, Organizzazione mondiale del commercio, disciplina in materia di sovvenzioni ed imposizione diretta: alcune riflessioni, in Dir. Prat. Trib. Int., n.2, 2007. 202 D.S. SMITH, Capital movement and direct taxation: the effect of the non-discrimination principles, cit., p. 132 ss. 203 A. PERSIANI, Organizzazione mondiale del commercio, disciplina in materia di sovvenzioni ed imposizione diretta: alcune riflessioni, cit., p. 560 ss.
149
Production tax havens are non-European States which have established a preferentially tax regime
for non resident companies. In this perspective, it can be said that these States realize an harmful tax
competition. Moreover, these regimes stimulating production and the exchange of goods can fall within
the Agreement on Subsidiaries and Countervailing Measures. In fact, they utilize export subsidies
derogatory in respect to the general taxation.
The headquarters tax haven provide for facilitations for attracting the localization of the foreign
multinational companies legal seat. These measures can affect, in an indirect way, the exchange of
goods. In fact, they enable the beneficiary companies to sell goods on comparatively lower prices.
In conclusion, the Agreement on Subsidiaries and Countervailing Measures can be useful for
supporting the OECD campaign against harmful tax competition at least for two reasons. First of all,
the WTO agreement consists of 150 members, whereas OECD members are only 30. Moreover, all
participation countries are bound by the Agreement on Subsidiaries and Countervailing Measures204.
150
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155
EUCOTAX Wintercourse 2008
Budapest
Università LUISS – “Guido Carli” – Roma
Facoltà di Giurisprudenza
Cattedra di Diritto Tributario dell’Impresa
Cattedra di Diritto Tributario Internazionale e Comunitario
TAXATION OF GROUPS OF COMPANIES
Ermanno Giuliani
Matricola: 072113
156
I - DOMESTIC SYSTEM
1. INTRODUCTION
In 2004 the consolidated regime of taxation for groups of enterprises entered into force in
Italy.
Our system provides for two genres of consolidation:
- National-based consolidation;
- World wide-based consolidation.
Looking at the common peculiarities of these two categories, at a first sight the consolidated
system of taxation works in the way that follows.
The holding company calculates the overall corporate income of the group, which is made
up of the sum of all the incomes of the consolidated enterprises. Then, the holding files a tax
return, provides for the determination of the amount of the taxes and finally pays for them.
With regard to the entities which can take part to the consolidation system, the national
consolidated is different from the world wide one for some peculiarities, which will be better
explained beyond.
The first one is that the national regime is based on the so-called “cherry-picking
approach”, i.e. the holding can choose which entity will enter the consolidated and which one will
not. The world wide one, on the contrary, obeys the “all in-all out” principle: there cannot be any
foreign enterprise of the group which stays out from the consolidated area, once that it has been
made the choice for consolidation.
The second peculiarity concerns the personal requirements of the members of the
consolidated: broadly speaking, the world wide-based system is fitter for the major multinational
groups; the national-based one, instead, is thought for resident companies.
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1.1 – ALTERNATIVE TECHNIQUES OF GROUP TAX PLANNING: THE TAXATION BY TRANSPARENCY SYSTEM
Another way to unify the income of several enterprises under the Italian tax law is the
taxation by transparency of capital companies, regulated in articles 115 and 116 of the “Testo Unico
delle Imposte sui Redditi”205 ( “Consolidated act on income taxes”, hereafter named “TUIR”).
This method consists in the attribution of the corporate income directly to the resident
partners of a company, proportionally to their own participation share, apart from the perception
of dividends 206.
This set of rules is deemed to operate “in coordination with the consolidated system”207, since the
relevant threshold of participation in a company varies from 10% to 50% (in the transparency
regime). These percentile rate is referred both to the shares with voting right and to the
participation to company’s profits.
The complementarity results also from a provision contained in art.115 TUIR, in which it is
stated that the transparency taxation does not apply to the entities which already are in a
consolidated208.
1.1.1 – REQUIREMENTS OF THE TRANSPARENCY SYSTEM
Now we are going to talk about the requirements which allow enterprises to choose for
transparency in the Italian system.
Resident capital companies (as defined by art. 73, par 1, let. a), TUIR) can choose this
discipline on condition that they comply with the participation threshold (10-50% of the shares
with right to vote and same percent rate of the right of participation to profits) and, then, that the
participated company is a resident capital company, too209. Whether the participating members are
205 Decreto del Presidente della Repubblica n. 917/86. 206 L. BUCCI, La tassazione per trasparenza delle società di capitali, in La disciplina IRES dei gruppi di imprese, Milano, 2006, p. 29. 207 V. FICARI, Profili applicativi e questioni sistematiche dell’imposizione “per trasparenza” delle società di capitali, in Rass. Trib., 2005, I, pp. 40-41. 208 Art 115, par.1, last phrase, lett. B), TUIR. 209 Art 115, par.1, first phrase, TUIR.
158
not resident, the option for transparency is permitted on condition that there is no withholding at
the source on distributed profits210.
Unlike the consolidated discipline (national-based), the percent amount is to be calculated
with regards only to the shares directly owned by the company. Moreover, the requirements of the
owned participations and the participations to profits must exist jointly in the company.
Art 116 TUIR provides for a regime of transparency for small companies (Limited
Companies with little cash flow and participated by less than 10 natural persons) and cooperatives
(with less than 20 members).
It is a residual discipline, with respect to the one provided in art. 115, and the reason behind
that is to make the members of a small Ltd. to be subjected, with regards to the profits, to the same
taxation provided for the members of a
partnership made up of natural persons.
By this way, in fact, they can avoid the heavier taxation provided for natural persons who
earn profits from capital companies (which rate is 40%, levied at the moment of raising)211.
On the contrary, the transparency regime under the art.115 aims to re-create a form of
transfer of losses related to participated companies, which was eliminated by the introduction of the
participation exemption system.
2. REQUIREMENTS FOR THE CONSOLIDATED SYSTEMS
First of all, we have to make a distinction between national consolidated and world wide-
based one.
2.1 - NATIONAL CONSOLIDATED
In this system, the holding can be both resident212 and non-resident213; these last ones have
to comply with some further conditions, that we will see after.
About resident holding, they can be:
210 Art. 115, par.2, TUIR. 211 Art. 47, TUIR. 212 Art 117, par. 1, TUIR: 213 Art. 117, par.2, TUIR.
159
• Companies, cooperatives, mutual insurance companies, European companies and European
cooperatives;
• Companies and entities of any kind, trusts included, having or not legal personality214.
Non-resident holding (which could be companies and entities of any kind, including trusts,
according to art.73, par.1, let. d)) as such can opt for national consolidation only if they satisfy two
conditions:
• They must be resident in Countries which have contracted with Italy a Convention against
international double imposition;
• They must carry on in Italy a business activity through a Permanent Establishment
(hereafter, PE), in whose property the participations related to each controlled company are
included215.
For the purposes of the national consolidated group taxation, only resident capital companies
can assume the quality of controlled entities. More specifically, according to art 120 TUIR, these ones
can be deemed as controlled companies: Joint-stock Companies, Limited Partnerships, Limited
Companies.
Other persons that can take part to national consolidation as controlled individuals are those
ones which transfer in Italy (from a foreign Country) their fiscal residence and the entities which have
turned into persons liable to the Italian corporate income tax (IRES)216.
Obviously, the entity that decides to transfer its residence must realize a genuine link with the
territory of the Italian state, according to what art.73 paragraph 3,TUIR states.
2.2 - WORLD WIDE CONSOLIDATED
In the world wide consolidated, also, we have to make some differences between controlling
persons and controlled entities.
The holding has to comply with the requirements of the art 73, paragraph 1, lett. a) and b),
TUIR, that is to say:
• It has to be resident in Italy;
214 Art. 73, par. 1, lett. A) and b), TUIR. 215 Art. 117, par. 2, TUIR.
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• It has to be a capital company (Joint-stock company, limited partnership, limited company),
or a cooperative company or a mutual insurance company;
• Else, it has to be a public or private entity, other from company, which carries on, solely or
mainly, a commercial activity 217.
Furthermore, there are other requirements to be satisfied by the holding which decides to
consolidate.
It has, alternatively,to:
• Have its shares traded in regulated stock exchanges;
• Be itself a controlled company, according to the requirements under art.2359, par 1, civil
code, on condition that the controlling person is, alternatively, the Italian state (or other
public entities) or resident natural persons which do not qualify as dominant shareholders
(under art.2359 par. 1, lett. a) and b), c.c.) of other resident or non-resident companies or
commercial entities218.
Talking about controlled foreign entities, they have to satisfy the requirements under art. 133
TUIR.
Particularly, they have to be companies or entities of any kind, having or not legal personality,
having a link of control with the holding according to art. 2359, n°1 or 2, c.c.219.
Moreover, the world wide consolidated admits also the possibility that the foreign subsidiaries
are indirectly controlled by one or more resident companies.
In this case, art. 131 par. 2 TUIR states that first, the resident companies have to make among
them a national consolidated; then, once that the national consolidated have been done, the top-level
resident holding exercises the option for the world wide regime, by including in it all the foreign
subsidiaries directly and indirectly controlled.
216 Art. 2, par. 1, Ministerial decree (09-06-2004) for the administrative implementation of the consolidated system. 217 Art. 130, par. 1, TUIR. 218 Art 130, par.2, lett. a) and b), TUIR. 219 art. 133, par. 1, TUIR.
161
3. – LINK BETWEEN PARENT AND SUBSIDIARIES
Talking about the necessary link between parent and subsidiaries, in this case also we have to
deal with this subject first with regard to the domestic consolidated and then to the world wide one.
3.1 - NATIONAL CONSOLIDATED
All the controlled companies must have a link with the holding according to art 2359, par. 1, n°
1) c.c., i.e. the holding must have at its disposal the majority (more than 50%) of the shares with voting
right in the controlled company.
It is a general criterion, integrated and specified by the TUIR inherent provisions220.
According to such provisions, a company is controlled, for the purposes of the national
consolidated, when:
• Its capital is owned, directly or indirectly, for more than 50% by the holding; or
• Its profits are attributed, directly or indirectly, to the holding for more than 50%.
We have to consider these requirements with no regard to shares without voting rights and to
the corresponding dividends, attributable to this last category of shares.
Besides, the 50% rate is supposed to be calculated by taking into account the eventual de-
multiplying rate produced by the chain of control of the intermediate companies in the group221.
Furthermore, these requirements of control have to come into existence from the beginning of
the financial year in which the companies of the group have chosen to consolidate222.
3.2 - WORLD WIDE CONSOLIDATED
The necessary link between resident holding and controlled entities is the same as the one in the
national-based discipline, with some further possibilities.
Apart from the direct control which occurs in conformity with art. 2359, comma 1, n°1, c.c.
(possession of the majority of shares with voting right in the ordinary shareholders meeting), there
220 Art. 120, TUIR. 221 An example can illustrate the matter. Company A owns 70% of B’s shares; B owns 70% of C’s. A cannot consolidate C since, because of the de-multiplying effect due to the chain of control, it owns only the 49% of the shares of C. Example in M. DI SIENA, Il consolidato fiscale, cit., p. 90. 222 Art. 120, par. 2, TUIR.
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could be even a particular possibility of indirect control. We have a sort indirect ownership of a non-
resident consolidated entity when the resident holding is as such controlled by:
• The Italian State or other public entities;
• Resident natural persons who cannot be qualified as owning the majority or a sufficient
number of shares with voting right in a resident or non-resident company or commercial
entity.
Moreover, it could happen (as we have seen before) that non resident entities are owned by the
top level holding through one or more intermediate resident companies (“sub-holding”). In such a case,
first it must be done the consolidation among national companies; then, the top level holding is entitled
to consolidate the foreign entities.
3.3 – OTHER REQUIREMENTS
One of the most important peculiarity which is common to the two forms of consolidation is
their optional nature.
With regard to the principles on the ground, as already said above, the national consolidated is
based on the “cherry picking” approach (the holding is able to choose which company will enter the
consolidated area and which will not), while the world wide one follows the “all in-all out” principle; as
a consequence, “the option made by the holding has to be effective with regard to all the controlled foreign companies of
the group”223.
Furthermore, the TUIR puts some conditions to the legal effectiveness of the option.
With regard to the national consolidation, these are the requirements:
• the equality of the financial period of any controlled company with that one of the holding;
• joint exercise of the option, both by the holding and by each single controlled entity to be
consolidated;
• each controlled member has to put its domicile at the holding one, so that they are able to
receive any notification of acts and deeds related to the tax periods which fall under the option;
• the option must be communicated to the internal revenue agency within the 16th day of the 6th
month of the tax period before the one to which the consolidated is related.224
223 V. CAPOZZI, Il consolidato mondiale, in “La disciplina IRES dei gruppi di imprese”, cit., p. 127. 224 Art. 119, TUIR.
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In the world wide consolidated, too, there are further conditions to be satisfied in order to
make the option for consolidation made by the holding to be effective.
Here they are:
1. as already said, the option has to involve all the entities of the group, holding and controlled
persons (“All in-all out” approach);
2. the financial period of the holding must be the same as that one of each controlled company;
3. the audit of every single member of the group has to be done by the authorized persons listed
in the CONSOB225 roll of auditors. Persons other than those listed in the aforesaid roll can do
the audit, but only if the assessment concerns non resident entities and on condition that the
auditor of the holding uses the results of the controlled companies’ assessments (made by such
persons) to release an evaluation on the yearly consolidated balance. Every non resident
controlled company, moreover, has to release a certificate in which it is stated:
• its approval for the audit of its balance sheet as seen before;
• its commitment to cooperate with the holding in order to determine the taxable base
and to accomplish, within 60 days from the notification, to the requirements of the
Internal Revenue Agency.226
The exercise of the option, finally, has to be communicated to the Internal Revenue
Agency227 and within one month after the expiry date of the answer to the application to the
Italian Revenue Agency under art.131 par. 3 TUIR228.
The mentioned application is put forward by the holding and is aimed to assess the
existence of all the necessary requirements to do the option. It shall point out the following
elements:
• the qualification of the consolidating person;
• the full description of the foreign structure of the group, with the exact identification of
each controlled entity;
• the name, the seat, the activity carried out, the last available balance sheet related to all
non resident controlled companies and the quantity of shares owned by the holding or
by the controlled entities which fall under the provision of art.131 par.2 TUIR; the
225 Commissione Nazionale Società e Borsa, the Italian board of control for companies which have their shares listed in the Italian recognised stock exchange. 226 Art. 132, TUIR. 227 See art. 142, TUIR.
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eventual different lasting of the financial period (relatively to the holding) and the
reasons behind this difference;
• the name of the authorized auditors and the confirmation of their acceptation to do the
assessment;
• the list of the credited taxes according to art.165 TUIR.229
Further obligations can be met by the holding in order to receive the authorisation to
consolidate from the Italian Revenue Agency and to achieve a better protection of the revenue’s
interests.
4 TREATMENT OF LOSSES
4.1 - NATIONAL CONSOLIDATED
After calculating its own income, the holding receives the tax returns of all the
controlled companies and then it computes the taxable income of the group, made up of the
sum of the returned incomes of all the companies, regardless of the amount of shares owned by
the holding in any single controlled entity (anyway, it has to be more than 50%). It is an
important peculiarity of the national based discipline: the income of every single consolidated
company is fully included in the overall income of the group, once it has been reached the
“control threshold” under art. 120 TUIR.
The holding, at last, presents the consolidated tax return, which can have a result both
in profit or in loss, depending on the sum of the net incomes of all the consolidated
members230.
If a loss results from the computing of all the net incomes of the controlled companies
and of the holding, it is up to this last one to carry forward the loss so obtained231.
Furthermore, art. 118 par. 2 TUIR contains a provision aimed at contrasting the
phenomenon of the companies bought only to get their losses for tax avoidance purposes.
228 Art. 132, par 3, TUIR. 229 Art. 132, TUIR. 230 Art. 122, TUIR. 231 Art. 118, par 1, TUIR.
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Carrying on the exam of the provision, we find that the fiscal losses related to the
periods before the beginning of the consolidated system of taxation can be used only by the
company which has suffered them.
This to avoid, as a general principle, the abuses related to the purchasing, just before the
consolidation, of loss-making companies only to take advantage of their liabilities, in order to
reduce, then, the group taxable base 232.
Then, dealing with the matter of the transfer of wealth, the amounts of money which
are paid or received by a company as remuneration for received or attributed fiscal benefits are
excluded from the whole taxable income of the group233.
Now, some interesting remarks could be done on the argument.
As a matter of fact, the expression adopted in the governmental delegated act of reform
(D.Lgs. 344/2003) is broader than that one included in the Parliamentary act of delegation.
This latter, indeed, talked about the fiscal non-relevance only of “payments received by
and granted to loss-making companies for their losses”.
In the act of reform a less strict provision was introduced, since the compensative
payments among members of the group do not necessarily concern only losses. Compensations
may be granted, in fact, also for the attribution of all those legally relevant situations which
allow a consolidated company to save taxes.
By this way, the money transfer among the members of the group (for the
aforementioned reason) has to be tax-free in accordance with its compensative (of suffered
losses or acquired benefits) nature.
4.1.1 – ADJUSTMENTS IN DETERMINING THE DOMESTIC CONSOLIDATED INCOME
Always dealing with the national consolidated, the Financial Act for 2008 has modified
many relevant provisions.
The most important modification concerns the abolition of all the rectifications of the
overall group income , formerly contained in art.122 TUIR, inherent the dividends distributed
232 G. INGRAO, In tema di tassazione dei gruppi di imprese ex D.Lgs. 344/03, in Rass. Trib, 2004, II, p. 566. 233 Art. 118, par.4, TUIR.
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among the consolidated companies, the determination of the patrimonial “pro rata”234 on the
indeducibility of passive interests and the fiscal neutrality of the transfers among the companies
within the group.235
4.1.1.1 – DIVIDENDS DISTRIBUTED FROM THE CONTROLLED COMPANIES TO THE HOLDING
The Financial Act 2008 has abolished the full exemption for such dividends.
At a first look, that seems to clash with the main reason on the base of the domestic
consolidation, which is the final attribution to the holding of the net incomes of the controlled
companies, that implies the de-taxation of the distribution of these incomes in the form of
dividends, because they are part of the wealth of the holding (and, so, of the group).
The new provision, nevertheless, does not come into clash with the consolidated,
because the incomes of the companies are not yet legally attributable to the holding or to any
other entity.
The holding, in the domestic consolidated, has mainly the duty to calculate the overall
income of the group (filing a consolidated tax return) and to determine the amount of tax to
pay.
But the companies of the group, finally, are the persons to which the income is legally
attributed. And so, the reception of dividends by the controlling company is a sign of wealth,
which deserves to be taxed.
4.1.1.2 - INDEDUCTIBILTY OF PASSIVE INTEREST
Even this has been modified by the Financial Act for 2008, through the abolition of the
re-determination of the patrimonial “pro-rata” of the indeducibility of passive interest.
Up to now, the excess of indeductible passive interests generated by a member
company can contribute to reduce the overall income of the group if and on condition that
other members of the consolidation have (in the same tax period), enough gross operative
234 Pro rata was a system that made passive interests, deriving from participations which produced exempted capital gains, indeductible in order to avoid taxable income reductions. 235 R. MICHELUTTI, Modifiche alla disciplina del consolidato fiscale nazionale,in Corr. Trib, 2008, n°4, p. 277.
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result in exceeding, i.e. that has not yet been completely offset by such passive interests236. The
system of the further deduction of the indeductible passive interest works in the way that
follows.
The first step is to check whether passive interest, in a national consolidated group, are
more than the active ones.
If they are less than the active ones, there is full compensation with these last ones,
without any problem.
On the contrary, if they are more than the active interests, the next step is to calculate
the 30% of the Gross Operative Result (hereafter, GOR)237. Then, we offset the remaining
amount of passive interests with the named part of GOR. If there are still further remnants of
passive interest, they are indeductible in the concerned tax period.
4.1.1.3 - PAYMENT OF FISCAL BENEFITS ARISING FROM THE USING OF SURPLUSES OF PASSIVE INTEREST
This kind of operation falls under the provision of art. 118 par.4, i.e. it is fiscally neutral.
The remunerated benefits can be both an excess of passive interest carried by a
consolidated company or a sufficient amount of GOR put at disposal of the group as well. The
transfer of the excess of passive interest as well as the GOR have to be anticipated by a display
of will coming from the company which carries the benefits and requires also an agreement
between the parts on how to use losses as well as the surplus of GOR.
Furthermore, the Financial Act for 2008 has added a paragraph to the art. 96, the no. 8,
TUIR.
This new rule provides238 that even foreign companies can be virtually (not on effective
basis, we have to pay attention on that) included in the national consolidated, if they comply
with some conditions (briefly, they have to be the same kind of persons of the national
members, their shares must be owned for more than 50% by the holding, they must satisfy the
requirements for the option and the tax period provided for the members of world wide
236 Art. 96, par 7, TUIR. 237 Gross Operative Result is the difference between the value and the production costs as provided in the rules on economic account (see art.2425, civil code), except the value of amortizations and immobilizations.
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consolidated). Such virtual inclusion occurs only for the purpose to make art. 96, par. 7 TUIR
(about the use of GOR against indeductible passive interests in a group) to be applicable.
The foreign company, then, has to notify to the consolidating holding the amount of its
passive interest and the GOR, that will be included in the group’s tax return. We remind once
again that the inclusion in the national consolidated of foreign controlled companies is merely
virtual.
4.2 - WORLD WIDE CONSOLIDATED
The Financial Act for 2008 has affected also this kind of consolidation.
First of all, we have to point out that losses of controlled foreign companies are
included in the consolidated tax base proportionally to the shares owned by the holding. In the
national consolidated, instead, there is full inclusion of profits and losses, provided that the
controlled are participated at least for 50%.
All this said, it is up to the holding to calculate the income of each single controlled
entity, by the application to each assessed balance sheet of the provisions ruling the
determination of the taxable base for resident companies and commercial entities239.
Then, the holding applies the adjustments that follow, provided that the losses of the
non resident controlled companies related to the tax periods before the option for the world-
wide consolidation cannot be included in the common taxable base.
The adjustments can be divided into two categories: adjustments made during the first
tax period in which the consolidated regime is into force and adjustments applicable during the
following tax periods240.
4.2.1 – ADJUSTMENTS RELATED TO THE FIRST TAX PERIOD OF WORLD WIDE CONSOLIDATION
As a general principle, this kind of corrections is based on the full acknowledgement of
the values of the last balance sheet of the foreign companies drafted before the entry into force
238 Only to make par.7 applicable. 239 Art. 134, par. 1, TUIR.
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of the consolidation241. This happens on condition that the balance sheets are first audited and
then that these values result from the application year by year of consistent and uniform
accounting standards.
This provision was made in order to avoid that the balance results of the controlled
foreign companies are artificially reduced just before the decision to enter into the consolidated
area, so that the taxable base of the group can be someway reduced.
This general criterion knows some exceptions.
Particularly, the funds for risks and burdens instituted for aims similar to those provided
by the Italian law are included (in the consolidated) up to the maximum amount according to
the Italian law.
This provision is made with the clear intent to save the interests of the Italian tax
administration, by limiting the eventual amount of this accountable benefits, which risk to
reduce drastically the consolidated tax base242.
Other rectifications made in the first tax period of the world-wide consolidated concern
the fiscal non-importance of the losses suffered by the controlled foreign companies before the
consolidation243. Such losses are completely slight.
4.2.2 - ADJUSTMENTS WHILE THE WORLD WIDE CONSOLIDATED REGIME IS INTO FORCE (TAX PERIODS FOLLOWING THE FIRST ONE)
These adjustments have to be applied during all the following tax periods in which the
world wide consolidated is into force, while the former corrections have to be used in the first
tax period of the world wide consolidation.
Some rectifications have been abolished by the Financial Act for 2008244.
They provided for the exemption of the dividends distributed by the companies of the
group.
240 M. DI SIENA, Il consolidato fiscale, cit., pp. 225-228. 241 Art. 134, par. 1, lett. C), TUIR. 242 M. DI SIENA, Il consolidato fiscale,cit. , p. 227. 243 Art. 134, par. 2, TUIR. 244 They are: art. 134, par 1, lett a), TUIR.
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The provision on art. 134, par. 1, lett. B), TUIR (nowadays into force)245 lists some rules
for the adoption of an uniform treatment for assets and liabilities, on the base of the criteria
included in the TUIR for resident commercial entities and companies.
Differently from what happens in the typical corporate income discipline, indeed, the
controlled foreign companies’ liabilities are deductible in the financial period of competence,
not only if they are included in the economic account of a former period, but also if they are
attributed to the economic account of a following financial period.
The following provision, on art. 134, par. 1, lett. D), TUIR, briefly, rules out from the
taxable income the assets and the liabilities due to the change of the currency used to pay or to
receive particular kinds of loans.
Other rectifications contained in art. 134 par.1 are inspired by a need for simplifying, as
they are an exception to the general rule according to which the income of controlled
companies has to be calculated by the resident holding according to the provisions concerning
the determination of the corporate income and the commercial entities’ income246 contained in
the proper parts of the TUIR.
Briefly, they are:
1. the deductions provided by the Italian tax law247 are granted to a controlled company
resident at abroad to the point to which similar deductions are provided by the law of
the state of residence of the controlled company248;
2. the non application (or the limited application) of several rules concerning limitations
on the deducibility of various costs and liabilities (such as costs for board and lodging of
employees, for entertainment249 and so on);
5 – TREATMENT OF THE HOLDING’S PARTICIPATIONS IN THE SUBSIDIARIES
About the regulation on the participations held by the controlling company, some general
remarks have to be done.
245 Art. 134, par 1, lett b), TUIR. 246 M.DI SIENA, Il consolidato fiscale, cit., p. 238. 247 Art. 109, par. 4, lett. B), TUIR. 248 Art. 134, par.1, lett. G), TUIR. 249 In Italian, “Rappresentanza”.
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The 2004 reform introduced into the Italian law the participation exemption (PEX)250.
This institution has known several changes, but the Financial Act for 2008 has brought it back
to its original structure, with some variations.
According to this set of rules, the capital gains realized on shares of companies are exempted
for the 95% of their amount if:
1)the shares have been held continuously fore at least 12 months;
2) they are included in the category of financial immobilizations in the first balance sheet related
to the named period;
3)the participated company must have its residence in a state which is not a tax haven, as stated
in a decree of the Minister of Economy and Finance;
4)the participated company must carry out a commercial activity.
The provision rules out explicitly the participation in companies whose property is made mostly
by real estate without any relevant commercial function.
Moreover, the requirement of the commercial business and the residence out of tax havens
must be at least from the beginning of the third tax period before the realization of the gain.
6 – TRANSFER OF ASSETS
Before analyzing the regulation of such situation, we have to do a short introduction, that will
deal with the provisions that regulated the infra-group capital gains made on property assets.
The Financial Act 2008 has intervened in this matter, by abolishing the specific provisions
which applied to the consolidated regulations.
250 The participation exemption is a system through which the capital gains, deriving from the alienation of the participations in a company, are exempted (but this happened in the former regime, now the exemption is up to 95%) from taxation if some conditions are complied with: • The participations have to be held for at least 12 months; • They have to constitute financial immobilizations; • They have to be related to the carrying out of commercial activity by the participated company; • Such participated company has not to be resident in a tax haven.
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6.1 - NATIONAL CONSOLIDATED
In this set of rules, the art 123 TUIR was introduced to create a facultative regime of fiscal
neutrality for the transfer of assets within the group (i.e. assets of the property).
Under this article, generally speaking, the transfers infra-group of assets could occur in a
context of fiscal neutrality, if the seller and the buyer agreed in writing for the application of this
regime.
6.2 - WORLD WIDE CONSOLIDATION
The Financial Act of 2008 has abolished as well the fiscal neutrality of the infra-group transfers
of assets in the world wide consolidation regime, once contained in art. 135 TUIR.
With regard to the transfers occurred among controlled foreign companies, the transfers were
neutral only if the holding owned an equal participation share in both the consolidated companies.
This occurred because the art. 135 TUIR provided that the alienation of assets among
controlled foreign companies would have been part of the income of group for an amount
proportional to the difference between the participation owned by the holding in the seller company
and the participation owned in the buyer one.251
6.3 – PRESENT SITUATION
The introductive speech was made to outline the rules (now abolished by the Financial Act
2008) which regulated the regime of the transfer of assets between the companies of a consolidated
group.
Now, in absence of special rules, the relevant provision is included in that part (of the TUIR)
concerning the determination of the corporate income.
As a matter of fact, art. 86 par. 4 TUIR states that it is possible for the company the carrying
forward of capital gains derived by the sale of property assets for the next four financial periods, shared
(the capital gain) in equal parts for these periods.
251 Abolished art. 135, par. 1, TUIR.
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The choose for carrying forward has to result in the tax return, otherwise the profit will be fully
computed in the income related to the financial period in which it was realized.
This provision is applied only if the asset has been owned by the company for at least three
years before the alienation.
The reason behind this provision is to avoid that an asset, which remains at disposal of the
company for several years, is calculated in the taxable base of a single tax period, in which it is
realized252, giving rise to a possible excess of tax charge.
We may say that the profits so arising (and then carried forward) are calculated in the income of
group in their full amount if we have a national consolidated, proportionally to the owned shares if that
happens in a world wide consolidation.
7 – FULFILMENTS OF THE CONSOLIDATED GROUP VIS-À-VIS THE ITALIAN REVENUE ADMINISTRATION
As in the Italian law the group as such has not any legal personality (fully distinct from that one
of its members) but it is only the “presupposition for the application of certain provisions”253, the
holding is the entity entitled to file the consolidated tax return254 and to pay taxes, generally speaking.
In the national consolidation there is a regime of liability towards the fiscal administration
which involves both the holding and the subsidiaries.
More specifically, according to the art. 127 TUIR, the holding is liable:
1. For the assessed larger tax (plus interests) related to the global income of the group as resulting
by the overall tax return of the group, drafted according to art. 122 TUIR;
2. For the amounts of taxes (which are related to the group tax return) resulting by the assessment
done by the fiscal administration on the tax returns issued by every person which takes part to
the consolidation;
3. For the meeting of the obligations related to the determination of the group total income
according to art. 122 TUIR;
252 G. TURRI, Riforma fiscale: disciplina del consolidato mondiale, in Dir. Prat. Trib, 2006, I, 130-131. 253 A. FANTOZZI, La nuova disciplina IRES:i rapporti di gruppo, in La riforma dell’imposta sulle società a cura di P. Russo, Firenze, 2004, p. 169. 254 Art. 122 TUIR.
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4. Jointly, for the payment of the fine which has been inflicted to a member of the consolidated255.
On the other hand, each subsidiary taking part to the domestic consolidation is liable:
o Jointly and severally with the controlling entity for the larger tax amount (plus interests),
referred on the group total income, as resulting by the adjustment done on the subsidiary’s
income;
o For the fine which corresponds to the assessed larger amount of tax related to the global group
income, as resulting by the adjustment operated on the subsidiary’s income;
o For any other category of fine, different from the previous ones256.
With regard to the liability regime which is inherent to the domestic consolidation, we have to
do some comments.
Someone affirms that such liability regime (and in general the national consolidated system of
group taxation) would anyway affect the contributory capacity of each single company, because, even if
the rules concerning the determination of the tax amount makes reference to the group, this entity does
not exist as legal centre of imputation of rights and duties and so the relevant persons are still the single
companies.
Such opinion seems to be not sustainable, because the legislator is free to give to a group a
personality limited to the attribution to it of the incomes of the consolidated entities.
This can well occur even if, according to the Italian theory of the tax law, the individuation of
the group as person with autonomous contributory capacity implies its acknowledgment as person
entitled of rights and duties vis-à-vis the fiscal administration.
In other words, there is no practical reason against the fact that a group has its own
contributory capacity (in the domestic consolidation) and that the persons involved in the legal relations
with the fiscal administration (e.g. assessment procedures, infliction of fines etc.) are the controlling or
the controlled companies as well257.
In the world wide consolidation, finally, it is up to the resident holding to calculate the overall
income, made up by the incomes of every single controlled company (re-computed according to the
Italian provisions for the corporate income), to draft the group tax return and to pay taxes.
255 Art. 127, par. 1, TUIR. 256 Art. 127, par. 2, TUIR. 257 G. FRANSONI, Osservazioni in tema di responsabilità e rivalsa nella disciplina del consolidato nazionale (con postilla finale di A. Fantozzi), in Riv. Dir. Trib., 2004, pp. 539- 543.
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The holding can also reduce the overall tax amount of the tax credits attributed for taxes
definitely paid in foreign Countries, up to the level of the Italian corporate income tax rate (limited tax
credit system)258.
8 – PROTECTION OF THE MINORITY SHAREHOLDERS’ INTEREST
The problem of the protection of the minority shareholders’ interests has particular relevance in
the national consolidated.
In the national consolidated, as a matter of fact, the income of a controlled company is
attributed completely to the group consolidated income, apart from the participation shares held by the
controlling entity.
For this reason, some measures to protect the minority share-holders (of the controlled
companies) have to be implemented.
The most frequent case of potential damage of such interests occurs when a controlled
company is in loss.
In this situation, if the negative result of the company were used to reduce the group taxable
base, the minority shareholders, consequently, would lose the possibility to reduce the income of their
company by amortizing the loss through the following years.
Another case of potential damage is the transfer of assets through the entities of the group in a
condition of fiscal neutrality.
Up to now, two are the solutions put forward to protect the minority shareholders of the
controlled companies.
The first one could consist in private agreements between the holding and the loss-making
controlled, so that the former pays for the benefits deriving from the consolidation of the latter.
The second remedy could consist in payments granted to the company in loss for the
conferring of its liabilities to the global consolidated income,
258 Art. 136, TUIR.
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According to the national provision259, the payments received and made among companies of
the group for attributed or received fiscal benefits do not constitute part of the taxable income: they are
fiscally neutral.
Another instrument of protection of the minority shareholders could be the fact that the assent
for the exercise of the option for the implementing of the consolidated regime can be given by the
extraordinary meeting.
It is an act which overcomes the ordinary administration and as such it requires a strict
protection of the minority shareholders.260
II – TAX TREATY LAW
1 – ENTITLEMENT TO DOUBLE TAXATION CONVENTIONS
Article 4 paragraph 1 of the OECD MC provides for a definition of “resident of a contracting
State” for the purposes of the Convention.
This paragraph states that “the term ´resident of a contracting State` means any person who,
under the laws of that State, is liable to tax therein by reason of its domicile, residence, place of
management or any other criterion of similar nature (…). This term, however, does not include any
person who is liable to tax in that State in respect only of income from sources in that State or capital
situated therein”.
First of all, we have to say that the aim for which this article was made is to solve cases of
double residence, in order to settle which is the criterion that will prevail on the other (for the purposes
of the application of the convention’s rules).
The typical case of conflict between the categories of personal link to a territory are residence
vs. residence and residence vs. source261.
259 Art. 118, par. 4, TUIR. 260 G. GAFFURI, Il consolidamento domestico nella disciplina dell’imposta riformata sulla società, in Tributimpresa, 2004, N.1, p. 23. 261 OECD Commentary on art. 4, Preliminary Remarks, n. 2
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While the latter conflict is solved (at least in principle) by the provisions of the national law of a
contracting State, the first one has no solution, whether we make reference only to the internal laws of
the States concerned.
In this circumstances “special provisions must be established in the Convention to determine
which of the concepts of residence is to be given preference”262.
For this purpose, the par. 2 of the same article gives some “tie-breaker” rules, in order to settle
the aforesaid dispute on “double residence” of an individual .
Coming back to the expression “resident of a Contracting State”, we are able to affirm that it
refers to the concept of residence adopted by the domestic laws, which can be based on criteria like
residence, domicile and “any other criterion of similar nature”.
By this piece of phrase, the OECD Model means that the elements which a State has to take
into account to link an individual to itself have to be substantial, rather than merely formalistic.
The provision of the OECD MC, moreover, only determines which domestic law has to be
applied to a particular case of conflict arising by double residence.
In other words, “the person maintains a double residence (e.g. in the source State and in the residence State),
but for the purposes of the convention against double imposition, only the residence of one state is attributed to the
individual”263.
That does not mean that the person becomes non-resident in the source State.
It only means that for the compliance of the obligations under a bilateral treaty (against double
imposition) the effectiveness of the rules on residence of the source State ceases.
1.1 – IMPLICATIONS OF THE OECD MC RESIDENCE CRITERIA FOR TRANSPARENT ENTITIES, TAX EXEMPT ENTITIES AND SIMILAR
In many States, charities, pension funds and other entities may be exempted from tax, whether
they meet all the requirements for exemption under domestic tax law.
So, if they do not comply with these requirements, they are subjected to tax and by this way
many States consider such organizations as resident for the purposes of the Convention264.
262 OECD Commentary on art.4, n. 5 263 G. MELIS, La nozione di residenza fiscale delle persone fisiche nell’ordinamento tributario italiano, in Rass. Trib., 1995, VI, p. 1069. 264 OECD Commentary on art 4 , n. 8.2.
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Besides, in some other States, these entities are not deemed to be subjected to tax if they are
kept exempted by the domestic law.
Thus, they are not regarded as resident for the purposes of the Convention, unless they are
explicitly included as such in the provisions of the Convention265.
Talking about partnerships, whether a State considers them as fiscally transparent, they are not
liable to tax and they are not, therefore, deemed to be resident of that State.
Furthermore, as the income of a “transparent” partnership is attributed directly to the single
partners, these last ones are liable to tax and they are also entitled to claim the benefits under the
Convention signed by their residence State.
1.2 – ENTITLEMENT TO TREATY BENEFITS OF THE GROUP ENTITIES
As in the Italian system ( both in the national and in the world wide consolidation regime) the
group has not any authentic legal personality, the scope of our investigation on which are the persons
entitled to benefits moves towards the members of the group.
1.2.1 - NATIONAL CONSOLIDATION
The main instrument, under a tax treaty (namely, art. 23 OECD model), to grant a tax relief
generally consists in a credit, granted for taxes definitively paid on foreign items of income which are
also taxable in the State of residence and against the same person.
Then, we have to make reference also to a provision of Italian tax law, the art. 165 TUIR,
according to which the Italian Revenue Administration grants a credit for the amount of taxes paid in a
foreign Country, concerning incomes also taxed in Italy against resident persons according the world
wide income principle.
Besides, we have also to take into account art. 169 TUIR, a very relevant provision, which states
that “the provisions of such act (i.e. the TUIR), whether more favourable to the taxpayer, apply even in
derogation of the international conventions against double imposition”.
265 OECD Commentaryon art. 4, n. 8.3.
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Well, it happens frequently that, in the field of the tax credit, the national provision is more
favourable than the corresponding provision in a tax treaty (this is true mostly for tax treaties which are
going to become out-of-date)266.
Dealing with the functioning of such double taxation relief mechanism, in the national
consolidation, the credit for foreign items of income is calculated State by State (Per Country
limitation).
It is up to the holding to calculate the amount of credit for taxes definitively paid by the
controlled companies for such items of income.
To meet this obligation, the consolidating entity uses all the necessary information given by
each single member of the consolidated267.
As a consequence, we could say that the partner of the group which is entitled to benefits to
avoid international double taxation is the holding.
This opinion is also confirmed by its consistency with the national consolidation system globally
intended.
In this set of rules, as a matter of fact, the holding embodies the most relevant role in
calculating the overall income of the group, in determining the amount of taxes, and, finally, in paying
them.
It seems natural that the holding would claim credits, since these last ones are related to items
which are (at last) part of the group taxable base and we know well that such taxable base is calculated
by the holding company.
Moreover, in cases of interruption of group taxation earlier than its natural expiry (3years), the
claimed tax credits remain at disposal of the controlling company or entity268: an element more at
sustain of our opinion.
1.2.2 - WORLD WIDE CONSOLIDATED
In this discipline, as we have seen above ,the income of the group is made up of the income of
the holding plus the incomes of the non-resident controlled companies, calculated proportionally to the
shares owned in them by the holding and apart from the distribution of these profits269.
266 C. GARBARINO, Manuale di tassazione internazionale, Milano, 2005, p. 147.
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The income of the foreign controlled entities, yet, is not indicated in a tax return on similar
items.
Their income, in fact, is “re-determined”(literally) by the holding through the application, to
each assessed balance sheet, of the provision inherent the determination of the corporate income tax,
insofar as they are compatible with the provisions of the world wide consolidated270.
Always talking about the rules of calculation of the group overall income, there is a principle to
be taken into account for our aims: the taxable income has to be determined starting from the foreign
entities incomes, in order to permit the use of credit for the taxes paid abroad271.
Moreover, the credit granted for the taxes paid abroad is calculated singularly, controlled
foreign company by controlled foreign company, according to the “Per company limitation” principle
(differently for what happens in the national consolidated, as seen before)272.
The reason behind this rule is to avoid that a foreign company, which pays for its taxes in its
State of residence, in a second moment cannot credit them because in the same State there are one or
more companies in loss, which could reduce the taxable base (related to that State) and consequently
the amount of due credits, if the “Per Country limitation” principle were applicable273.
In conclusion, we can say that in the world wide consolidated also the holding is the person
entitled to claim tax credits to the Italian revenue administration. For these reasons.
First of all, the fact that the holding calculates the overall group income and the due amount of
tax, subtracting from it the amount of paid taxes and determining the (limited) tax credit, makes us
think that it is the holding the person which has entitlement to the credits.
Then, this opinion is also in accordance with a systematic interpretation of the consolidated
system, consistent with the national regime.
267 C. GARBARINO, Manuale di tassazione internazionale, cit., p. 1097. 268 Art.124, par. 4, TUIR. 269 Art.131, par.1, TUIR. 270 Art. 134, par.1, TUIR. 271 C. GARBARINO, Manuale di tassazione internazionale, cit., p. 1127. 272 Art. 136, par. 3, TUIR. 273 C. GARBARINO, Manuale di tassazione internazionale, cit., pp. 1139-40.
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2 – DISTRIBUTIVE RULES
2.1 – DIVIDENDS (ART 10 OECD MC)
The article on dividends274 affirms that “dividends paid by a company which is a resident of a
Contracting State to a resident of the other Contracting State may be taxed in that other Contracting
State.
However, such dividends may also be taxed in the contracting state of which the company
paying the dividends is a resident and according to the laws of that state, but if the beneficial owner of
the dividends is a resident of the other Contracting state, the tax so charged shall not exceed:
1. 5% of the gross amount of dividends if the beneficial owner is a company (other than a
partnership) which holds directly at least 25% of the capital of the company paying dividends;
2. 15% of the gross amount of the dividends in all other cases”275.
Par. 1 does not oblige to tax dividends exclusively in the State of beneficiary’s residence or, on
the other hand, in the State of which the company paying dividends is a resident276.
It states simply that dividends may be taxed in the State of beneficiary’s residence277.
Par. 2 reserves a right to tax to the State of the source of the dividends, even if such a right is
considerably limited. The tax rate is moderate because the source state can already tax the company’s
profits278.
Furthermore, taxation for dividends distributed by a subsidiary to a holding which owns directly
at least 25% of the subsidiary’s capital is at a rate of 5% to avoid economic double imposition and to
facilitate international investments279.
Briefly, the following paragraphs of art. 10 provide for, respectively:
2 a definition of the word “dividends” (10 par. 3);
3 what happens if the beneficial owner of dividends has a PE in the state of residence of the
payer (par 1 and 2 do not apply) (10 par4);
274 Art 10, par. 1, OECD MC. 275 Art 10, par 2, OECD MC. 276 OECD Commentary on art. 10, n. 4. 277 OECD Commentary on art. 10, n. 7. 278 OECD Commentary on art 10, n. 9. 279 OECD Commentary on art. 10, n. 10.
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4 the case in which the company receives profits or income by the other contracting state (that
other state may not impose any tax on dividends paid by the company, except the cases
which fall under paragraphs 1, 2 or 4).
2.2 – ITALIAN REGULATION ON DIVIDENDS
Under the Italian tax law, dividends can be divided in “outgoing”, if paid by an Italian resident
to a non resident person, and “incoming”, that is to say that they are paid by an Italian person to a non
resident beneficiary.
The applicable rules on outgoing dividends are the so-called “Parent-Subsidiary” Directive no.
90/435 (if dividends are paid to a company which is resident in a EU State, under certain conditions)
and the rules on withholding tax under national or under Conventional law.
The aforementioned Directive has settled an important principle: the taxation of the infra-EU
dividends has to occur only in the State of residence of the beneficiary.
Finally, about the Dir. 90/435 (implemented in Italy with L. 142/92), from 2005 it applies also
to PEs, under particular conditions, that it would be too long to explain in such a place.
Now, we are going to examine the Italian relevant regulation on dividends.
2.2.1 - DIVIDENDS PAID BY AN ITALIAN SUBSIDIARY TO A NON RESIDENT PERSON
For such category, it is into force a withholding tax of 27% on dividends paid to non resident
persons.
Non resident persons, besides, can get a tax refund up to the 4/9 of the withholding tax
amount levied in Italy if they prove that they have paid in their state of residence taxes on the same
item of income. The evidence required by the Italian law consists in a certification released by the fiscal
administration of the State of residence of the recipient (of dividends)280.
280 Art. 27, par. 3, Decreto del Presidente della Repubblica (hereafter, DPR) n° 600/73.
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2.2.2 – DIVIDENDS PAID BY AN ITALIAN SUBSIDIARY TO A FOREIGN EU-RESIDENT PARENT COMPANY
In this case, we have to make a distinction between the company which falls under the
provisions of the “Parent-subsidiary” Directive (90/435) from other companies.
In the first case, if the parent company (resident in a EU member state other from Italy) owns
more than 25% of the shares in the subsidiary (threshold which is going to decrease gradually: 20%
beginning from 1-1-2005, 15% from 1-1-2007 and so on) and this possession has been lasting for more
one year, the dividends distributed to the holding are exempted from taxation. More particularly, the
parent company has right to the refund of the withholding tax paid in Italy (by its subsidiary) on such
dividends281.
In the second case, the Financial Act for 2008 has modified the amount of the tax rate.
In fact, before such law, Italy has been subjected to a procedure of infraction from the
Commission, because it levied an amount of taxes on dividends distributed to non resident companies
(for the purposes of the Commission, to EU resident companies which do not fall under the provisions
of the 90/435 Directive) which was larger than the rate imposed on Italian companies (respectively,
27% and 12,5%).
Such a discrimination, according to the Commission, constituted a distortion of the freedom of
circulation of capitals under art. 56 EC Treaty and so it had to be abolished.
Italy has complied with the Motivated Advice issued by the Commission282 by introducing a
withholding tax rate of 1,375% on dividends distributed to companies and entities subjected to
corporate income tax in EU member States (the former tax rate was, as we have affirmed above, at
27%).
And now, we are going to talk about the dividends paid by foreign persons to Italian entities.
281 Art. 27bis, DPR 600/73. 282 Motivated advice no. C(2006)2544, 28 June 2006.
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2.3 INCOMING DIVIDENDS
2.3.1 – DIVIDENDS PAID BY A NON RESIDENT COMPANY TO A RESIDENT COMPANY
With regard to such category of dividends, the relevant rule of Italian tax law is the art. 89 par.3,
TUIR, which provides for an exemption of 95% on dividends paid by a foreign entity to a resident
Italian company, on condition that such income:
• Does not come from an entity situated in a tax haven;
• Is not deductible in the foreign State. Such indeductibility must result from a certification
issued by the foreign entity or by other clear and precise elements283.
Dealing with dividends paid by a EU resident company to an Italian holding, the rule which
regulated such case (art 96bis, TUIR) has been abolished.
The provision which applies to such case, so, is again the art. 89, TUIR, as seen before.
Finally, we can say that such rules are applicable to the consolidated regimes, especially to the
world wide consolidated, insofar as they are compatible with.
More particularly, we have to do some general remarks.
First of all, the rule is that, when there are a conventional rule and a national provision which
may apply to the same case, the former shall prevail, unless the latter is more favourable for the
taxpayer (as stated also in art. 169 TUIR). So, when the Italian regulation provides, for example, for a
withholding tax of 27% on dividends paid to a foreign person and this last one is a resident of a state
with which Italy has signed a convention, the conventional rules (5% or 15% of withholding tax as seen
before) will have to apply.
On the contrary, if the dividends are paid to a company which is a resident of a EU state with
which Italy has into force a Convention, and the company complies with the requirements of the
“Parent-subsidiary” directive as implemented in the Italian law, this last provision shall apply because
more favourable for the beneficiary of the dividends (no withholding on the source).
283 Art. 44, par. 2, lett. A), last phrase, TUIR.
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2.4 – BUSINESS INCOME (ART. 7, OECD MC)
Generally speaking, Art. 7 OECD MC identifies which is the Contracting State entitled to levy
taxes on enterprise income.
This article affirms that the power to tax such income is up to the State of residence of the
enterprise, unless such enterprise carries on a business in the other Contracting State through a PE
situated therein. In this last case, the quantity of income attributable to the PE is taxable in that other
Contracting State.
With regard to the PE, the Italian tax law gives a definition of PE which is a (almost) literal
translation of the definition laid down in art 5 par.1 OECD MC:
“a PE is a fixed place of business through which the business of an enterprise is wholly or partly carried on in the
other Contracting State”284.
Moreover, for our purposes, in order to ascertain if a subsidiary of a non resident enterprise
could qualify as a PE, article 5 OECD MC affirms in par. 7 that “the fact that a company which is a resident of
the other Contracting State controls or is controlled by a company which is a resident of the other Contracting State (…)
shall not in itself constitute either company a PE of the other”
Such provision has been acknowledged by the Italian tax law in the art. 162 par.9 TUIR, which,
as usual, constitutes a translation of the aforementioned provision of the OECD MC, with the addition
of a particular matter of fact: that both the enterprises (to which the rule refers) are controlled by a
third person carrying out or not a business activity.
This last piece of Italian provision could be seen as a broadening of the scope of the
Convention’s provision, in order to better protect the tax administration’s interest, and so it cannot be
applied according to art. 169 TUIR, as it constitutes a less favourable provision to the enterprise vis-à-
vis the provision of the Convention.
Anyway, by such rules (both national and conventional) we argue that a subsidiary does not
necessarily constitute a PE of a non resident controlling company.
In the Italian tax law, if the foreign subsidiary is part of the world wide consolidated and its
income is attributed to the resident holding (apart from any distribution of dividends285), the double
284 Art. 162, TUIR. 285 Art. 131, par. 1, TUIR.
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taxation is avoided by granting to the holding a limited credit for the taxes definitively paid by the
foreign subsidiary in its State of residence286.
All that said, it could even happen that a company which is controlled by a non resident holding
represents only a formalistically independent entity, created only for tax avoidance purposes.
In this case, even the OECD Commentary287 admits the possibility to re-define as a PE (of the
holding) the fictitious controlled foreign entity.
This is what happened in Italy with the so-called “Philip Morris” case288.
In this case, the Italian judges have refused to recognize as a legally independent company a
resident subsidiary owned by several non resident companies, being such companies all part of the
same group “Philip Morris”.
It happened, in fact, that the Italian subsidiary received big amounts of money by the
companies of the group and that such companies gave to the Italian subsidiary very binding and
intrusive orders about the management of the enterprise. So, on the basis of such elements, the juridical
independence of the Italian company was deemed to be a fiction, made only to avoid the payment of
certain taxes.
In the named decision, the Italian Supreme Court of Cassation has stated that “a resident
company can assume the qualify of ‘multiple’ PE of several non resident companies, which belong to
the same group and pursue a unique business strategy”.
In conclusion, if it is true, on one hand, that a controlled company is not necessarily a PE of the
controlling person solely because of the link of control, it is also true, on the other hand, (according to
the OECD Commentary and to the decision of the Italian Supreme Court, which has anyway a highly
persuasive role, even if it is not binding) that a controlled company can be deemed a PE of a non
resident holding under certain conditions.
286 Art. 136, par. 2, TUIR. 287 OECD Commentary on art. 5, n. 41. 288 Decision of the Italian Supreme Court of Cassation n. 3367, 7 March 2002.
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2.5 – OTHER INCOME (ART.21 OECD MC)
Dealing with other distributive rules under the OECD model, we have to make reference now
to the art. 21, which regulates the so-called “other income”, that is to say all the possible genres of
income not expressly ruled by the Model.
This article affirms that these incomes, wherever arising, shall be taxable only in the state in
which their receiver is resident. If the recipient carries out, in the state of source, a business through a
PE – and the right or property in respect of which the income is effectively connected with such PE-
the income is taxable in the state in which the PE is situated, according to art.7 OECD MC.
Now, we have to identify what are the categories of income, under the Italian tax law, which fall
under the art. 21 OECD MC provision, so that they are taxable in the state of residence of the receiver
(as a general principle).
This provision is important, for example, because it allows to attribute several elements of
income to resident companies of a (national) consolidated without activating the system of the tax
credit, since this kind of income is taxable in the state of residence of the recipient, even if it arouse in a
foreign Country.
Art. 67 par. 1, TUIR lists some items of income which do not fall under conventional
provisions different from art. 21, OECD MC.
Such elements are (for instance):
• Other profits realized by the conclusion of capital income-making juridical relations289;
• Incomes deriving from non-usual commercial activities290
• Etc. etc.
2.6 OTHER DISTRIBUTIVE RULES
2.6.1 INTERESTS
Such kind of income is regulated by art. 11, OECD MC.
289 art. 67, par. 1, lett. C-quinquies), TUIR. 290 Art. 67, par. 1, lett. I), TUIR.
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This provision states that, generally speaking, the interests may be taxed in the State in which
the receiver is resident291.
The interests, yet, can be taxed also in the State in which they arise, and if the beneficial owner
of such interests is a resident of the other Contracting State, the tax so charged shall not exceed the
10% of the gross amount of interests292.
With regard to such kind of income, we have to make a distinction between interests paid from
an Italian resident person to a non-resident one (“outgoing interests”) and interests paid from a non
resident individual to an Italian person (“incoming interests”).
Moreover, we have also to take into account the Directive “Interest-royalties” 2003/49
(implemented in Italy by D. Lgs. 143/05), which regulates the interests (and royalties) paid among
associated companies which are resident in EU states (or paid to a EU-resident PE of a company which
is resident in another member State).
2.6.2 - INTERESTS PAID BY AN ITALIAN PERSON TO A NON RESIDENT COMPANY
Generally speaking, we repeat, such interests are taxable in the State in which the receiver is
resident.
Italy, yet, has a concurrent power to levy taxes on such income (according to art.26 DPR
600/73).
More particularly, such interests are subjected to a withholding tax rate which varies from
12,5% (on interests paid to non resident persons or to PEs of non resident persons and arising from
capital income293) to 27% (whether the perceiver is resident in a tax haven and as a general hypothesis).
If the receiver of the interests is also the beneficial owner, the withholding tax rate, as a
consequence, will not exceed 10% of the gross amount of interests paid (this happens on condition that
the receiver is resident in a State with which Italy has into force a convention against double imposition
based on the OECD MC).
291 Art. 11, par. 1, OECD MC. 292 Art. 11, par. 2, OECD MC. 293 Art. 26, par. 5, DPR 600/73.
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2.6.3 - INTERESTS PAID BY AN ITALIAN COMPANY TO A COMPANY WHICH IS RESIDENT OF A EU STATE
In such case, on further conditions that we are going to check below, it is applicable the
aforesaid “Interest-royalties” Directive as implemented by the Italian law.
Such Directive provides for the elimination of the double taxation on interests paid among EU-
resident companies through the abolition of the withholding tax (levied by the source State) and the
attribution of the exclusive power to tax such income to the State of residence of the beneficial owner
(which is qualified as the final receiver of the amount of those interests).
The companies have to comply with the requirements under the Directive (or better, under the
corresponding Italian act which has implemented it), if they want to benefit such kind of taxation of
interests.
More particularly, the beneficial owner has right to the exemption if:
• The payer company (or the payer PE of the company), owns directly more than 25% of the
shares with voting right in the company receiving the payment (or in company whose PE
receives such payment);
• The company (or the corresponding PE) which receives the payment holds directly more
than 25% of the rights to vote in the company which does the payment (or in the company
whose PE does the payment);
• A third company, resident in a EU state, holds directly more than 25% of the rights to vote
both in the company which pays and in the company which receives the interests294.
With regard to other requirements, the companies have to be subjected in their State of
residence to the corporate income tax (without exemptions or other benefits) and they have to be
capital companies, included among the legal national types specified in the regulation.
PEs, on the other hand, have to be as well subjected to the corporate income tax; moreover, the
interests have to be inherent to the business carried out by such PEs295.
294 Art. 26quater, par. 2, DPR 600/73. 295 Art. 26quater, lett. B), DPR 600/73.
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2.6.4 – INTERESTS PAID BY A NON RESIDENT PERSON TO AN ITALIAN COMPANY
Such interests, paid to a company which is subjected to the Italian corporate income tax, are
taxable in Italy (and the State in which they arouse will have a concurrent power to tax them) according
to the Italian rules .
More particularly, the interests are considered as items of business income (and consequently
subjected to the corresponding provisions concerning their taxation) if they are earned in carrying out a
business activity, even if they are (in themselves) items of capital income. Art 81 TUIR states in fact
that the overall income of the resident companies is considered as business income, never mind the
source which it comes from.
This reflects the principle of the so-called “force of attraction of the business income”, which
implies that other incomes (e.g. capital incomes) are deemed to be business income if they arise in the
exercise of a business activity.
2.6.5 – INTERESTS PAID BY A EU-RESIDENT COMPANY TO AN ITALIAN COMPANY
With regard to such category of interests, it is applicable also the aforementioned directive and
all the related provisions, to which we refer, having care to specify that in such a case Italian rules on
taxation of interests (namely the art.26 DPR 600/73 and the TUIR provisions on the taxation of
business income) will be applicable.
Finally, even this set of rules is applicable to the consolidated regulations, insofar as it is
compatible with them; all the remarks done for the dividends’ regulation, about the supremacy of the
conventional law on the internal rule unless this last one is more favourable to the taxpayer than the
former one, have so to be repeated, paying attention to the fact that we are dealing with interests and
that different are the concerned rules (namely the “Interest-royalties” directive as implemented by
Italian law and the art 10 OECD model as implemented by the network of Conventions contracted by
Italy).
Moreover, about the payment of interests between the companies of a group, it is applicable the
transfer pricing rule (see art 11 par. 6, OECD MC).
Such rule states that if between the payer and the receiver of the interests (or between both of
them and a third person) a particular relationship exists (like being part of a consolidated system, for
instance) and so, thanks to this last one, the amount of the interests paid is bigger than the average
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value of market (for tax avoidance purposes), the provisions of the art. 11 apply only to the part of the
amount which is equal to such average value.
2.7 ROYALTIES
According to art. 12 OECD MC, royalties are taxable only in the state of residence of the
beneficial owner296, as a general rule.
An exception to this rule is provided by the 3rd par. of such provision, where it is stated that if
the beneficial owner of the royalties (resident in a contracting State) carries on a business activity
through a PE situated in the other contracting State, and the right or property in respect of which the
royalties are paid is effectively connected with such PE, art. 7 shall apply (i.e., the income produced by
the PE is taxable in the state of residence of the PE, but only if such income is linked with the activity
carried out by the PE).
Now we have to make the usual distinction between royalties paid by a non resident person to a
resident one and vice-versa (from resident to non resident), provided that the named directive
“Interest-royalties” is applicable, obviously, also to the field of royalties.
2.7.1 – ROYALTIES PAID BY AN ITALIAN PERSON TO A NON RESIDENT PERSON
Such royalties, according to the OECD Model, are taxable only in the state of residence of the
receiver.
Italy, however, in its conventions signed with many EU member states (and not only), applies a
clause which states that the royalties may also be taxable in the state of source.
Nevertheless, if the effective beneficial owner is a resident of the other contracting state, the
withholding tax rate shall not exceed the percent settled by mutual agreement in such Conventions,
which could vary from 4% to 30%.
Moreover, in this matter we have to make reference to a provision, the art. 25, DPR 600/73,
which affirms that the royalties paid to non resident persons are subject to a withholding tax rate of
296 Art. 12, par. 1, OECD MC.
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30%, levied on the gross amount of these payments. We could say that this last provision operates
whether there is no Convention against double imposition into force.
2.7.2 – ROYALTIES PAID BY A NON RESIDENT PERSON TO AN ITALIAN RESIDENT COMPANY
Once stated that the income raises from a foreign state, if the beneficial owner is a resident
company, the applicable rules are contained in the articles 81 et seq. TUIR, which deal with the taxation
of corporate income (assimilated to the business income in the Italian tax law). All this happens in
accordance with the general rule under art 12 par.1, OECD MC.
If such income is subject to a withholding tax in the state of source, the amount of the tax paid
is creditable by the resident company.
2.7.3 – ROYALTIES PAID AMONG EU-RESIDENT COMPANIES ACCORDING TO THE “INTEREST-ROYALTIES” DIRECTIVE’S PROVISIONS
In this case, they are applicable the same rules than in the interests regulation.
More specifically, even with regard to royalties such Directive (and the Italian law which have
implemented it, the D. Lgs. 143/2005) has abolished the withholding tax levied by the state of source,
attributing an exclusive power to tax to the state of residence of the beneficial company.
With regard to the requirements of the companies which are involved in such regulation, they
are the same than in the case of interest (i.e., EU-resident capital companies owned each other for more
than 25% of the shares with voting right, these companies have to be subjected to the corporate
income tax in their state of residence and so on).
Finally, also for the royalties we have to do the same remarks as for dividends and interests, i.e.
that the international law shall prevail on the national unless the latter is more favourable to the
taxpayer.
With regard to the royalties, we have to say in addition that they are taxable in the state in which
they arise only if they are effectively linked to a PE of an enterprise resident in the other contracting
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state. In this case, it will be applicable the art 7 OECD MC, i.e. royalties arising in the State in which
the PE is situated shall be taxable only if they are connected with such PE.
Moreover, also for royalties it is applicable the transfer pricing rule.
This provision (contained in art. 12 par.4) states that if there are special relationships between
the payer and the beneficial owner (or between both of them and some other person, like in a
consolidated system, for instance) and thanks to these relationships the income of the royalties paid is
larger than the average value of market, the provisions of art.12 shall apply only to the last-mentioned
amount.
3 – CFC LEGISLATION
CFC legislation constitutes a system made to fight international tax avoidance and evasion.
Generally speaking, it provides for the attribution, directly to the single shareholders, of the
profits arising from an enterprise located in a tax haven. This is to avoid that the controlled (or the
“associated”) company which is resident in a tax haven defers sine die the distribution of dividends to
the shareholders which are resident in a state at average tax rate (e.g. Italy), so that these profits do not
suffer taxation as distributed dividends, since profits of foreign companies in Italy are taxed in the tax
period of their perception .
A potential conflict between Controlled Foreign Companies regulations and Conventions
against double imposition (shaped on the OECD model) has been sought.
The power of taxation, indeed, according to art. 7 of the OECD MC, is up exclusively to the
State of residence of the enterprise, unless this last one has a PE in the other Contracting State.
Controlled Foreign Companies regulations (e.g. the Italian one), instead, tax in the State of
residence of the shareholder the income produced in a different State by an enterprise therein resident
and without PE in the shareholder’s State. This could represent an element of conflict between the
conventional rule (based on art. 7 OECD MC) and the same CFC regulation.
Notwithstanding this, there are some arguments in favour of the compatibility between the
Controlled Foreign Companies and the Convention provisions.
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More specifically, the superiority of the Controlled Foreign Companies regulation on the
Convention can be based on an OECD Recommendation issued in 1998 and included in the report
named “Harmful tax competition: an emerging global issue”.
The recommendation no 10 on the Conventions states that, in order to fight well the harmful
tax competition, the OECD model and the corresponding Commentary have to be modified in such a
way to eliminate any uncertainty and ambiguity about the compatibility between anti-avoidance national
laws and provisions included in the OECD model.
Furthermore, the recommendation n.1 of the same report invites the States without a
Controlled Foreign Companies regulation to adopt one, aiming at eliminating the harmful tax practices.
The Controlled Foreign Companies legislation, according to the opinion favourable to its
compatibility, does not levy taxes on the participated foreign enterprise; it only extends the taxable base
of resident shareholders, to the point that it includes also the income deriving from Controlled Foreign
Companies.
Finally, one of the main aims of the OECD model is to oppose tax evasion and avoidance: a
national law provision created for the same purpose cannot be, so, frustrated by a contrary provision
under OECD model.
Anyway, such problems of incompatibility between OECD model provisions and national
Controlled Foreign Companies legislations are out of date for States, like USA, which preserve their
national anti-CFC law, apart from any provisions of the Treaties that they negotiate and conclude297.
4 - METHODS FOR THE ELIMINATION OF DOUBLE TAXATION
Article 23B OECD MC requires that the residence state must give a tax relief to a person which
derives income in the other contracting state, but only to the extent to which these items of income
may be taxable in the state of the source, according to the provisions of the Convention298.
In the Italian group taxation systems, as we have seen above, a primary role is attributed, in
both the cases, to the holding.
297C. GARBARINO, Manuale di tassazione internazionale, cit., pp. 1395-96. 298 OECD Commentary on art. 23, nn. 32.1 and 59.
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In the national regulation, the holding calculates the income of the group by making the
algebraic sum of the net incomes (as resulting from the tax returns of all the consolidated subsidiaries)
of the controlled companies; then, it files the consolidated tax return, in which it is calculated the
overall group tax.
If the group income is made up of items of income produced at abroad, the tax paid there are
creditable by applying to such items the Italian corporate tax rate299: the resulting amount will be the
maximum credit grant by the Italian fiscal administration (limited tax credit).
In the world wide one, the resident holding determines the incomes of the non resident
subsidiaries by applying to their balance sheets the provisions of the Italian tax law, with some
adjustments. Then, it calculates the overall income, made up of the algebraic sum of the holding’s
income and the subsidiaries’ ones. On such overall income, the holding calculates the due tax amount,
and then it reduces such amount by applying a limited tax credit on the taxes definitely paid in a foreign
Country for foreign items of income300.
From such arguments, as a consequence, we argue that the Italian fiscal administration has to
allow the tax credit for foreign items of income (raised equally by the holding or by the subsidiaries) to
the holding, in accordance with the meaning of the art 23B OECD MC.
In addition on that, some short remarks could be done about the relation between the
Conventional provision on tax credit (art. 23B OECD MC) and the Italian provision which deals with
the same issue301.
Well, such relation is of complementarity between the national provisions and the conventional
ones, rather than supremacy.
That implies that, whether Italian rules provide for a more favourable treatment to the taxpayer
than the conventional ones, the former prevail on these latter.
Whether conventional rules are more favourable, instead, they prevail on the Italian provisions
if they (the conventional rules) are sufficiently clear to be directly applied. Otherwise, there could be
technical problems, arising from the fact that often the Conventional provisions are generic and
incomplete.
299 Art. 165, par. 1, TUIR. 300 Art. 136, par. 2, TUIR. 301 Art. 165, TUIR.
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In such cases, it should be applicable the most favourable internal provision, as far as it is
possible (see art. 169, TUIR)302.
And now, we are going to deal with the possibility that a group member could claim reductions
on withholding taxes directly to the State of the source.
According to the comments done before, we can say that such eventuality is not given in the
Italian consolidation system, because the mechanism of the tax credit works in a way so that the
company first pays the taxes in the state in which the corresponding items of income arise, then it
indicates to the holding the amount of such taxes (or, in the world wide consolidated, it is the same
holding the person that determines, in the consolidated tax return, the amount of creditable foreign
taxes), being the holding, finally, the person entitled to ask the Italian fiscal administration the limited
tax credit.
Considering Italy as the state of the source of an item of income (realized by a non resident
person), we know that such item can be considered in different ways depending on which category of
income it falls under (dividends, interests, royalties et al.).
If it is a dividend, it could be subjected to a withholding tax levied by Italy or, as well, according
to the “Parent-subsidiary” directive (once that have been complied the conditions required by such act),
such income is subjected only to taxation in the state of residence of the receiver, being exempted from
the withholding tax levied according to Italian laws.
A similar line of reasoning has to be followed about interests and royalties.
With regard to the first items of income, they could be subjected to a withholding tax in Italy,
unless it is applicable the “Interest-royalties” directive (as implemented by Italian law), which states that
interests paid between companies (under certain conditions) are taxable only in the state of residence of
the beneficial company.
Finally, dealing with royalties, we have to repeat the remarks outlined for the interests, but
pointing out also that for such category of incomes the OECD model (differently from dividends and
interests) attributes the exclusive power to levy taxes to the state of residence of the beneficial owner.
Anyway, apart from such last statement, Italy provides also for a withholding tax (which is effective in
absence of any Convention against double imposition and in cases not covered by the aforementioned
directive).
302 C. GARBARINO, Manuale di tassazione internazionale, cit., p. 126.
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5 – NON DISCRIMINATION (ART. 24 OECD MODEL)
Art 24 can be considered the expression of the non discrimination principle under the
conventional law. This article forbids citizens (nationals) of a contracting state to suffer a more
burdensome fiscal treatment in the other contracting state. This happens on condition that the
discriminating behaviour is compared to the treatment granted to the national of the other contracting
State in a similar circumstance.
With regard to the scope of art 24 par. 1 OECD MC, legal persons, partnerships and
associations are assimilated to individuals. This result is achieved through the definition of the term
“national” contained in art 3, par 1, lett. g), OECD MC (“the term ‘national’, in relation to a contracting state,
means: i) any individual possessing the nationality or the citizenship of the contracting state; and ii)any legal person,
partnership or association deriving its status as such from the laws in force in that contracting state.”)303.
The last paragraph of art 24 extends the scope of the article also to persons that are resident of
neither of the contracting states. This constitutes a deviation from the rule on the scope of the
Convention, which is contained in article 1 OECD MC (“This Convention shall apply to persons who are
resident of one or both of the Contracting States”).
In other words, all nationals of a contracting state are entitled to invoke the benefits of this
provision, even the nationals of the contracting states who are not resident of either of them but of a
third state304.
With regard to what are the elements of the corporate income which are covered by such a
provision, they include the modalities of calculation of the taxable base, included the amount of the
rate, the methods of assessment and all the other formalities connected with taxation, like returns, legal
fulfilments etc305.
Within a context of group, so, such provision could find a ground of application for items of
income which arise in a foreign Country and realized by a non resident (in the aforementioned
Country) company.
Well, such incomes have not to be subjected, for example, to a heavier taxation than similar
incomes realized by resident companies.
303 OECD Commentary on art 24, par.1, n. 11. 304 OECD Commentary on art. 24, par. 1, n. 2. 305 OECD Commentary to art 24 par. 1, n. 10.
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Furthermore, the third paragraph of art. 24 OECD MC deals with the treatment to be granted
to a PE (of a non resident company), situated in a Contracting State, in respect with enterprises which
are resident of the same Contracting State of the PE.
This fiscal treatment shall not be less favourable than that one reserved to the mentioned
enterprises.
Well, the national consolidation seems to have caught the indication inferable from this
provision, since it allows to non resident companies with a PE in Italy to opt for such kind of
consolidation as controlling person, being the position of this PE assimilated to a resident company
under any point of view ( levied C.I.T. rate, fulfilment vis-à-vis the tax administration and so on).
Furthermore, it is important, for our purposes, that art. 117 par. 2 TUIR affirms that a non
resident company with a PE in Italy can become a holding in the national consolidated only if it is
resident in a state which have signed a Convention with Italy. This fact makes even more effective, in
the national law, the principle stated in art. 24 of the OECD model.
Moreover, this paragraph deals with the prohibition of “less favourable taxation”, while in the
other paragraphs of art. 24 the wording concerns “other or more burdensome taxation”.
This broader scope of this expression could leave room not only to criteria of determination of
the taxable base or of the tax rate (on the obvious condition that it does not imply an overall heavier
taxation charged to the PE than that one levied to resident companies), but also to the granting of
some benefits.
Anyway, the second phrase of the paragraph states that such provision do not bind a
contracting state to grant to PEs of non resident persons the same benefits or allowances conceded to
residents on personal basis (on account of civil status, family charges and so on).
Such a matter is felt as important even in the Community law.
In the EC law, as a matter of fact, the ECJ has granted to the PEs of the EU enterprises the
same fiscal treatment given by the Member States to their national enterprises306.
In the “Avoir fiscal” case307, for instance, the ECJ held that “the denial under Tax Treaties of
the imputation credit to EU companies that receive dividends from French companies through a PE
located in France is in conflict with the freedom of establishment under EU law”, given that, according
306 C. GARBARINO, Manuale di tassazione internazionale, cit., pp. 192-3.
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to French law, the French subsidiaries which distributes dividends to French parent companies receive
an imputation credit (“Avoir fiscal”) for the taxes paid on such income.
Finally, with regard to par. 5 of art. 24 OECD MC, the non discrimination is at the level of the
enterprises and does not affect as such the shareholders of the same enterprises308.
The purpose of such provision is in fact to ensure equal fiscal treatment to both national and
foreign companies which are resident in the same contracting state.
It is out of the scope of such provision the aim to give the same treatment to the owners of
foreign capital, in respect to the possessors of shares in national enterprises.
III EC LAW
1. PARTICIPATION OF FOREIGN ENTITIES TO THE ITALIAN SYSTEMS OF CONSOLIDATION
In the Italian tax law, with regard to the possibility of the participation of foreign entities to the
consolidation, some remarks have to be done.
Looking at the rules inherent the domestic consolidation, we have realized that foreign entities
can take part to a consolidated group only as controlling persons and under some further conditions
(i.e. they have to be resident in a State with which Italy shares a convention against double imposition
and they have to carry out also, in Italy, a business activity through a PE, being the participations in the
national controlled companies included in the property of the named PE).
Foreign subsidiaries, so, cannot be included in the domestic system of group taxation, unless
they transfer their residence in Italy and they comply with the requirements which Italian tax law
demands in order to consider as a resident a legal person (to have the legal seat, the place of
management or the main business in Italy for the most part of a tax period, usually equal at more than
307 C-270/83, 28-01-1986. The question was on whether the denial of the imputation credit (the “Avoir fiscal”) as relief to taxation levied on dividends distributed by French subsidiaries through a PE (related to a foreign holding) constitutes a breach to the freedom of establishment under EC treaty. 308 OECD Commentary on art. 24, par. 5, n.57.
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180 days-a-year)309. By the way, even the Italian Revenue Agency has released an advice on the matter,
substantially confirming what we have just said310.
On the contrary, if we look at the discipline of the world wide based consolidation, we can see
that foreign companies can be all included in the group taxation area by the resident holding company
at the top of the group’s chain of control.
Anyway, both the systems present elements of contrast with the freedom of establishment
under art. 43-48 EC Treaty.
Particularly, the domestic system does not allow, as we have seen above, the consolidation of
the foreign companies. Such companies are admitted only as controlling person with a PE in Italy. This
fact, as it provides for a further cost for groups with foreign control (in respect with groups with an
Italian holding at their head, which do not need a PE to consolidate Italian subsidiaries), could
constitute a hindrance to the freedom of establishment and it risks to distort the free competition311.
Moreover, the principle on the basis of the two regulations is different: in the domestic, there is
the “cherry picking approach”, thanks to what one or more controlled companies can be excluded
from the consolidation.
In the world wide discipline, instead, it is into force the “all in-all out” rule, according to which
the option for the consolidation has to be done by the holding for all the companies of the group, none
excluded.
The reason behind such difference is to avoid the phenomenon of the “trade of losses”,
according to which the consolidating entity could be prone to include in the consolidated area only
loss-making foreign companies (or companies which are resident in Countries with heavy regimes of
corporate income taxation), to reduce the group taxable base.
But this difference, if on one hand could be justified by the protection of the Italian revenue’s
interest, on the other hand it could be deemed as discriminatory vis-à-vis the controlling companies
which opt for the national consolidation.
309 Art 73, TUIR. 310 Agenzia delle Entrate, Risoluzione N. 123/E, 12 August 2005. With this act, the Italian fiscal administration has stated that a capital company resident in a EU State, in the specific case a Dutch BV, (deemed equivalent to an Italian capital company on the basis of a systematic interpretation of Directives, like the “Parent-subsidiary” (90/435), which –for their purposes- have a list of capital companies constituted according to the member states’ laws) can assume the qualify of controlled company in a national consolidated if it transfers its fiscal residence to Italy, on condition that such transfer is not made only for purposes of tax avoidance. Otherwise, such moving of residence will be deemed as void by the Italian fiscal administration, in accordance with art. 37bis, DPR 600/73.
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As a matter of fact, such persons can choose which resident companies include in the
consolidation, and so they can decide, as well, to exercise a joint option only with loss-making
companies, even, at the most, for tax avoidance purposes312.
Furthermore, the international consolidated could generate an incompatibility with the freedom
of establishment under art. 43 EC Treaty, with regard to the proportionality test, because the named
“All in-all out” approach would exceed the aim of the enforcement of the Italian revenue service,
discouraging so the Italian enterprises from consolidating foreign companies.
A remedy could consist in introducing the “cherry picking” principle also in the global
consolidation, symmetrically to the inclusion of the option for the world wide consolidation among
those facts that might give the Italian revenue service the power to make them void if they are aimed
only to avoid taxes, under art. 37bis, pars. 1, 2, 3, DPR 600/73313.
1.1 -TREATMENT OF LOSSES SUFFERED DURING THE CONSOLIDATED PERIODS
A relevant consequence of not including foreign subsidiaries in the domestic consolidated is the
impossibility to take into account their losses, in the determination of the group taxable base.
According to the world wide consolidated rules, instead, the losses suffered by the foreign
consolidated subsidiaries can be included in the common tax base of the group, as we have seen above.
Up to this point, the rules inherent the treatment of losses under Italian group tax law can be
seen under different points of view, having regard to the EC law and the ECJ’s case law.
We may think that such non-inclusion under domestic consolidation is justified by reasons of
public interest, such as the symmetry of the Italian fiscal system, which demands that foreign losses (or
better, losses related to foreign controlled companies) shall not be included in the national
consolidated, because neither foreign profits are attracted in the group taxable base.
Furthermore, it could be invoked a sort of complementarity between national consolidated and
world wide one for what regards the treatment of “foreign losses”: if a holding wishes to attract to the
311 A. DI PIETRO, La nuova disciplina dell’IRES: la tassazione dei redditi dei non residenti ed i principi comunitari, in La riforma dell’imposta sulle società a cura di P. RUSSO, Torino, 2005, p. 129. 312 A. DI PIETRO, La nuova disciplina dell’IRES: la tassazione dei redditi dei non residenti ed i principi comunitari, cit., p. 130. 313 E. DELLA VALLE, L’utilizzazione cross-border delle perdite fiscali: il caso Marks&Spencer, in Rass. Trib., III, 2006, 1012.
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group taxable base the losses coming from foreign controlled companies, it will be able to choose the
global consolidation, which provides for this possibility.
By this way, so, an eventual unfavourable decision (providing for the extension of the use of
foreign losses) by the ECJ would be avoided, on condition that the ECJ “considers all these reasons in a
global way”314.
These arguments, on the other hand, are easily contradictable, if singularly taken.
Beginning from the second one, it is clear that there is not any complementarity between the
two systems.
The requirements which Italian law provides for entering the world wide consolidated are more
burdensome than the criteria listed for the national group taxation315. Different is also the approach at
the base of each discipline: the “cherry picking” of companies in the domestic one, the “all in-all out”
in the world wide based rules. Such difference, obviously, complicates even more the “supposed”
complementarity between the two consolidated.
With regard to the loss treatment of foreign companies, the fact that it is not allowed in the
domestic-based rules (since it is not allowed the consolidation of foreign companies tout court) it would
be suitable to the purposes of preserving Italian tax law symmetry, but it could be censured by the ECJ
under the profile of the proportionality, because (among the other reasons) it would compel the
holding to choose the world wide consolidated with taking inside it all the foreign companies, without a
reasonable possibility of choice of the subsidiaries to include (operating the all in-all out approach).
Up to now, we have seen what is the situation, under the Italian tax law into force, of the
treatment of foreign losses within a consolidated group, a possibility which is present only in the world
wide discipline.
314. M. RUSSO, Tassazione di gruppo e deduzione delle perdite delle società controllate estere:un ostacolo fiscale alla libertà di stabilimento ancora in attesa di una soluzione?, in Riv. Dir. Trib., 2006, I, p. 30. 315 M. RUSSO, Tassazione di gruppo e deduzione delle perdite delle società controllate estere:un ostacolo fiscale alla libertà di stabilimento ancora in attesa di una soluzione? , cit., p. 31.
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1.2 - TREATMENT OF LOSSES OCCURRED BEFORE THE CONSOLIDATION
In the world wide consolidated, foreign losses related to tax periods before the entry into force
of the consolidated cannot be used neither in reduction of the overall income of the group316 nor in
reduction of the incomes of the controlled foreign companies which have suffered them317.
There is another provision, inherent the national consolidated, to be taken into account.
This provision is contained in art. 118, par. 2, TUIR and states that “losses related to financial
periods before the entry into force of the [national consolidation system] can be used only by the
companies which they refer to.”
There is, so, a (little) difference between the treatment of previous losses in the domestic
consolidated and the treatment provided in the world wide one.
In this latter, in fact, the previous losses are not relevant at all, and consequently they cannot be
either carried forward by the controlled foreign companies to which they refer, in order to offset future
profits, which are then attributable to the holding entity.
In the domestic discipline, instead, it is possible, for these controlled entities, to carry forward
the remaining part of such losses in reduction of their (now consolidated) income.
Such difference of loss treatment between consolidated regulations could represent a profile of
discrimination under art 43 EC Treaty, which could be censured by the ECJ, similarly to what
happened in some cases, like “Marks&Spencer” and others318.
2 - DETERMINATION OF GROUP INCOME
Dealing with the national consolidated, each controlled company files its own tax return, in
which it is calculated its own income and other relevant elements (e.g. the withholding taxes paid, the
316 Art. 134, par. 2, TUIR. 317 B. ALOISI, Il consolidato mondiale, in Aspetti internazionali della riforma fiscale a cura di C. Garbarino, Milano, 2004, pp. 193-4. 318 ECJ 29March 2007, C-347/04, Rewe Zentralfinanz; ECJ 13 December 2005, C-446/03, Marks&Spencer, in which the ECJ stated that the use of foreign losses (made by a resident holding) could be permitted when such losses cannot be anymore used by the foreign controlled companies to reduce their income in their state of residence. Broadly speaking, this decision has denied legitimation to those systems which do not ever grant the use of losses coming from non resident subsidiaries, whether there is no proportionality between the reasons of the enforcement of national revenue interests (deemed as imperative public interest justifying restrictions on fundamental freedoms) and such restrictions.
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tax reductions and the tax credits due for taxes paid on foreign incomes). Such incomes are calculated
by applying the ordinary provisions inherent the determination of the corporate income319.
With regard to the holding company, it has obviously to file its own tax return, in addition with
the group tax return. Because of the Financial Act for 2008, the holding, now, has not any longer to
make adjustments by law on the overall income, since they (once in art. 122, TUIR) have been
abolished.
In the world wide consolidated, on the contrary, the foreign subsidiaries send to the resident
controlling company their own audited balance sheets (not their tax returns) and the holding applies on
them the adjustments by law320 in order to determine the group overall income.
2.1 - ABOUT THE SYSTEM OF CALCULATION OF CORPORATE FOREIGN INCOME IN THE WORLD WIDE CONSOLIDATED
If we get an insight to the Italian laws for the determination of the world wide income of a
group, we note that they are not the pure and easy application of TUIR’s provisions inherent the
corporate income to the single consolidated balance sheets.
The world wide regulation, indeed, has provided not only for appropriate adjustments to be
applied to the single balance sheets, but has also excluded the implementation of some rules contained
in the TUIR, because these last ones are thought for enterprises and entities with a prevailing Italian
ground.
2.2 - COMPATIBILITY OF THE CONSOLIDATED REGULATIONS WITH EC LAW
By the way, such a non effectiveness of a part of the TUIR, joint to the fact that the option for
international consolidation is irrevocable for the following five tax periods (while in the national it is
three-year lasting), and other (e.g., the all in-all out principle, opposed to the cherry picking approach,
the mandatory auditing for the foreign companies’ balance sheets etc.) have given rise to doubts about
319 Art. 83 et seq. , TUIR. 320 Art. 134, TUIR.
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the compatibility of the world wide consolidation with the EC Treaty provisions on the freedom of
establishment and non discrimination321, as mentioned above.
If these single remarks, as we have seen before, could have some ground with regard to
potential distortions on the freedom of establishment as such, generally speaking the world wide
consolidated needs more protection of the revenue’s interests, as it involves foreign entities interfacing
several foreign tax administrations and tax laws.
Such demand of protection, as a consequence, can imply stricter provisions than in the national
consolidated. These provisions, anyway, might be called to face the proportionality test, (as seen in
“Marks&Spencer” case with regard to the limits on the use of foreign subsidiaries’ losses), in order to
verify if they do not sacrifice too much the fundamental freedoms.
In the light of the comments done so far, we may say that Italy could implement in a better way
the international consolidated.
By introducing such kind of group taxation, Italy wished to be in the forefront of the European
tax law, but the actual version, as we have just remarked, gives rise to so many possible problems under
the EC law that some caution more would have not been improper.
Paradoxically, another practical solution could be to not implement at all the world wide
consolidated, since such solution constitutes nowadays, in the European Community, an exception
rather than a rule (only Denmark and France have similar systems), and allowing, on the other hand, a
form of consolidation of foreign losses within the same national consolidated.
By the way, about the national consolidated, we have to remind the remark done above: the
main hindrance to the freedom of establishment could consist in the fact that there is no way to include
within the consolidated foreign entities (and so foreign losses).
But we have also to remind that the extension to non resident persons of group tax benefits
(broadly intended) reserved to resident persons cannot be implemented so easily; we do not either think
that the ECJ always authorizes such extension in the name of the freedom of establishment (or of the
non discrimination).
In the “oy AA”322 case, for example, the ECJ has deemed compatible with the EC Treaty
provisions on the freedom of establishment the restrictions of a national legislation on the deductibility
321 Arts. 43-48 EC Treaty 322 ECJ 18 July 2007, C-231/05, “oy AA”.
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of financial transfers between companies of a group (the restrictions limited the entitlement to the
deduction only to resident companies paying such transfers to a resident controlling company).
Such limitation, according to the ECJ, is compatible under the EC Treaty because its aim is to
protect the fiscal integrity of a member state. The named integrity would have been threatened if the
benefit had been extended also to the payments done in favour of a non resident holding, because by
this way the taxable income of the state of residence of the payer company would have been reduced
and the revenue’s interests damaged.
This reference was made to assert that the extension of fiscal benefits to non resident persons
(and so the respect of the freedom of establishment), within a group taxation system, has to be
balanced with the fiscal interests of a member state; this remark has to be taken into account by the
Italian legislator, whether it will undertake, in the future, any act of reform of the domestic
consolidation.
Finally, in view of future improvements of the Italian law, in order to overcome such potential
profiles of incompatibility with EU law, it could be hoped for a better coordination between the two
consolidated system, especially with regard to the personal requirements, to the principle on the basis
(“cherry picking” vs. “all in-all out”323), to the period of effectiveness of such systems (three years at the
beginning in the domestic, five years in the international324), to the fulfilments of group up to the
holding company and so on.
By this way, so, it could be easier to a resident holding (or even, in the national regulation, to a
non resident company with a PE in Italy) to opt for one or another consolidated regime, in order to do
in the best way the interest of the group, without excessive hindrances to the freedom of establishment.
323 We remind the comments done before, on the compatibility of the “all in-all out” principle with the freedom of establishment under the profile of proportionality. 324 E. DELLA VALLE, in L’utilizzazione cross-border delle perdite fiscali: il caso Marks&Spencer , cit., 1013, affirms that the protection of the revenue’s interests cannot constitute a sufficient reason for this kind of restriction of the freedom of establishment. C. PERRONE, in Elementi di specificità del “consolidato estero” rispetto al “consolidato nazionale” , in Il Fisco, n°15 , 2003, 2257, affirms as well that such difference cannot find ground only on reasons of internal fiscal protection and proposes the conformation of the world wide consolidation’s lasting to three years (as well as in the national group taxation system).
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3 – EC STATE AID RULES
3.1 - INTRODUCTION
A state aid325, according to the general definition developed by the EU institutions (within the
powers to them conferred by art. 88 EC Treaty), is such whether:
o It grants an economic advantage to the beneficiary, so distorting the competition between
member states;
o Its grant is attributable to the State or anyway to public resources;
o The beneficiary is an undertaking or the production of certain goods;
o It is selective by favouring certain undertakings or the production of certain goods.
The scope of this requirements is very broad, including also the state aid given through fiscal
measures, which facilitate undertakings by reducing their tax burden.
With regard to this kind of aids, a fundamental text is the Communication of the Commission
on the application of the rules concerning state aids on corporate taxation326.
Such act of soft law affirms that “a revenue loss for a member State is equivalent to the spending of public
resources” and so “the aids granted through fiscal measures have to be examined in the light of their effects, with regard to
their compatibility with the Common market”. The present act is important because it contributes to base the
relevant decisions of the Commission on such issue, even if it is not binding.
Furthermore, the Commission has pointed out that the advantages to the enterprises through
the reduction of the fiscal burden might be granted in these modalities (non exhaustive list):
6. A reduction of the taxable base (derogatory deduction, extraordinary amortizing…);
7. A total or partial reduction of the tax amount (exemption, credit…);
8. The deferral, the cancelling or an extraordinary re-negotiation of the tax debt.
Nevertheless, the selectivity of such measures (and others) “can be justified by the nature or by the
structure of a system”327.
Furthermore, the same Commission has outlined a distinction between State aid and general
measures.
325 See art. 87, par. 1, EC Treaty for the definition. 326 98/C 384/03, in Official journal of the European communities, n° C 384, 10 December 1998, 3. 327 G. FURCINITI – E. PALLARIA, Illegittimità degli aiuti di stato concessi mediante agevolazioni di natura fiscale: principali problematiche applicative dell’azione di recupero, in Il fisco, n°5, 2005, 696.
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The main features of these latter are the following:
• They are addressed to all the economic operators within a member state;
• They are applicable to all the enterprises on a ground of effective opportunity of access (no
discretional procedures or factual limitations);
• They are accessible to all the economic operators, without any preference for certain
undertakings or certain sectors of production.
By this way, we consider as general fiscal measures the fundamental choices of economic policy
of a member state, which, according to the example of the Commission, could be:
• The decisions of pure fiscal technique (determination of tax rates, rules concerning the
carrying forward of losses, rules made to avoid double imposition and tax evasion);
• The decisions aimed to achieve a purpose of general economic policy (R&D, environmental
protection, education, employment etc.), even if such decisions involve the reduction of some
elements of the overall tax burden of an undertaking.
Moreover, the measures aiming at achieving social purposes can be deemed as consistent with
the “nature or the structure” of the system, whether this last pursues such aims (e.g. if such aims are
included in the Constitution, as in Italy happens).
As we can see, the boundary between state aid and admitted exceptions is very subtle.
3.2 - COMPATIBILITY OF THE ITALIAN GROUP TAXATION WITH THE EC TREATY PROVISIONS ON STATE AID
The group taxation in Italy presents some aspects which could be discussed in the light of the
EC Treaty regulation on state aid. We make a short summary of the two sets of rules and then we are
going to analyze the eventual points of friction with the relevant Community rules.
3.2.1 - DOMESTIC CONSOLIDATION
Such group taxation system is open to the following enterprises: to resident commercial
companies, to public commercial entities, to non resident entities with a PE in Italy and to some
particular capital companies (as controlled ones).
The holding makes the choice for consolidation jointly with each controlled company entering
into this system, according to the “cherry picking” approach.
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The group income is made up of the algebraic sum of the single incomes realized by all the
partners of such group plus some corrections (the ones which have been left after a general abolition
made by the Financial act for 2008).
Dealing with the incomes produced at abroad by the companies of the domestic consolidated
group, the Italian state grants a tax credit according to the principle of the “Per Country limitation”.
Such a principle means that the credit is given by calculating the tax amount definitively paid by the
enterprises State by State for the items of income therein arisen.
3.2.1.1. - RELATIONS WITH THE STATE AID REGULATION
Such a system of group taxation is addressed to resident capital companies and, at most, to non
resident controlling entities with a PE in Italy. All this implies that the present set of rules is not
available to any enterprise in Italy and so that it shows the typical requirements of the selectivity, being
considered, under such profile, a State aid.
The act of legislative delegation328, yet, affirms that the group taxation is introduced in Italy to
fill the gap existing with the most important EU Countries and to comply with the indications of the
Commission, which asserted329 that the correct functioning of the internal market requires the
consolidated group taxation.
Moreover, another reason behind the introduction of such kind of taxation lies in the need to
promote the diversifying of the economic activities of a group and “to not damage [as such] the plurality of
persons which are part of the same enterprise”330. Such grounds could fall under the justifications which excuse
a selective measure; particularly they could be deemed as provisions aiming at achieving purposes under
EC Treaty in conformity with the indications of the Commission.
The provisions inherent the compensation of infra-group losses and about the grant of a tax
credit, finally, can be considered of “pure fiscal technique” and as such they could not fall under the
matter of fact of state aid under art. 87 EC Treaty.
Other relevant profiles of possible violations of Community rules could involve the freedom of
establishment, as seen before.
328 L. 80/2003. 329 See “Company taxation in the internal market”, a study promoted by the Commission issued in 23 October 2001. 330 G. ZIZZO, Osservazioni in tema di consolidato nazionale, cit., p. 628.
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3.2.2 - WORLD WIDE CONSOLIDATED
In this group taxation system the top level resident holding has a very relevant role.
Such controlling company, as a matter of fact, does the option for consolidation by involving all
the foreign companies of the group (“all in, all out”).
Moreover, it calculates the income of the group through the application to each audited balance
sheet of each foreign subsidiary of the TUIR’s provisions on corporate income tax, with some
adjustments by law.
In the world wide consolidated, obviously, it is possible to offset losses deriving from non
resident companies with profits coming from other members of the group. Even better, it is the main
reason for which a resident holding is led to include in this group taxation system foreign controlled
entities.
Then, the controlling company determines the global group tax, excluding from it the amount
of tax paid by the foreign subsidiaries (for which the Italian state grants a limited tax credit, calculated
foreign company by foreign company, according to the principle of the “Per company limitation”) and
consolidating the income of each controlled person proportionally to the shares owned, directly or
indirectly.
3.2.2.1 - RELATIONS OF THE WORLD WIDE CONSOLIDATED WITH THE STATE AID RULES UNDER EC TREATY
Even here, similarly to what happens in the domestic regulation, there could be a profile of
selectivity of this group taxation, as it is addressed only to certain enterprises (the multinational
enterprises with a consolidating holding in Italy).
But such provision does not seem to constitute a state aid, because it was made to comply with
the demands of the Commission, that has promoted in a study in 2001331 the necessity to create a
system of compensation of losses and profits within the group, in order to create an overall taxable
base expressing the economic result of a group, removing so the hinders of fiscal nature against the
expansion of the groups of enterprises within the Community market.
And so, the world wide consolidation, too, can be considered as a general measure of economic
policy, because it pursues an aim put by an EU institution (the Commission). Such conclusion “is shared
331 “Company taxation in the internal market”, cit. in the foot-note n. 134.
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by the most part of the Italian scholars, which think that such system is a structural measure, more than a fiscal
facilitation”332.
Generally speaking, the group taxation as such could constitute a state aid or could not: that
depends on how such system of taxation is implemented within the concerned Member States.
In Italy, for example, there are several critic profiles, but all in all it seems that the reform has
been implemented in a way respectful of the EU laws on state aid and of the indication of the
Commission about the creation of a way to calculate a common group result, in order to favour the
development of groups of enterprises within the EU market.
A group taxation system, in my opinion, cannot be considered as such a state aid, because the
European economy is characterized by the presence of several multinational groups, operating within
EU borders and outside them, and so it has necessarily to be taken into account the introduction of
some form of consolidated taxation, which does not frustrate their international dimension and in the
same while does not distort the internal market.
3.3 - CODE OF CONDUCT
This act is part of the Communication of the Commission called “Towards the fiscal coordination
within EU: a set of measures aimed at contrasting the harmful tax competition”333.
This document considers as “harmful” those fiscal provisions determining a tax burden clearly
lighter than the average level of taxation levied in the same member State.
The named Code, then, makes a list of harmful fiscal provisions, which are deemed as not
admissible:
1. fiscal facilitations addressed only to non resident persons or applied on those operations which
involve non resident persons;
2. facilitations without any link with the national economy, not affecting the national taxable base;
3. facilitations applicable apart from the carrying out of an effectual economic activity in the
member state;
4. if such measures are not granted through a transparent procedure;
332 V. CAPOZZI, Il consolidato mondiale, cit., p. 124. 333 Communication of the Commission COM (1997) 564.
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5. if the criteria concerning the determination of the profits of the non resident’s economic
activity significantly differ from the OECD acknowledged principles.
More particularly, according to the Code, a national fiscal provision is deemed to be harmful if
two elements are present at the same time: i) the suitability to influence the placement, in a certain
member state, of an undertaking334; ii) the facilitating or selective nature of such provision335.
According to all these requirements, we may argue that a national tax regime which provides for
a very low tax burden, being such taxation applied to all the enterprises operating in the same member
state, does not fall under the provisions of the Code336.
3.3.1 - RELATIONS CODE OF CONDUCT – STATE AID PROVISIONS
And now, we have to ask ourselves which is the relation between the Code of conduct on
harmful tax competition and the provisions on the state aid (arts. 87-89 EC Treaty and inherent soft
law).
The Commission and the Council are very prudent on outlining a link between such kinds of
measures even “because of the different aims pursued by the Code and the regulation on state aid”337.
More particularly, the measures censurable under state aid provisions are aimed to encourage
the development of national enterprises, while the potentially harmful tax provisions tend to attract
foreign investments.
Besides, the same Code affirms that “only a part of the measures also fall under the EC Treaty provisions
on State aid”; even the Communication of the Commission (1998) says that “a measure deemed as harmful
under the code of conduct can also fall under the state aid ban [even if not necessarily]”.
All this said, we have to remark that the outlines (A and B) included in the Code of Conduct
satisfy the requirements of the State aid provisions.
More specifically, the condition laid down in the paragraph A affirms that the Code applies only
to measures which affect (actually or potentially) the placement of the enterprises within the EU states.
334 Par. A), Code of Conduct. 335 Par. B), Code of Conduct. 336 C. GARBARINO, Manuale di tassazione internazionale, cit., p. 777. 337 A. PERSIANI, Le fonti e il sistema istituzionale, in Aiuti di stato in materia fiscale a cura di Livia Salvini, Milano, 2007, p. 45.
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Such requirement is well related with the criterion of the hindrance of the freedom of the
Common market under art. 87 EC Treaty.
The provision under paragraph B, on the other hand, states that the Code bans the fiscal
measures which determine, in a member State, a tax burden relevantly lower than the average one.
Since a harmful tax provision, to be such, has to be somehow addressed to foreign economic
operators, this paragraph satisfy also the requirements (under EC Treaty law) of the economic
advantage and of its selectivity.
Moreover and in conclusion, the isolation of a harmful tax measure can be deemed (under State
aid outlines issued in 1998 by the Commission in a Communication) in contrast with the nature or the
structure of the system and so it could be censured, too, as a State aid.
3.4 - PROCEDURE TO ELIMINATE HARMFUL TAX PROVISIONS
Agreed that such a Code is not a binding act, but rather a political commitment of the single
member States, it provides that these last ones will not introduce any new harmful tax provision
(“Standstill” clause) and that they will abolish all the similar measures into force within a member state
(“Rollback” clause).
Then, a group of study (the “Primarolo Group”) was established in 1998, with the purpose to
seek, in the tax laws of the member States, the harmful measures concerning the direct taxation of the
enterprises.
Such group presented the results of its studies in an ECOFIN Council (29 November 1999).
This survey has found 66 harmful tax measures at that time into force in the EU states.
Subsequently, the 2000 ECOFIN stated then such measures had to be abolished or modified at
most within 31-12-2005.
The 2003 ECOFIN, yet, has granted respites to 2010 for some measures.
About Italy, the only measure censured by the Primarolo group concerned the facilitations
granted to financial and insurance enterprises carrying out their activity in the off-shore centre of
Trieste, but such a provision did not ever had any real effectiveness338.
338 G. MELIS, Coordinamento fiscale nell’ Unione Europea, in Enciclopedia del diritto 2006, Annali, I, Milano, 2007.
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3.5 - COMPATIBILITY OF ITALIAN GROUP TAX FACILITIES WITH THE CODE OF CONDUCT
It is a question of checking if the general structure of the consolidated systems falls under the
“prohibitions” enumerated in the Code of Conduct.
About the first point (“facilitations addressed only to non resident persons”), the regulation on
the consolidated seem to avoid this censure, because it is addressed to the generality of the enterprises
operating in the Italian market.
At most, here the problem of compatibility with the EU law could concern the difference about
the requirements (both personal and not) for access demanded by the two consolidated systems, as
seen before.
With regard to the second point (“facilitations isolated from the national economy”), we have
to make reference to the very system of attribution/calculation of the group income.
In the world wide consolidated, the income is attributed to the holding, which calculates the
single incomes of the non resident entities by applying the Italian tax law provisions to the balance
sheets and then it files a unique tax return. In such a system, the contributory capacity is referred to the
group, intended as a unique person which expresses a unitary duty to pay taxes for its overall income.
In the Italian tax law, on the contrary, the contributory capacity is generally attributed to each
single person, both legal and natural: the world wide consolidation system, so, appears like a deviation
from the normality339 and it could be considered a facilitation under the Code of Conduct (and under
the 1998 Communication of the Commission, as “breach” of the “nature and structure of the system”)
on condition that we consider the world wide consolidation (and so the simple attribution of the group
members’ incomes to the holding) a measure of State aid in itself.
Another potential advantage could consist in the fact that the group’s income in the world wide
oriented regulation is calculated starting from the incomes of the non resident entities. Such a thing
does not happen in the national consolidated (with regard to the foreign incomes of the consolidated
companies, which contribute to form the overall income without any preferential order), and this one
could be considered as an isolated measure of fiscal favour, too.
About the effectiveness of an economic activity within the State, such requirement could be
complied with by the international consolidated (the reference is to the incomes of non resident
339 A. FANTOZZI, La nuova disciplina IRES: i rapporti di gruppo, in La riforma dell’imposta sulle società a cura di P. Russo, cit. , p. 173.
215
entities) insofar as we consider the economic results of the controlled foreign entities as a unique
income, calculated under the Italian tax law provisions by the holding and attributed to this last one
according to the new perspective of the group taxation, which gives relevance under the tax law to an
economic complex unit, i.e. the group.
With regard to the last requirements of the Code (“no transparency in giving facilitations” and
“relevant differences in respect with OECD principles”), a hint has to be done to the procedure of
application340 to the Italian revenue agency made by the holding in the world wide consolidated.
Such application has the function to put the holding in the best conditions to exercise the
option for consolidation, in order to know if it the members of the group (holding included) have all
the requirements prescribed by the law.
Well, this procedure of application could not be very transparent where the Internal Revenue
Agency of Italy subordinates its positive advice to the request of not specified “further mandatory
fulfilments to be done by the holding aimed at better preserving the interests of the Italian revenue”341,
which could be very burdensome.
Coming to the last point of the Code, problems may arise in order on how to consider the
adjustments by law to be made by the holding when calculating the income of foreign entities.
Briefly, we could say that such variations do not affect the overall consistence of the provisions
applicable to calculate the group income, and that they are functional to adapt an income produced at
abroad to the Italian tax law system, which present several provisions thought mostly for national
entities.
3.6 - CODE OF CONDUCT AND ITALIAN TAX LAW
Italy does not apply any measure which can fall under the “prohibitions” of the Code of
conduct, since the only one which was recognized by the “Primarolo group” (the facilitations for the
financial and insurance enterprises settling their centre of activity in Trieste) has never been
implemented in an effective way.
With regard to the way through which Italy complies with the demands of the Code of
Conduct, there is to be said nothing more than what have been said above: Italy takes the commitment
340 Art. 132, par. 3, TUIR. 341 Art. 132, par. 4, first phrase, TUIR.
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to preserve the status quo for the present time and to dismantle gradually all the measures suspected to
violate the provisions under the Code of conduct.
The Code of Conduct (and the provisions contained in the Communication of the Commission
1998) represents a useful instrument to reach the so-called “negative integration” between the fiscal
systems of the EU member States. This is one of the few possible ways, because the field of direct
taxation is still today jealously kept by the member States as one of the primary elements of sovereignty,
and so it is necessary a step-by-step approach (in a general perspective aimed at reaching the objectives
of the EC Treaty), in which the fiscal systems of the States are oriented to the realization of the
Common market and to “the elimination of the most relevant distortions”342 existing among them, within the
framework of a renewed approach and coordination of the member states’ tax legislations.
342 G. MELIS, Coordinamento fiscale nell’ Unione Europea, cit., Annali, I.
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BIBLIOGRAPHY
ALOISI B. , Il consolidato mondiale, in Aspetti internazionali della riforma fiscale, a cura di C.
Garbarino, Milano, 2004, pp. 169-214.
BUCCI L., La tassazione per trasparenza delle società di capitali, in La disciplina IRES dei gruppi di
imprese, Milano, 2006, pp. 29-65.
CAPOZZI V., Il consolidato mondiale, in La disciplina IRES dei gruppi di imprese, cit., pp. 123-176.
DELLA VALLE E., L’utilizzazione cross-border delle perdite fiscali: il caso Marks&Spencer, in Rass.
Trib., III, 2006, 1012.
DI PIETRO A., La nuova disciplina dell’IRES: la tassazione dei redditi dei non residenti ed i principi
comunitari, in La riforma dell’imposta sulle società a cura di P. RUSSO, Torino, 2005, pp. 121-138.
DI SIENA M., Il consolidato fiscale, Milano, 2004.
DODERO A., FERRANTI G.,MIELE L. , L’imposta sul reddito delle società, Roma, 2005.
FANTOZZI A., La nuova disciplina IRES:i rapporti di gruppo, in La riforma dell’imposta sulle società a
cura di P. Russo, Firenze, 2004, pp. 167-190.
FICARI V., Profili applicativi e questioni sistematiche dell’imposizione “per trasparenza” delle società di
capitali, in Rass. Trib., 2005, I, pp. 38-72.
FRANSONI G., Osservazioni in tema di responsabilità e rivalsa nella disciplina del consolidato nazionale
(con postilla finale di A. Fantozzi), in Riv. Dir. Trib., 2004, pp. 515- 543.
FURCINITI G. – PALLARIA E., Illegittimità degli aiuti di stato concessi mediante agevolazioni di natura
fiscale: principali problematiche applicative dell’azione di recupero, in Il fisco, n°5, 2005, 696.
GAFFURI G., Il consolidamento domestico nella disciplina dell’imposta riformata sulla società, in
Tributimpresa, 2004, N.1, p. 23 (citazione de relato)
GARBARINO C., Manuale di tassazione internazionale, Milano, 2005.
INGRAO G., In tema di tassazione dei gruppi di imprese ex D.Lgs. 344/03, in Rass. Trib, 2004, II, pp.
537-579.
MELIS G., Coordinamento fiscale nell’ Unione Europea, in Enciclopedia del diritto 2006, Annali, I,
Milano, 2007.
218
MELIS G., La nozione di residenza fiscale delle persone fisiche nell’ordinamento tributario italiano, in Rass.
Trib., 1995, VI, pp. 1034-1081.
MICHELUTTI R., Modifiche alla disciplina del consolidato fiscale nazionale,in Corr. Trib, 2008, n°4, pp.
277- 284.
PERRONE C., in Elementi di specificità del “consolidato estero” rispetto al “consolidato nazionale” , in Il
Fisco, n°15 , 2003, 2257
PERSIANI A., Le fonti e il sistema istituzionale, in Aiuti di stato in materia fiscale a cura di Livia
Salvini, Milano, 2007, pp. 3-53.
RUSSO M., Tassazione di gruppo e deduzione delle perdite delle società controllate estere:un ostacolo fiscale alla
libertà di stabilimento ancora in attesa di una soluzione?, in Riv. Dir. Trib., 2006, I, pp. 13-33.
TURRI G., Riforma fiscale: disciplina del consolidato mondiale, in Dir. Prat. Trib, 2006, I, pp. 95-176.
VALENTE P. - VALENTE G., Consolidato e trasparenza, Milano, p. 107 (citazione de relato)
ZIZZO G., Osservazioni in tema di consolidato nazionale, in Riv. Dir. Trib.,V, pp. 625-656.
219
EUCOTAX Wintercourse 2008
Budapest
Università LUISS – “Guido Carli” – Roma
Facoltà di Giurisprudenza
Cattedra di Diritto Tributario dell’Impresa
Cattedra di Diritto Tributario Internazionale e Comunitario
INTANGIBLES
Margherita Saccà
Matr. 069453
220
Introduction
Nowadays the exploitation of intangibles is more and more important. First of all, it is necessary to
distinguish between “relevant legal things” portion of reality suitable for becoming object of legal rights
and “not relevant legal things”, portion of reality that are separated from that individuals work with
them and know them well 343. The first notion could also be called “good” and the second
“entity”344.
The intangible entities are suitable to be considered from a legal point of view and they could also be
called intangible things. This last term reminds us thickness and materiality for this reason the
expression intangible is widely used345. Not everyone has the same opinion about this particular issue.
Some support a negative specification of intangibles as an impossibility of perception caused by a lack
of thickness 346 347. Other authors support a positive specification of intangibles. Some of them have
spoken about the notion of intellectuality as a result of human experience and as an individual and
human thought fixed in a specific moment of his being 348 349. Every intangible entity could not be
considered as an intangible and so subject to privities. It would be very difficult to carry out, but if it
were possible, there would be the standstill of intellectual production350. Some entities have not legal
requirements and so they are not “intangibles”351.
1. Common elements of intangibles
Intangibles show some commons elements:
- These entities achieve a creative result. We should remember Art.2575 c.c.352. It declares that
works of talent with a creative result are covered by copyright.
343 M. ARE, Beni immateriali (dir. Priv.), in Enc. dir.,1959, V, p. 3. 344 R. NICOLO’, L’adempimento dell’obbligo altrui, Milano, 1936, p. 78. 345 M. ARE, Beni immateriali (dir. Priv.), cit, p. 4. 346 C. VALENTINI, Profili fiscali dei beni immateriali, in Dir. Prat. Trib., 1992, I, 1398. 347 D. MESSINETTI, Beni immateriali, in Enc. giur., 1998, V, p. 1. 348 M. ARE, Beni immateriali, cit., p. 5. 349 D. PICARD, Le droit pure, Bruxelles-Paris, 1899, 98 ss e 119 s. The expression intellectual goods was used to explain intellectual rights theory. 350 M. ARE, Beni immateriali (dir. Priv.), cit, p. 5-6. 351 C.VALENTINI, Profili fiscali dei beni immateriali, cit, p. 1399. 352 D. MESSINETTI, Beni immateriali, cit., p. 2.
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- These entities are reproducible they could be reproduced in an undefined number10 and
circulate353 indefinitely though tangibles.
- They are liable to multi-enjoyment. Several people could enjoy advantages that comes from
the same intangible. The owner could transfer intangibles without losing his ownership.354
- They need to be shown in order to become a legal subject. Before an external expression they
are only a thought of his author.
- They are transcendent :the material is useful to intellectual entities.
- They are unbreakable355 and immortal: they are able to survive their authors and their
tangible means of expression.
- They cannot give an immediate economic enjoyment because they need a concrete mean of
expression 356.
2. Different categories of intangibles
2.1 Copyright
Works are covered by copyright according to the articles 2575- 2582 c.c., and law 22 April, 1941, n. 633
( hereinafter, copyright law). The mentioned provisions do not give a rigorous legal specification357.
Works of talent are intellectual works that have concreteness of expression and artistic flair that allow a
personal and original showing of ideas, feelings, and other similar qualities 358.
We could remember three types of talent productions that are under copyright law:
- Artistic works such as literary works, drama, musical and others.
- Works that are not totally artistic expressions such as collections of lessons, conferences
,that have a bit of originality in the annotations.
353 M. ARE, Beni immateriali, cit., p. 7. 354 M. MASCHIO, I beni immateriali nella determinazione del reddito d’impresa, p. 591 12 D. MESSINETTI, Beni immateriali,cit.,p.2. 355 M. ARE, Beni Immateriali, cit., pag. 7. 356 T. ASCARELLI, Teoria della concorrenza e dei beni immateriali, Milano, 1957, p. 236. 357 M. ARE, Beni immateriali, cit., pag. 13. 358 C. VALENTINI, Profili fiscali dei beni immateriali, cit., p. 1400.
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- Non artistic works such as scientific works, relief models and maps.359
There is the problem about the protection of the idea, for example, advertising could be protected,
only, by the wills of the contractual parties and not by copyright law360. The copyright law does not
speak about unlawful works. In fact they are protected by constitutional freedom in art and scientific
expression. For this reason, they, differently from patents laws, could also be contrary to public order,
imperative rules, and good morals. Limitations of copyright can be caused by penal or administrative
laws.361
The main Italian scholars distinguish two components of copyright: moral and economic rights. The
first is also called the right to fatherhood of works362. The author acquires his title when he creates his
work (art.8copyright law). The economic right represents a right, separated from the personality of his
author. In this case some authors support property or monopoly rights on works. However, this right
includes every form of work exploitation: its reproduction, publication, execution, modification and
circulation, (art.9 copyright law)363.
2.2 Distinctive signs: trademark
Law protects firms, signs, and trademarks for their capacity to identify things by their particular
characteristic. These have been classified intangibles because of their creative characterization of
things.364
Trademark is under art. 2569-2573 c.c. and law and provisions of legislative decree 10 February 2005 n.
30 ( hereinafter industrial property code ). Italian law protects the distinctive capacity of trademarks and
forbids its imitation365.The trademark also owns a suggestive capacity linked to the advertising of
products. This capacity is not protected by the law. The enterprise can use trademarks by a specific
patent or by a license. According to art. 2573 c.c. the enterprise can transfer the trademarks only if it
transfers the whole enterprise or one of its branch. The notion of trademark is stated in art. 2569c.c.
359 M. ARE, Beni Immateriali, cit., p. 14. 360 M. FABIANI, Autore (diritto di), in Enc. giur., 1988, IV, p. 3. 361 M. FABIANI, Autore (diritto di), cit., p.6. 362 A. DE CUPIS, I diritti della personalità, Milano, 1961, II, p. 177 363 C. VALENTINI, Profili fiscali dei beni immateriali, cit., p. 1400. 364 C. VALENTINI, Profili fiscali dei beni immateriali, cit., p. 1402. 365 D. MESSINETTI, Beni immateriali, cit., p.3.
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and in art. 7 of the industrial property code: a trademark is a distinctive sign that is possible to affix on
products and goods366. Italian law guarantees, according to art. 13 industrial property code, a
distinctive capacity of trademark as a guarantee of the origin of the products. It does not guarantee a
particular standard.
Art.2569c.c. recognizes an exclusive right on trademark, that is not suitable to multi-enjoyment . Some
Italian scholars do not consider trademarks as intangible because they are not separable by
enterprise367. A word or a figure could be a trademark. It is necessary to obtain a patent in order to
protect trademarks by law .According to articles 7,12,13 of industrial property code has to be different
from the common name of products and from the other trademarks that classify the same products, in
order to obtain the patent. The trademark have to be legal, in fact art. 14 of industrial property code
requires that it has not be contrary to public order, good morals and imperative rules 368.
2.3 Patent
Patent are intellectual creations that are able to solve technical problems. These consist in new work
conceptions, used for a specific result.
The result can consist in appliances, substance (invention of product) or it can consist in a method or
process production (invention of process). It can also consist in a new use of substances and processes
(use invention)369.
As far as the law is concerned, we should remember, articles 2584-2594c.c.and industrial property code.
Art. 2585 c.c. requires a new, creative and industrial invention, but it does not give us a specific notion
of industrial invention. A more specific notion of patent is contained in the art.45 of industrial property
code. The art. 50 of industrial property code requires the lawfulness of the inventions. The industrial
inventions have to be accomplished in a relevant economic manner in respect to the market
requirements370, in other terms it is necessary to have the production of a reproducible object in order
to produce a product or to offer a service.
A production of simple knowledge is not an industrial invention30.
366 C. VALENTINI, Profili fiscali dei beni immateriali, cit., p. 1402 367A. VANZETTI, Natura e funzione giuridica del marchio, in Problemi attuali del diritto industriale, Milano, 1977, p. 1161. 368 A. VANZETTI, Marchio:I) diritto commerciale, in Enc. giur., 1990, I, p. 6. 369C. VALENTINI, Profili fiscali dei beni immateriali, cit., p. 1401 370 M. ARE, Beni Immateriali, cit., p. 282.
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If industrial inventions have complied with law requirements, but their inventor does not ask for a
patent because he prefers a secret exploitation, we could have problems about law protections of the
inventions. Some scholars have supported the possibility of protection of these as if they were patented
inventions. According to these scholars it should be possible though the combination of art. 9 of the
Italian Constitution that protects scientific research, art. 35 of the Italian Constitution that protects
work and vocational training, 2589 c.c. that forbids the transfer of the right to be recognized as the
author of the work.
2.4 Software
Software is a collection of instructions used directly or indirectly by a computer to obtain a specific
result371. Software incorporates a creative expression of an entity that could be economically used.372
Software is comparable to talent woks and is protected by the copyright law. Art. 1of EC directive 14
May 1991n. 250 imposes to Member states to protect software as literary work under the Berne
Convention. This directive is being enforced in Italy by the legislative decree 29 December 1992 n.
518373.
Art.2 n.8 copyright law, modified by the legislative decree n.518 of 1992, includes under the copyright
law software, as a result of intellectual inventions. It is not clear what kind of novelty is required by law.
If the copyright originality (a sort of personal expression) or the patent law novelty, but several scholars
support the extension of novelty copyright.374
Art. 64 bis (Copyright law) asserts the author’s exclusive rights on software consist in:
- right to authorize permanent or temporary, total or partial software reproduction;
(Art 64 bis forbids every kind of reproduction; also the reproduction for personal use is prohibited.
Instead art. 13 a) copyright law allows the reproduction for personal use);
- right to make any kind of software modification;
- right to distribute software to users e. g. software leasing, software sales; (the right of
distribution are limited to the first distribution: afterwards there will be diminishing of
monopoly rights);
371 E. GIANNANTONIO, Programmi per elaboratore (tutela giuridica dei), in Enc. giur, 1995, p. 1. 372 D. MESSINETTI, Beni immateriali, cit., p.6. 373 M. MASCHIO, I costi del software nel reddito d’impresa, in Rass. Trib., 1995, IV, p. 624. 374 E. GIANNANTONIO, Programmi per elaboratore (tutela giuridica dei), cit., p. 4.
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- right to elaborate software34;
Some of these authors’ prerogatives are too rigorous for a lawful user and so art. 64 ter recognizes that
a lawful user has the faculty to reproduce, to elaborate and to adapt software for personal use375.
The creator of software (the Author ) is the owner of an original right.
The software can be a common work, if it is generated by several persons. It can also be a collective
work if it is the union of different software. In the first case the software rights belong to all the
authors, in the second case the software rights are of the manager of the whole software program.
Software rights last for the entire author’s life and for the following 50 years376.
2.5 Know-how
The term is used to identify methods, systems, processes and applicative or constructive details. These
elements, linked to each other, constitute a property of experiences and researches 377. Know-how can
be transferred despite of the owner’s personal qualities378.
Know- how and its respective is not ruled by a specific law. For this reason the scholars and the
majority of judges argue that in this case there should be only an indirect law protection by 621,622,623
p.c. that protects secrecy, 2598 that forbids unfair competition, 2105 c.c. that mentions duty of loyalty
of employees and other provisions. The owner of know-how right has a different position from the
owner of other intangibles; for this reason some scholars do not include know how in intangibles
category. We have to consider two notions of know how: technical- industrial notion and a commercial
one (this last one referred to experience rules derived from marketing and financial field). Several
scholars prefer this last notion instead of technical one.
The commercial notion is accepted by the Italian tax law and by OCSE. Also the Italian Supreme Court
(Civil Section) supports this notion (sentence n. 1669/1985)379. Court has stated that know-how is not
an intangibles and it‘s considered intangibles if it is liable to be patented.
We can conclude that know-how notion includes technical or commercial rules and processes used for
enterprise organization and goods production380.
375 E. GIANNANTONIO, Programmi per elaboratore (tutela giuridica dei), cit., p. 5. 376 E. GIANNANTONIO, Programmi per elaboratore (tutela giuridica dei), cit., p. 7. 377 L. SORDELLI, Il Know how: facoltà di disporre e interesse al segreto,. in Riv. Dir. Ind., 1986, I, p. 94. 378 A. ANGIELLO, Il know-how: un oscuro oggetto di bilancio, in Giur. Comm., 1986, II, p. 827. 379 C. VALENTINI, Profili fiscali dei beni immateriali, cit., p. 1406.
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The importance of know how is linked to the benefits that an enterprise can earn by enjoying or
transferring it (license, sale).
When an enterprise gives know-how in license in order to avoid a complete and uncontrolled use of it,
some particular precautions and conditions are necessary.
One of this conditions is the protection of the absolute secrecy. On one hand, it is important that
know-how could not be easily available or known. But on the other hand it must be able to satisfy
technical or commercial demands that without the know-how could be impossible to achieve381.
2.6 Goodwill
“Goodwill” is defined as a company’s aptitude for producing profits by means of factors formed over
time for reward. These factors do not own an autonomous value in regard to the company. Goodwill
includes value increments, which the cumulative of company assets acquires regarding the sum of the
single assets, in an efficient system, qualified for producing profits. 382 Therefore, the value of the
goodwill even depends on the way in which its investments have been organized. The organisational
ability of the entrepreneur is economically confirmed by the goodwill, which will only be completely
achieved by a sale of business from which it originates. Goodwill is therefore a constructive factor of
the business. The company by this factor can satisfy a new interest and then it can constitute an asset
and gain value383.
In reality, the most of the scholars do not consider goodwill as an appropriate entity for having rights,
in that, it represents only a synthesis value, which allows the company to produce future income. The
prevalent thesis of the Italian scholars sustains that goodwill is only a business quality protected by the
provisions of unfair competition. Goodwill produces benefits, that even though deriving from the
whole business production, are not imputable to separately-transferable assets384.
Goodwill is distinguished as original goodwill and derived goodwill 385.
380 D. MESSINETTI, Beni immateriali, cit., p. 10. 381 SORDELLI, Know-how, in Enc. Giur., 1990, I, p. 3. 382 CONSIGLIO NAZIONALE DEI DOTTORI COMMERCIALISTI E DEL CONSIGLIO NAZIONALE DEI RAGIONIERI, Le immobilizzazioni immateriali nella legislazione civilistica e fiscale, in Le Società,, 1999, II, p. 36. 383 G. AULETTA, Avviamento commerciale, in Enc. Giur., 1998, I, p. 1-9 384 M. MASCHIO, I beni immateriali nella determinazione del reddito d’impresa, cit., p. 591 385 CONSIGLIO NAZIONALE DEI DOTTORI COMMERCIALISTU E DEL CONSIGLIO NAZIONALE DEI RAGIONIERI, Le immobilizzazioni immateriali nella legislazione civilistica e fiscale, cit., p. 36-37.
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Original goodwill is the result of an efficient management of human resources and of tangibles and
intangibles assets. This goodwill cannot be capitalized and included in the balance of the business year.
This is not possible due to the inability to define it as liabilities and costs with a deferred utility, as well
as, because it constitutes the current value of a flow of expected future profits.
Derived or derivative goodwill results from acquisition of a company (purchase, exchange),
shareholding or contribution by shareholders , merger or split –up of a company.
Italian law has provided for the protection of whole goodwill value in the business circulation, by
controlling distinctive signs of the same and by the regulation of competition386.
3. Accounting Standards and Intangibles
3.1 Accounting domestic standards
We should consider now the relevant provisions as they concern intangibles in accounting domestic
standards, by the way we will also take a look to the international accounting standards (IAS). These
standards were introduced in Italy by decree-law 12th February 2005 n. 38 in regard to EC directive 19
July, 2002, n.1606. The regulation of International Accounting Standard can be chosen in these two
situations:
- unlisted companies that draft consolidated balance sheet;
- companies that are obliged to draft consolidated balance sheet in regulation of IAS.
As soon as the financial year is determined by Ministry of Justice and Finance , the other unmentioned
companies (except to companies that draft balance in a shortened form), could chose the regulation of
the IAS.
Companies that are not obliged or that do not want to adopt the IAS, to draft their consolidated
balance sheet, shall continue to draft their balance according to domestic accounting and European
Accounting Directive Standards387.
386 G. AULETTA, Avviamento commerciale, cit., p. 1-9. 387 O. FERRARO, Gli Intangibles a vita utile indefinite secondo I principi contabili internazionali: un’analisi empirica, Roma, 2007, p. 5-6.
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It is important to consider some accounting domestic standards required by the Italian law in order to
draft a balance sheet. We have to remember principle of truth, that concerns content of the balance
sheet and the valuations of property component parts of it. In the first meaning, the balance sheet is
true, if it shows all the component parts of the property, without any omissions of real assets or real
liabilities and if it does not contain fictitious assets and liabilities.
In the second sense, it is necessary that the evaluation of the property component parts are true and so
without overvaluations and without underestimations. Therefore, the truth of the balance sheet (trading
account) determines the accuracy of the company’s property and so the truth and accuracy of the
company’s profits and loss388. Article 2423-ter c.c., according to the principle of truth, does not allow
the compensation of entries. Different alternative criteria could be used for each property component
part, for this reason, the amount of income and the net worth, may be variable. According to the
scholars the principle of truth is not absolute but relative because there are several types of balances
sheets and different kind of property and income valuations. The Italian law has adopted this principle
with a further meaning, by this, the principle of truth includes the completeness principle of the balance
sheet.
The principle of clarity is required owing to article 2423c.c. a balance sheet is clear when the assets and
the liabilities are shown in details and these are easy readable. The principle of prudence is used in order
to avoid, hypothetical profits, its aim is to preserve the integrity of social worth (e.g. capital expenditure
are enrolled at purchase cost or at production cost art.2426 c.c.389)
The Italian civil code considers intangibles as a capital expenditure which could be both tangibles or
intangibles. Article 2424-bis c.c. declares that capital expenditure is a steadily entity, which must have a
duration that is referred to the activity of the business .They must be registered separately from the
liquid assets, in fact they have a different function in order to the valuation of financial and property
situation. These entities need a different criteria of valuation and statement into the balance sheet. We
also have to take a look at art.2424 ,2425 and 2426 c.c. These articles refer to copyright, patent, license,
concession, trademark. These intangibles must be enrolled at purchase money or at cost price. The
courts have argued that this provision does not concern only the mentioned intangibles, but also other
intangibles values, such as know-how. In fact Courts have included purchase know-how rights as a
specific item of balance sheet . This item has to be enrolled in assets separately 390.
388 M. CARATOZZOLO, Il bilancio contabile negli aspetti contabili e civilistici, Roma, 1988, p. 37. 389 M. CARATOZZOLO, Il bilancio contabile negli aspetti contabili e civilistici, cit., p. 51 390 C. VALENTINI, Profili fiscali dei beni immateriali, cit., p. 1417-1418.
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Intangible assets, with a limited time of use, have to be written off in each financial year in connection
with their residual exploitation time. The depreciations have to be enrolled in profits and loss account
according to the art. 2425 c.c. The total amount of depreciations have to be deducted from the original
value of each intangible and so this shall be shown in annexed note according to art.2427c.c.Installation
and expansion costs, research, development and advertising costs could be enrolled in assets, after
approval of the board of internal auditors. These have to be written off in a period not up to 5 years.
Until the end of depreciation, dividends could be distributed only if there still are sufficient reserves, in
order to cover the amount of all not written off costs owing to art.2426 co.1 n.5 c.c.. The art. 2424 c.c.
refers about concessions, licenses, trademark and similar rights (n.4). The meaning of “similar rights’’
was explained by governmental return that has underlined the possibility to cover different future
privities by this provision391. This interpretation allows to go over past difficulties, especially about the
enrolment of know -how included, now, in similar rights category.
Before it was not clear if the term concession was referred to administrative acts or if it were included
contractual privities. Now this problem does not exist because point n.4 of art.2424c.c. mentions
similar rights in which we could include contractual privities. These shall be enrolled in trading account;
trading account may contain property of the enterprise and also goods that were used by enterprise
owing to a license. Some authors, claim that is necessary to enroll royalties in profits and loss account,
meanwhile the single payment must be enrolled in trading account392.
The goodwill that comes from a purchase of a business, shall be enrolled in assets with the approval of
board of internal auditors. The goodwill can be written off, even, in a long but limited period. This
period shall not last more than the period of assets use. It is possible to write off the goodwill in a
limited but longer period, this time shall not last more than the use of assets and for this reason a
justification in the annexed note is necessary. (2426c.c., co.1,n. 6).
The article 2425 c.c. requires that activity income, in regard to intangibles assets, must be enrolled
separately in profits and loss account in different items.
The art.2427c.c. asserts that annexed note has to show in addition:
- “The composition of the items” installation and expansion costs, research, development,
advertising costs, and the justifications of the enrolment and respective criteria of depreciation.
- “The amount of financial charges attributed to the financial year at the enrolled value in the
trading account assets that have to be separated for each item”.
391 C. VALENTINI, Profili fiscali dei beni immateriali, cit., p. 1417. 392 F. DEZZANI, Know-how: scritture contafili, in Fisco, 1981, p. 4444 ss.
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Art. 2426 c.c. par.1, point 2, requires that depreciation criteria modifications and applied parameters
changes shall be justified in annexed note.
Article 2428 c.c. par. 2, point 1 asserts that research and development activities shall result from
directors’ report393.
The article 2426c.c par. 1 affirms that intangibles assets are enrolled at purchase cost or production
cost. The accessory costs are included in the purchase cost; otherwise production costs include all
necessary costs to the constitution of intangible assets; this causes the exclusion of gratuitously acquired
intangibles assets394.
The cost of intangible assets, with a limited use, have to be written off for each financial year, regularly
in connection with the residual use of it.
Intangibles assets, with a lasting inferior value, referring to the previous points, shall be enrolled at this
minor value. It is not allowed to maintain this value in the following financial years, if there are not
sufficient reasons.
The governmental return, has clarified, that adverb “regularly” means that it is not possible, to speed up
or slow down, depreciations, on the base of opportunity, as depreciations need defined planes, with
constant depreciation expenses395.
3.2 International Accounting Standards
The IAS N. 38, defines intangibles assets as “a not” monetary business (that is possible to identify,
without material thickness), owned to be used for production, goods or services supply, for rent to
third or for administrative purposes. Intangible assets in order to be separated from goodwill have to be
identifiable, IAS n.38 specifies as the possibility to separate intangible, in order to identify them, is not
necessary. The goodwill is not an intangible, because is not easy to identifiable.
The IAS n.38 asserts: at the beginning intangibles assets shall be taken over at cost.
The possibility to identify, to control and to produce future benefits allows the capitalization of an
incurred costs. IAS classify the internal production business in two phases:
393 CONSIGLIO NAZIONALE DEI DOTTORI COMMERCIALISTU E DEL CONSIGLIO NAZIONALE DEI RAGIONIERI, Le immobilizzazioni immateriali nella legislazione civilistica e fiscale, cit., p.4-5. 394 C. VALENTINI, Profili fiscali dei beni immateriali, cit., p. 1419. 395CONSIGLIO NAZIONALE DEI DOTTORI COMMERCIALISTU E DEL CONSIGLIO NAZIONALE DEI RAGIONIERI, Le immobilizzazioni immateriali nella legislazione civilistica e fiscale, cit., p. 6.
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- research; in this phase to demonstrate the capacity to obtain future economic benefits is not
possible and so research costs shall not be capitalized;
- development; costs of this phase shall be capitalized, only, if the enterprise demonstrates the
capacity to carry out the production of intangible assets and moreover only if it demonstrates
the will to complete and to use them.
According to IAS the installation, expansion and advertising costs shall not be capitalized396.
IAS n.36 has distinguished intangibles in two different categories:
- Intangibles with an undefined useful life (e. g. goodwill) and intangible with a defined useful life.
It has also stated different provisions for them. By analyzing in detail these two categories, we
can affirm that the components of the first one shall not be written off, but only undergone to
impairment test. The components of the second category shall be written off. Then if they, as
it is probable, will have a lasting loss of value they shall be undergone to impairment test. The
impairment test was defined as an economic depreciation corresponding to the real value397.
There is not an official characterization of intangibles with an undefined useful life, IAS distinguish
only between goodwill and other intangibles, they do not give us exhaustive examples (IFRS 3), they
exclude the multi–year charges category. It is difficult to determine if an asset has an undefined life or
not, for this reason, we have doubts about the implementation of the impairment test/depreciation.
This provision is not clear, this increases the writers discretion on drafting the balance sheet. By the
way there will be not comparable balance sheets. This result is not in accordance with law n.1606 of
2002 . The purpose of IAS consists on the harmonization of the financial information in order to
guarantee an high transparency level, and the comparability of balance sheet. This shall allow an
efficient European and internal market398.
4. Intangibles in the ITC
Business income regulations do not replicate the accounting classification, they handle costs according
a division between “intangibles” (article 103 ITC) and costs related to additional “operations” (article
396 A. D’ATRI, L’iscrizione in bilancio dei beni immateriali con riferimento ai principi contabili internazionali, in Le Società, 2001, XLII, p. 13592. 397 O. FERRARO, Gli Intangibles a vita utile indefinite secondo I principi contabili internazionali: un’analisi empirica, cit., p. 5. 398 O. FERRARO, Gli Intangibles a vita utile indefinite secondo I principi contabili internazionali: un’analisi empirica, cit., p. 27.
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108 ITC)399. Concerning Know-how contracts, a regulation which rules directly is missing from the
law. On the contrary, the importance of such knowledge, as know- how, is not indifferent to tax
legislator, and he has therefore regulated various aspects of it400. It is not certain, tax law regulation of
all the aspects of these institutes regulated in various branches of law (e.g. civil law)401. Tax law set
aside moral aspects of copyright and patent. These rights are covered by tax law only as it concerns
proprietary aspect. Incomes that come from their economical exploitation, such that intangibles assets
are considered as ability to pay, both as a source of income, as well as a transferable utility402.
We should remember when an intangibles generate business income.
According to article 53 ITC, paragraph 2, letter b: “business income deriving from the use by the
author or inventor of a patent, processes, formulas or information relative to experience gained in the
industrial, commercial or scientific field are independent incomes, if they are not achieved by the
business (the same solution is stated for various incomes according to article 67 ITC, letter g.)403. This
provision is accordance with the article 55 ITC that defines business incomes these incomes turned out
by the commercial enterprises”.
Articles 85 and 86 ITC, concerning revenues and capital gains, seems to be applicable to intangibles.
The enterprise may be the owner of the intangibles that it has originally turned out the work on their
own or through expressly-tasked third parties404. Article 23 L. 1939 N. 1127 provides two hypotheses
of original acquisition:
- First case: the invention is made during the performance of a contract. In this case the inventive
activity is required by the contract.
- Second case: The inventive activity is not foreseen in the contract, but is nonetheless turned out
during the performance of that contract. In this case, the worker has the right to an fair
reward405.
Further, the enterprise may be the owner of assets by a purchase, license of third parties (by derivative)
406.
399 P. CARLO, Le immobilizzazioni immateriali e I costi pluriennali, in Corr. Trib., 2001, 71, p. 512. 400 E. GULMANELLI, Beni immateriali, diritto tributario(II),in Enc. Giur., 1993, p. 1-2. 401 F. BOSELLO, La formulazione della norma tributaria e le categorie giuridiche civilistiche, in Dir. Prat., Trib., 1981, I, p. 1433 ss. 402 E. GULMANELLI, Beni immateriali, diritto tributario( II),cit., p. 2. 403 C. VALENTINI, Profili fiscali dei beni immateriali, cit, p. 1416. 404 E. GULMANELLI, Beni immateriali, diritto tributario( II),cit., p. 5. 405 S. SCIARPA, Invenzioni industriali. II) Invenzioni e opere dell’ingegno del lavoratore, in Enc. Giur., 1997, p.23. 406 C. VALENTINI, Profili fiscali dei beni immateriali, cit., p. 1416.
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Business income is calculated by the outcomes of the balance sheet. The entrepreneur has to draft the
balance sheet according to civil law principles, having a look to the modifications that come from tax
provisions(the smaller enterprises are not subject to this provision)407.
Before examining articles 103 and 108 ITC., it should be remembered that the final paragraph of the
article 2426 c.c., which allowed value adjustments and allocations of tax regulations, and provision
2427c.c. n.14, which required the illustration of those adjustments in annexed-note , were repealed.
Today, from the civil-law point of view, every “distortion” of accounting principles cause of tax law, is
unfair. International accounting does not allow fiscal interference. A legislative intervention has
eliminated tax interference in accounting standards. The connection between income tax on businesses
to the balance was not changed, but the following changes were introduced;
- Article 109 ITC, paragraph 4, letter b declares that even though not imputable to the balance
sheet, the depreciation of intangibles and tangibles, the other value adjustments and the
allocations are tax deductible if their total amount, the civil and tax values of the assets and of
funds, are shown in a separate income tax return. Further, the same provision has imposed a
bond on the distribution of reserves different from legal ones and another bond on the use of
an operating profit. This provision aims to avoid the distribution of untaxed profits. According
to this provision, in case of distribution of reserves or net profit, if further reserves or new
profits do not exist, for a total amount equal to the deprecations and value adjustments the
amount in excess is subject to tax., If there are not sufficient reserves, this bond could involve
the reserves and the profits turned out in the following operations. We must remember that this
provision was repealed by Budget law 2008.
- Further, tax rules providing for tax interference have been repealed, such as those requiring the
allocation to appropriate tax reserves or to tax risk funds.
Article 103 ITC, par.1 provides for the depreciation share of the costs of copyright, patents and
processes use and of the use of formulas and information relative to experience gained in the industrial,
commercial and scientific field, are deductible no more than 50 %. The final part of paragraph 1
regarding trademarks provides for a depreciation deductibility no higher than 1/18 of the cost. This
paragraph, already amended by law. 18 September 1997, n.449, was later amended by article 37 c. 45
decree- law 4 July, 2006, n.223. Article 103 ITC par.2 provides for the deductibility of the depreciation
shares of license and of the other rights registered in the budget. This deductibility shall be in
407 E. GULMANELLI, Beni immateriali, diritto tributario( II),cit., p. 5.
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accordance with the length of use provided by the contract or the law408. Different from the previous
situation, according to par.2, the deductibility takes place for constant shares in every use operation. It
is not allowed to change the depreciation shares in the next operations409. The term “royalties”
includes all rights of exploitation of intangibles. This article includes the costs connected to public
assets (use of public assets, state property, etc.), those in accordance with lease of public land and
public permission and those that come from private citizen. According to accounting standards
depreciation must also be referred to the legal and contractual duration of the right; from this point of
view civil law is similar to tax law410. Article 103 ITC, paragraph 3 deals with depreciation of goodwill
enrolled in the assets. Goodwill has been inserted in an article entitled “depreciation of intangibles ”.
According to the civil law goodwill is not an intangibles, nevertheless, for tax purposes, it holds an
independent value of the other elements of the company411. The legislator has used a drafting
technique, typical of tax matters. He wanted to reconnect equal effects to different particular cases and
he prefers to adopt a single provision which provides for different institutes rather than different
provisions.412. The examined provision provides for the deductibility of depreciation shares. This shall
be not higher than 1/18 of its value (this paragraph, already amended by article 21 paragraph 6
lawn.449 of 1997, was later modified by article 1, paragraph 21 law17 October, 2005, n.226). The last
paragraph of article 103 works a reference to article 102 ITC paragraph 8 and declares that depreciation
shares of the intangibles costs for the life estate of a company and for a lease of a business concerned
to a life tenant or leaseholder413.
Before considering article 108 ITC, it is advisable to remember that the acquisition costs of
merchandises are immediately deductible on an annual basis, except for deferment in case of
remainders. The costs of capital goods are distinguished in external and internal costs. The external
costs supported by the business for the acquisition of third-party rights are depreciated separately. The
internal costs, on the other hand, are supported by the business for the production of the assets. These
costs belong to the category of long-term expenses, that are taken into account of article 108 ITC
.Article 108 concerns the other hypothesis listed in the balance sheet but not regulated by article 103:
- paragraph 1 regards to research and development costs;
408 P. CARLO, Le immobilizzazioni immateriali e I costi pluriennali, cit., p. 513. 409 E. GULMANELLI, Beni immateriali, diritto tributario( II),cit., p. 6. 410 P. CARLO, Le immobilizzazioni immateriali e I costi pluriennali, cit., p. 514. 411 . GULMANELLI, Beni immateriali, diritto tributario( II),cit., p. 6. 412 A. BERLIERI, Principi di diritto tributario, Milano, 1967, I, p. 138.
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- paragraph 2regards to promotion and advertising costs ;
- paragraph 3 regulates other long-term expenses;
- paragraph 4 regulates installation and expansion costs.
Paragraph 1 declares that research and study costs are deductible in the same financial year in which
they were supported or in constant shares in the same and following financial years, but not beyond the
fourth. Therefore it is possible to adopt two criteria: the total deductibility in the financial year in which
costs are supported or splitting up of the costs in constant shares in the same and following financial
years , but not beyond the fourth. Subsequently, assets as result of research and studies, after the choice
of deductibility of costs in constant shares, would be registered in the balance sheet in accordance with
the residual sum of the costs enrolled but not depreciated. This sum could then be depreciated
according to article 103. The governmental return to the Italian Tax Code specifies that the
deductibility of the depreciations is independent from the actual use. According to the governmental
return depreciation acceleration and elimination of the production cycle are not correct. In this case
ordinary depreciation criteria are not applicable.
In such case depreciation is not considered a sort of adjustment of the goods value registered in the
assets , but it is a splitting-up of a long term expenses according to competence principle414. In this
case, tax regulations do not interfere with civil law controls. The choices made by the balance sheet
drawers are applicable even for tax purposes. The deductibility of such expenses, in fact, is allowed if
they are charged to the profit and loss account of the financial year in which they are supported, as well
as, in the case of choice of their capitalization.
It is not allowed to deduct the entire non-depreciated residual costs, when the depreciation of the costs
was started in constant shares. A distinct rule is provided by paragraph 1 of article 103 ITC for assets as
a result of studies and researches. Their depreciation shares, in fact, must be calculated on the cost of
the same and reduced by the amount already deducted. This provision focuses on avoiding a double
deduction as regards the same costs. One time because it should be classified as a long-term expenses, a
second time because good as result of research should be depreciated.
Article 108 ITC 2 paragraph states that the marketing expenses and advertising ones are deductible in
the financial year in which they were supported or for constant shares in the same and in the four
following financial years.
413 GULMANELLI, Beni immateriali, diritto tributario( II),cit., p. 6. 414 C. VALENTINI, Profili fiscali dei beni immateriali, cit., p. 1420.
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Further, article 108, paragraph 2 provides a deduction of 1/3 of their depreciation of the entertainment
expenses. It states they are deductible in constant shares of the financial year in which they were
supported and in the four following financial years. This regulation has a merely tax aspect. This
provision expanded in time the deductibility of expenses, that from the civil point of view have to be
charged to the financial years in which they were supported. This regulation allows the
predetermination of the inherence of these costs in connection with the uncertain utility of the
enterprise, which think to produce taxable future incomes. This concerns, in fact, the company image
and not the activities or products of the enterprise.
Article 108 ITC paragraph 4 states the a long-term expenses supported by a new enterprise, including
goodwill expenses according to paragraphs 1, 2 and 3 of art. 108, are deductible, starting with the
financial year in which the first revenues are achieved.
This provision allows to identify the moment, that corresponds to the first financial year in which
revenues are achieved from which installation and expansion costs can be deducted. Really this rule
concerns only installation costs and not the expansion costs. Expansion costs, in fact, presuppose a
profit making business. Tax regulation of expansion is contained in the general provision of article 108,
paragraph 3, which regulates long-term expenses different from those stated by that same provision.
Article 103 paragraph 3 ITC provides a residual rule for all expenses related to several financial years,
different from researches and entertainment expenses, that they are covered by the first two paragraphs
of this article. Such expenses are therefore considered deductible with the limits of the share pertinent
to each financial year. The rule does not state specific criteria for tax purposes. The same provision
does not impose limitations in connection with the drawing of balance sheet if the choices on the
drawing of balance sheet correspond with reasonable estimate to then pertinent financial year. It is right
to consider now accounting standards n. 24 focusing on long-term expenses, not expressly considered
by tax provision:
- expansion costs: both in the technical commercial sense in other terms costs supported as a
result of the enterprises expansion into activities not previously carried out; as well as in the
legal sense for extraordinary acts such as company reorganizations , mergers and acquisitions
of businesses and of business branches;
- pre-operative costs: costs supported before starting a new business or a specific production;
- costs for improvements of third-party asset: if such improvements have not independent
purpose from the asset;
- costs of short and long-term financing;
- costs for software use and user license.
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The residual rule of deductibility in five financial years can be applied in the cases not considered,
5. Transfer pricing
5.1 Transfer pricing in the ITC
The Italian tax law deals with transfer pricing in the art. 110 of ITC. Italian transfer pricing rules and
practice are largely based on the OECD Guidelines.415 The Italian tax authorities issued guidelines416
following to the publication of the 1979 OECD Report. (Transfer Pricing and Multinational, Paris:
OECD 1979).In the absence of subsequent guidelines by the tax authorities, in practice reference is
made to the most recent OECD Guidelines. In choosing a method, the comparable uncontrolled
price (CUP) method is preferable , as it is the only one which is expressly referred to under domestic
law.417 If the CUP method cannot be applied, the resale price and cost-plus methods ought to be
used, without a strict hierarchy; the taxpayer is free to choose the method that is the most suitable to
the relevant case. If the traditional methods are not applicable, alternative methods may be taken into
consideration.418 In practice, transfer pricing is increasingly scrutinized during tax audits. The
approach by the tax authorities sometimes focus on the entire value chain rather than only, or mainly,
on the Italian company under audit. When determining margins as part of the functional analysis,
people’ functions are given much more weight than risks and assets (especially intangible assets).If the
Italian company participating in the supply chain performs labour-intensive functions but bears little or
no risk and owns no intangibles, it will be regarded as being entitled to a significant share of profits as
compared to other companies that employ fewer people but bear all the risks and own all the
intangibles. The level of scrutiny will increase due to the circumstance in modern supply chain
management structures where companies owning the intangibles and legally bearing the risk are often
located in low- tax jurisdictions. As from 2004, an international ruling system began under which
415 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, Paris: OECD,1995. 416 Circular 22 September 1980 n.32. 417 C. GALLI, Supply Chain management, in ITPJ, 2006, p. 306. 418 The 1980 Circular states that alternative methods should be used only it is absolutely impossible to use one of the traditional methods. The 1981 circular allows an easier application of alternative methods than the other one.
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unilateral advance pricing agreements may be concluded.419 The arm’s length principle is codified in
ITC, in fact, the legal framework for transfer pricing requires that the arm’s length principle is applied
to any intercompany relationship in accordance with the following provisions:
- Art. 110(7) of the ITC states that components of the income of an enterprise derived from
operations with non-resident entities which directly or indirectly control that enterprise, must
be valued on the basis of value (i.e. arm’s length price) of the goods transferred, services
rendered or services and goods received, if an increase in taxable income derives there from.
Reductions in the taxable base are allowed only on the basis of mutual agreement procedures or
under the Arbitration Convention;
- Art. 9 of the ITC provides the statutory mechanism used to determine the arm’s length value
of an intercompany transaction. Paragraph 3 states that the arm’s length price or consideration
paid for goods and services of the same or similar type, carried out under free market
conditions and at the same level of commerce, at the time and place in which the goods and
services were purchased or performed; and by means of a circular 22 September 1980 n. 32
(hereinafter: the 1980 Circular), the Ministry of Finance clarified for each type of transaction
(i.e. tangible assets, intangibles, and intra-group services) the principles and methods to be used
in determining the arm’s length price. This circular follows the 1979 OECD Transfer Pricing
Report , although the official translated version (only partially translated to date) has not yet
been implemented. Other clarifications have been provided by Circular 12 December 1981
n.42. Although the 1980 and 1981 circulars were issued before the date of the enforcement of
Article110(7) , their provisions are still fully applicable 420.
Besides, it is important to consider that the transfer pricing provisions currently in force do not cover
intercompany domestic transactions. The transfer pricing rules apply only to cross-border transactions.
In fact, the clear wording of art. 110(7) (the rules concerning transfer pricing) does not allow any
extension of the rule contained therein, and most of the literature traditionally supports this view421.
419 Governed by art. 8 of decree–law 69 of 30th September 2003 and implemented by tax agency decree of 24 July 2004. 420 D. BERGAMI, C. ROTONDARO, A new challenge to domestic Intercompany relationship, in ITPJ, 2000, p. 58-59. 421 D. BERGAMI & C. ROTONDARO, A new challenge to domestic Intercompany relationship, cit., p. 65.
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5.2 OECD and Transfer Pricing
The “arm’s length” principle is codified in the OECD Model.
But the phrase “arm’s length” is not included in art. 9 of the OECD Model- yet art.9 is cited as the
authoritative statement of the arm’s length principle by the OECD Guidelines422 (OECD: Paris 1995).
The arm’s length principle requires the compatibility of transactions. In determining compatibility
number of general factors that should be taken into account: characteristics of property and services,
functional analysis, contractual terms, economic circumstances, business strategies, transaction
structure, government policies, intentional set-offs.
This study is based only upon a functional analysis of the relationship between manufacture and
distribution enterprises belonging to the same group, assuming that no problem of comparability arises
from the characteristics of property and services, contractual terms, economic circumstances, business
strategies transaction structure, government policies, intention set-offs423.
In its 1995 Transfer pricing guidelines, the OECD describes functional analysis as “an analysis of the
functional performed (taking into account assets used and risks assumed) by associated enterprises in
controlled transactions and by independent enterprises in comparable uncontrolled transactions”. The
OECD stresses that particular attention should be paid to the structure and organization of the group
and, in a general context, elaborates on the factors that should be considered. The process of a
functional analysis requires taxpayers to consider the relevant characteristics of a branch or subsidiary.
In the 2001 discussion draft, the OECD recognizes that , in undertaking this consideration, “it is the
economic (rather than legal) conditions that are most important because they are likely to have a greater
effect on the economic relationships between the various parts of the single legal entity”. This appears
to be a measure that attempts to align the current tax model with economic reality. It is suggested,
however, that merely recognizing economic activity does not equate to an allocation based on
economic activity424.
A major problem with the arm’s length standard is cited as being the assumption that each market place
has willing buyers and sellers. This does not work when the market is controlled and in that case there
is simply no arm’s length transaction available. Application of the arm’s length standard is conducted
422 M.VAN, HERKSEN, BAKER & MCKENZIE, The transfer Pricing of Intangibles by Michelle Markham, in Intertax, 2006, XXXIV, Issue 11, p. 563. 423 R. FRANZE’, Transfer Pricing and distribution arrangements: from arm’s length to formulary apportionments of income, in Intertax ,2005, XXXIII, Issue 6/7, p. 260-261. 424 K. SADIQ, The fundamental failing of the traditional transfer pricing regime – applying the arm’s length standard to multinational banks based on a comparability analysis, in Bulletin, 2004, p. 68.
240
via comparable uncontrolled transactions, yet there is a lack of comparable transactions and even more
so in the field of transactions relating to intangible property425.
The OECD does not apply a Best Method Rule. The Transfer Pricing guidelines emphasize flexibility
and even go as far as requesting tax administrators to hesitate to make minor adjustments. Five transfer
pricing methods are allowed pursuant to the OECD Guidelines: the CUP method, Release Price
method, Cost Plus method, Profit Split method and Transactional Net Margin method (TNMM). Five
comparability factors should be applied as well, such being the specific characteristics of the property,
functions performed, contractual terms, economic circumstances and business strategies426.
5.3 Anti-fraud and anti-abuse provisions
A recent decision of the Italian Supreme Court427deals with a key international tax law concept: the
arm’s length value of transactions between companies belonging to an international group. In this case,
the tax authorities asserted that the price paid by an Italian company to its foreign affiliates was higher
than the arm’s length price. As a result, the tax authorities assessed increased profits to the Italian
company under the transfer pricing provisions of 110(7) ICT.
The Supreme Court decision focused on the true nature of domestic transfer pricing rules and which
party bears the burden of proof with regard to transfer pricing (the taxpayer or the tax authorities). In
considering the second issue, the Supreme Court referred to the concept of “abuse of law” as stated in
the recent decisions of the European Court of Justice 428.
With regard to this case at hand, Italian Supreme Court interpreted the transfer pricing rules contained
in Art.110(7) of the ITC as an anti-avoidance provision aimed at preventing the situation where,
through intra-group transactions, taxable income is shifted from Italy to a country with a lower tax
burden. In this regard, the Court reasoned that the transfer pricing rules must be regarded as anti-
avoidance provisions because they have their source in the Community law doctrine of abuse of law, as
well as in other areas of domestic anti-avoidance legislation (i.e. Art.10 of the law 408/90).The Court,
425 M. VAN HERKSEN, The transfer Pricing of Intangibles by Michelle Markham, cit., p. 563. 426 M. VAN HERKSEN, The transfer Pricing of Intangibles by Michelle Markham, cit., p. 567. 427 Court of Cassation decision n. 22023, 13th of October 2006. 428 See Halifax plc et al. v. Customs and Excise Commissioners (Halifax), C-255/02.
241
cited some of its previous judgments429. It also stated that burden of proof rests with the tax
authorities.
To this end, the Court also referred to the1995 OECD Transfer Pricing Guidelines, which provide that
should the relevant jurisdiction place the burden of proof on the tax authorities.
For the first the Supreme Court has issued a decision in transfer pricing case that involves both
procedural and substantial issues.430
Some authors have criticized the outcome of this case. In fact they have clarified as the burden of
proving that inter- company transactions have been carried out other than at arm’s length still would
rest with tax authorities, merely applying the general civil law principle (art 2967 c.c.).
Italian tax law does not contain a general anti-avoidance provision. Rather, tax avoidance is dealt with
through specific provisions, such as:
- Art.37-bis of presidential decree 29 September 1973 n.600, under which tax authorities may
disregard single or connected acts, facts and transactions intended to circumvent obligations
and limitations provided under tax law aimed at obtaining tax savings or refunds otherwise not
due in the absence of valid economic reasons;
- CFC legislation, contained in art. 167 of the ITC, the application of which may be avoided If
the resident person proves that the foreign entity predominately carries on actual industrial or
commercial activity in the state or territory in which it is located or the resident person proves
that the participation in the foreign entity does not achieve the localization of income in tax
heaven countries or territories. In both cases, the taxpayer must apply to the Ministry of
Finance for an advance ruling;
- Anti- tax heaven legislation, contained in art.110(10) and (11) of the ICT, which limits the
deductibility of expenses related to transactions carried out with enterprises based in low-tax
jurisdictions, unless the resident person proves that the non -resident enterprise carries on a real
business activity, or the relevant transactions had a real business purpose and actually took
place;
- Art.73 (3) and (4) of the ICT, under which non-residence companies and trusts are deemed to
be resident in Italy for tax purpose if a number of requirements are met, unless the taxpayer
provides evidence of the contrary.
429 Decision 4317/03. 430 D. BERGAMI, Onere della prova a carico dell’amministrazione nel transfer pricing, in Corr. Trib.,2006, p. 3732.
242
The Italian Supreme Court referred to the concept of abuse of law as stated in recent ECJ decisions,
particularly Emsland–Starke Gmbh. In the authors’ opinion, reference to the concept of abuse of law is
not relevant to the case at hand, as transfer pricing rules do not have their source in Community law.
So if the position of the Supreme Court is to apply indirectly the domestic anti-avoidance provisions to
transactions which are not expressly listed in such provisions (i.e. those contained in art. 37-bis of
Presidential Decree n.600 of 1973) on the basis of the broader concept of abuse of law, it is doubtful
whether such an interpretation can be justified. The principle found in domestic anti-avoidance
legislation, as provided for by Art.37-bis of Presidential Decree n.600 of 1973, is very close to the
interpretation of abuse of law given by the ECJ. However, as previously noted , the Italian legislature
chose to apply this provision only to a number of transactions expressly listed in Para. 3 of Art. 37-bis,
amongst which commercial transactions carried out between affiliated companies, as those at issue, are
not included. Therefore, the Supreme Court should not make reference to the ECJ concept of abuse of
law to classify Art. 110(7) of the ITC as an anti-avoidance provision, while, from a legislative
perspective, the choice was made not to include the relevant transaction for purposes of Art. 110(7) of
ITC in the domestic anti-avoidance provision.431
6. Cost Sharing Arrangement
Cost sharing arrangements, are multinational agreements, that are undersigned by the companies of a
multinational group.
The aim of these agreements is to share the costs of group services among the member companies.
In Italy, there is not a tax law dealing with Cost Sharing Arrangements.
Currently the only existing document, about CSA, is the ministerial circular: n. 32 of 1980. The circular
accepts the OCSE Recommend, contained in the “Transfer Pricing and Multinational Enterprises”
report of 1979.432
This circular has clarified tax outlines of the Cost Sharing Arrangement.
The circular refers to the group costs, of research and services (R&S).
431 G. CHIESA, G. COTTANI, Supreme court decision on transfer pricing: burden of proof, anti-avoidance interpretation and abuse of law principle, in Int. Tr. Pric. J., 2007, I, p. 197. 432 L. PICCARDI, E. VITALI, Il cost sharing agreement, .in Bollettino tributario d'informazioni, 1991, II, p. 102.
243
The head company can transfer high profitable intangibles assets (at cost price) to its subsidiary that
may be located in a tax haven.
A R&S cost sharing arrangements are preferred to a intangibles license contract (owing to lower CSA
costs instead of license royalties).
Therefore, a Cost Sharing Arrangement could cover the following costs:
- use (license) of patent, copyright and other intangibles rights;
- use of research results;
- technical administrative and marketing assistance.
The ITC transfer pricing provisions could be extended in order to rule CSA, in particular the art. 9 and
110(2), (7).
It is important to consider the Supreme Italian Court decision (14 December 1999 n.14016), that
concerns the direction costs of a company group. The main issues of this decision deals with Cost
Sharing Arrangement rule owing to their general extension.433
The Court has stated when an Italian company (that is part of a group), can deduct its costs. These
costs must be inherent to profits production, they have to correspond to effective and economic
operations. Moreover they must have a justification through a contract and relative documentation.
Otherwise they must refer and be pertinent to the activity of each company that endures costs. They
must contribute to the company profits.
The above mentioned company costs are not automatic. If they were, we could also include the
stewardship costs. These are pertinent to the head company that do not give any profit to the
subsidiary.
The burden of proof deals with tax authorities. They have to demonstrate the wrongful costs
deduction. They have to collect effective and concrete evidences, because there is not a law
presumption.
There is not a provision that imposes an agreement form, but we have to remember OECD Guidelines
that recommends a written form.
Each share of the CSA is given by a fixed rule, based on the division between the beneficial owner turn
over and the group’s one.
433 L. DE ANGELIS, Pianificazione fiscale dei gruppi di società in Italia, in Dir. Comm. Intern., 2000, IV, p. 874.
244
References
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ARE M., Beni immateriali (dir. Priv.), in Enc. dir., 1959, V, pp. 267-298.
ASCARELLI T., Teoria della concorrenza e dei beni immateriali, Milano, 1957.
AULETTA G., Avviamento commerciale, in Enc. Giur., 1998, I, p. 1-9
BERGAMI D., Onere della prova a carico dell’amministrazione nel transfer pricing, in Corr. Trib., 2006,, pp.
3727-3736.
BERGAMI D., ROTONDARO C., A new challenge to domestic Intercompany relationship, in ITPJ, 2000, pp.
57-65.
BERLIERI A., Principi di diritto tributario, Milano, 1967, I.
CARATOZZOLO M., Il bilancio contabile negli aspetti contabili e civilistici, Roma, 1988.
CHIESA G., COTTANI G., Supreme court decision on transfer pricing: burden of proof, anti-avoidance
interpretation and abuse of law principle, in Int. Tr. Pric. J., 2007, I, pp. 192-197.
CARLO P., Le immobilizzazioni immateriali e I costi pluriennali, in Corr. Trib., 2001, 71, pp. 512- 518.
CONSIGLIO NAZIONALE DEI DOTTORI COMMERCIALISTU E DEL CONSIGLIO
NAZIONALE DEI RAGIONIERI, Le immobilizzazioni immateriali nella legislazione civilistica e fiscale, in Le
Società,, II, p. 1-55.
D’ATRI A., L’iscrizione in bilancio dei beni immateriali con riferimento ai principi contabili internazionali, in Le
Società, 2001, XLII, pp. 13582-13599
DE ANGELIS L., Pianificazione fiscale dei gruppi di società in Italia, in Dir. Comm. Intern., 2000, IV, pp. 863-
880.
DE CUPIS, I diritti della personalità, Milano, 1961, II.
DEZZANI F., Know-how: scritture contabili, in Fisco, 1981, pp. 4444 ss.
FABIANI, Autore (diritto di), in Enc. giur., 1988, IV, p. 1-11.
FERRARO O., Gli Intangibles a vita utile indefinite secondo I principi contabili internazionali: un’analisi empirica,
Roma, 2007.
FRANZE’ R., Transfer Pricing and distribution arrangements: from arm’s length to formulary apportionments of
income, in Intertax ,2005, XXXIII, Issue6/7, pp. 260-265.
GALLI C., Supply Chain management, in ITPJ, 2006, pp. 305-309.
GIANNANTONIO E., Programmi per elaboratore (tutela giuridica dei), in Enc. giur, 1995, p. 1-19.
GULMANELLI E., Beni immateriali, diritto tributario(II),in Enc. Giur., 1993, pp. 1-14.
MASCHIO M., I beni immateriali nella determinazione del reddito d’impresa, p. 589-612.
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MASCHIO M., I costi del software nel reddito d’impresa, in Rass. Trib., 1995, IV, p. 624-635.
MESSINETTI D., Beni immateriali, in Enc. giur., 1998, V, p. 1-16.
NICOLO’R., L’adempimento dell’obbligo altrui, Milano, 1936.
PICARD D., Le droit pure, Bruxelles-Paris, 1899.
PICCARDI L., VITALI E., Il cost sharing agreement, .in Bollettino tributario d'informazioni, 1991, II, pp. 102-
104
SADIQ K., The fundamental failing of the traditional transfer pricing regime – applying the arm’s length standard to
multinational banks based on a comparability analysis, in Bulletin, 2004, pp. 67-81.
SCIARPA S., Invenzioni industriali. II) Invenzioni e opere dell’ingegno del lavoratore, in Enc. Giur., 1997, pp. 1-8.
SORDELLI L., Know-how, in Enc. giur., 1990, I, pp. 6 ss.
SORDELLI L., Il Know how: facoltà di disporre e interesse al segreto,. in Riv. dir. ind., 1986, I, pp. 93-157.
VALENTINI C., Profili fiscali dei beni immateriali, in Dir. Prat. Trib., 1992, I, p. 1398-1434
VAN HERKSEN M., , The transfer Pricing of Intangibles by Michelle Markham, in Intertax, 2006, XXXIV,
Issue 11, pp. 562-574.
VANZETTI A., Natura e funzione giuridica del marchio, in Problemi attuali del diritto industriale, Milano, 1977,
pp. 1161 ss.
VANZETTI A., Marchio:I) diritto commerciale, in Enc. giur., 1990, I, pp. 1-18.
246
EUCOTAX Wintercourse 2008
Budapest
Università LUISS – “Guido Carli” – Roma
Facoltà di Giurisprudenza
Cattedra di Diritto Tributario dell’Impresa
Cattedra di Diritto Tributario Internazionale e Comunitario
EXPATRIATES
Livia Ventura
069033
247
1. INTRODUCTION
Nowadays individuals have become more mobile, in particular in the area of international
assignments of employees, so-called expatriates. The possibility that a worker carries out his own work
abroad is really common. The international mobility of workers rose up in a significant way in the last
years. The worker that carries out his activity in a foreign country is often an highly skilled employee
out of his country to increase his professional ability or to increase his employer business. The field of
individual taxation is not treated as a domestic matter and the tax competition between countries is not
concentrated only on company taxation, but also the highly skilled expatriates’ taxation has an impact
on decision of multinational investors. We can find out the effect of the individuals mobility on
taxation and social security law.
1.1. Expatriate and EU Code of conduct
Globalization and technological revolution have created exciting opportunities and challenges
for business and consumers, but also for tax authorities, throughout the world. One of the challenges
brought about by these changes is the increased opportunities for financial crimes and the increased use
and proliferation of tax heavens and preferential tax regimes. The European Union was the first
governmental body to formulate measures against harmful tax practice or harmful tax competition. The
EU released its Code of Conduct for Business Taxation in December 1997. The goals of the Code is to
eliminate harmful tax competition among EU Member States.
Also the OECD in April 1998 attacked tax heaven and harmful preferential tax regimes.
Criteria used in identifying harmful tax practices are no or low taxes, lack of effective exchange of
information, lack of transparency and the restriction of the application of particular provisions to some
kind of transactions. The OECD Report was approved by all Member countries, including Italy but
except Switzerland and Luxembourg.
1.2. Migrant worker and non-discrimination principle
The European Community freedoms and the non-discrimination principle mean that the
migrant worker may not be discriminated against in his/her State of residence, because he/she works in
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another member State. From the point of view of the State of employment, a migrant worker falls
within the category of non-resident workers. The Court of justice has constantly held that residents and
non-residents are not generally in the same situation. Differences in taxation between residents and
non-residents may therefore not necessarily constitute discrimination. However when a non-resident
worker is virtually in the same situation as a resident worker, the non-resident worker may not be
subject to less favourable taxation rules in the State of employment than residents of that state.
2. INCOME TAX
In Italy there is no special regime for expatriates, there are only some differences in
determination of taxable base. In order to examine the taxation of expatriates we need to introduce the
Italian income tax system.
2.1. General description
The income tax applicable to individuals is the “individual income tax” (so called imposta sul
reddito delle persone fisiche, IRPEF). This is a progressive tax which is applied to the aggregate total
income of the taxpayer. The rates are of 23% , 27%, 38%, 41%, 43%434. This progressive scale is
applied to successive portions of taxable income. The tax year is the calendar year. Individuals benefit
from tax credits or allowances which depend upon their taxable income and are increased in respect of
dependent relatives. In addiction, credits are given in respect of certain expenses and the credit is
calculated as 19% of the expense. A full deduction is granted for social security and welfare
contributions paid in accordance with the law or voluntarily paid to the mandatory pension plan.
Resident and non-resident taxpayers, who are subject to IRPEF, are obliged to file an annual tax return.
The tax office is authorized to issue assessments to taxpayers who have not filed a tax return or whose
tax return has not been prepared in accordance with the law.
434 According to Art. 13, TUIR, the rates of the personal income tax are: the lowest bracket of 23% applies to income up to EUR 15,000; a 27% rate applies to income of EUR 15,001-28,000; 38% applies to income of EUR 28,001-55,000; 41% applies on income of EUR 55,001-75,000; the 43% rate applies on income exceeding EUR 75,000.
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2.2.Taxable income
According to the Income Tax Code (ITC)435, IRPEF is based on the possession of income,
whether in money or in kind, falling within the categories indicated in art. 6 of ITC. The categories are:
a) income from land and buildings
b) income from capital
c) income from employment
d) income from independent work
e) business income
f) miscellaneous income.
According to Art.6 (2), ITC, revenue and profits received instead of income constitute income
of the same category as that replaced or lost. The aggregate taxable income is calculated by adding the
income of each category. The determination of each category of income and the attribution of income
to a period are governed by rules provided for the category of income to which it belongs. Italian tax
law does not allow deduction of expenses related to the production of income from capital or
employment; only business income and income from independent work are computed net of
deductible expenses. Deductions from total income are provided in respect of expenses not directly
deductible in calculating the separate categories of income. These deductions reduce the tax base.
According to Art. 10, ITC, from the aggregate income it is possible to deduct , for example:
- medical care expenses sustained by disabled individuals,
- alimony paid to a spouse from whom the taxpayer is legally separated
or divorced
- the mandatory social security contributions paid by an employee,
- personal contributions paid for pension plans.
The progressive scale is applied on the aggregate income resulting after the deductions.
Art. 12 of ITC provide for personal allowances, such as:
- for a dependent 436 spouse not legally separated,
435 D.P.R. 22 December 1986, n. 917. 436 A taxpayer's spouse is considered a dependant if he or she earns less than Euro 2.840,51 a year.
250
- for each child, increased for children with disabilities. In case of more than 3 children, the
amount is increased by EUR 200 for each child after the first,
- for each dependent relative EUR 750.
A tax credit is granted to taxpayers deriving income from employment or pension. The amount
of credit depends on the level of the aggregate income of the taxpayer.
According to Art. 15, ITC, a tax credit is granted up to 19% of the specific expenses set forth
by the law. The most common expenses are the following:
• Documented medical care expenses sustained in the tax period for an amount exceeding Euro
129.11;
• Premiums paid to Italian qualified insurance companies for death or invalidity up to an
amount of Euro 1,291.14 a year;
• Mortgage loan interest and accessories paid to entities resident in the European Community
paid for the purchase of real estate homes to be used as first home within one year from purchase up to
an amount of Euro 3,615.20 per tax period;
• Funeral expenses up to an amount t of Euro 1,549.37 per tax period;
• Veterinary expenses up to the amount of Euro 387.34 for the amount exceeding Euro 129.11
per tax period;
• University fees of children within the limit of the fees set forth by public universities;
• Liberal contributions to non profit entities up the amount of 2% of total income in favour of
non-profit public entity operating on performing arts;
• Liberal contributions to non profit entities up the amount of Euro 2,065.83 per tax period.
Starting from the tax period 2003 a specific “no tax area” has been introduced.
The “no tax area” regimen provides for specific tax deductions of EUR 3,000.00 a year. An
additional deduction of Euro 4,500.00 is applicable for dependent income different from pension
income for which the deduction is of Euro 4,000.00. In case that the employers performs also non
dependent income the additional deduction is reduced to Euro 1,500.00. The “no tax area” regimen
provides for a general tax free area for dependent income, or pensions, inferior to Euro 7,500.00 a year.
In accordance to Art. 24 of ITC, deduction for non residents are different. It is not applicable
entirely Art. 10, ITC, but only letters a), g), h), i), l), of Art. 10. Only letters a), b), g), h), h-bis), i) of Art.
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15 are applicable. No personal allowances of Art. 12 are enforced. The law 4 July 2006, n. 223, exclude
the application of “no tax area” for non resident.
2.3.Taxable person
In accordance to Art. 2 of ITC, all individuals are subject to IRPEF, but according to Art. 3,
ITC, residents are subject to individual income tax on their worldwide income and a credit is provided
for taxes paid abroad. Non-residents are taxable on their income arising in Italy. An income is
considered arise in Italy in compliance with Art. 23 of ITC. With regard to employment income when
they are considered arisen in Italy.
2.3.1. Resident
Resident individuals are those who for the greater part of the tax year are registered in the
Italian Civil Registry or have a residence or domicile in Italy, as defined in the Civil Code (Art. 2 of
ITC). Referring to Art. 43 of the Civil Code, the domicile is the place where he has established the
principal centre of his business and interest, so called the centre of vital interest. Residence is the place
where he has his habitual abode. Art. 2 (2-bis) of ITC contains an anti-avoidance provision that applies
to Italian citizens who have removed themselves from the residents’ register on moving to a state
considered as a tax heaven by the Ministry of Finance. An Italian national is deemed to be resident in
Italy if he emigrates to a tax heaven even if his name is removed from the Italian civil registry unless
proof to the contrary is provided. The burden of proof is shifted to the taxpayers and not to the
employer even if the employee is subject to a withholding tax437. The status of resident or non-
resident is proved by an employee’ statement, because it depends from a global consideration of
taxpayer position and this control concern only the taxpayer and not the withholding agent.
437 F. Marchetti, Tassazione dei redditi di lavoro dipendente all’estero, Milano 2006, p. 4.
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2.3.2. Non-resident
Non-resident individuals are those who do not meet either of the residence criteria in Art. 2 of
ITC. Non resident are liable to IRPEF and are obliged to file a tax return with respect to income which
is considered to arise in Italy, unless such income is subject to a final withholding tax deducted by the
taxpayer of the income.
According to Art. 23, ITC, it is considered to arise in Italy :
- income from land and buildings situated in Italy,
- income from capital with the exclusion of interest on deposits and current account,
- income from employment if the work is performed in Italy,
- business income derived from activities conducted in Italy by a permanent establishment,
- miscellaneous income derived from activities in Italy or related to assets located in Italy,
- income derived by a no resident partner of a resident partnership or non resident shareholder
of a company that has opted for a look-through taxation treatment,
- pensions, similar allowances and termination payments, as well as income regarded as
employment income, when paid by the State, by residents of Italy or by permanent establishments of
non residents in Italy,
- compensation earned on their behalf in Italy, if paid by the State, residents of Italy or by
permanent establishments of non residents in Italy.
2.3.3. Tie breaker rules
States use personal and economic attachment to justify their income taxation. Sometimes a
person could be considered resident of two different States; in this case the recipient of the income is
taxed twice. With Conventions against double taxation, States established criterions to attribute to a
person only one State residence for the application of the convention438. Italian conventions with
other European State or extra-European State are modeled upon the Art. 4 of the OECD Model. Art. 4
introduce the Tie breaker rules to determine the resident State of a taxpayers. If an individual is a
resident of both the contracting States, his status shall be determined referring:
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- to his permanent home;
- to the state with which his personal and economic relations are closer;
- to the state of which he is a national;
- to a mutual agreement settle of the competent authorities of the contracting states.
3. EMPLOYMENT INCOME
3.1. General description
Income from employment is defined, on Art. 49 of ITC, as that income derived from a
relationship having as its object the performance of work in the employ of and under the direction of
others. Pension of all types and allowances treated as the equivalent are considered employment
income. In Art. 50 there are others kinds of income that are treated as employment income. No
deduction for expenses are allowed from employment income.
There is no special regime for expatriates in Italy, we have only a different method of
computation of the employment income.
3.2. Taxation of Resident
3.2.1.Resident working in Italy
For a person who lives in Italy, who is an Italian resident according to Art. 2 of ITC and who
carries out his work in Italy, the computation of employment income is based on Art. 51(1-8) of ITC.
Income from employment consists of all compensation, whether in cash or in kind, received during the
tax period, including any compensation received as profit-sharing with reference to an employment
relationship, reimbursement of expenses relating to the production of income and gratuitous payments.
The following benefits are not included in the taxable income even if provided by the employer:
438 G. Melis, La nozione di residenza fiscale delle persone fisiche nell’ordinamento italiano, in Rass. Trib., 1995, p. 1069.
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- social security contributions paid by employees and employer;
- contribution, up to EUR 2,065.83, for medical assistance made to entities or funds whose sole
purpose is social welfare in accordance with the provision of labour contracts or agreements;
- food served in canteens or equivalent services;
- -transportation between home and work;
- the value of services provided by the employer for the benefit of all employees for education,
recreation, health, and religious purposes and social assistance;
- exceptional and non-recurring payments (up to an amount of 258.23 EUR) to all employees or
specific categories of employees;
- the value of the shares offered to all employees up to 2,065.83 EUR, subject to the condition
that the shares are not repurchased by the employer or otherwise transferred within 3 years (if
so transferred, the exempt value is taxable in the period in which the transfer occurs);
- the difference between the value of the shares on the date of assignment and the price paid by
the employee, provided that the amount paid by the employee be equal at least to the fair
market value of the shares at the date on which the shares were offered, and subject to the
condition that (i) the option cannot be exercised before 3 years from the offer have elapsed, (ii)
the employee maintains for at least 5 years shares representing at least the difference between
the fair market value of the shares at the time of exercise and the price paid by the employee,
and (iii) at the time of exercise the shares are listed on a regular market; the exemption does not
apply if the shares held by the employee represent more than 10% of the voting rights or the
capital of the issuing company.
The last two exemption also applies to shares issued by a resident or non-resident company
controlling, or controlled by the employer, or by a company controlled by the same person controlling
the employer.
Benefits in kind are deemed to constitute income equal to their market value, with some
exceptions.
Where a car or motorcycle is made available by an employer to an employee, the taxable benefit
is equal to 50% of the amount determined on the basis of published tables assuming a yearly use of
15,000 km. With respect to a low-interest loan to an employee from an employer or through financing
agreements with a third-party lender, the taxable benefit is equal to an amount corresponding to 50%
of the difference between the legal rate of interest and the actual rate of interest in force at the end of
each year.
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According to Art. 51(5) allowances and the reimbursement of expenses for business trips within
the municipality where the business is established are included in taxable employment. If the trip takes
place outside the municipality, EUR 46.48 per days is excluded from taxable income in all cases.
Pension are taxed as employment income, but the financial component of annuities from
qualified pension is treated as income from capital and subject to a 12.5% substitute tax.
3.2.2. Expatriates
For a person who is resident in Italy, but that carries out his work abroad, Italy have not a
special rule now. There was one until 1997.
With the old text of Art. 3(3) letter c) of ITC, the employment income was excluded from
taxation if it derived from an activity permanently performed abroad and if the activity was the
exclusive object of the employment. This provision was a derogation from the worldwide principle.
The employment income was exempt from tax because the legislator wanted to avoid the application of
the faulty credit method to employment income439. The positive aspect of this provision was that
there were not problems of double taxation with the State in which the worker carried out his activity
because the income was taxed only in the source State and not in the resident State (Italy). But at the
same time this could create problems of double exemption if the source State did not tax the income
deriving from employment exercised on its territory.
With the Legislative Decree 2 September 1997, n° 314, the letter c) of Art.3(2) of ITC was
repealed but the inclusion of employment income in the taxable base of IRPEF was postponed to tax
year 2001440. In accordance with this modification employment income deriving from activity abroad
should be determined with the rule of Art. 51, with the same method use for resident working in Italy.
In fact Art. 36, of law 28 November 2000, n° 342 , introduced paragraph (8-bis) to Art. 51 of ITC.
According with this new provision, income derived from an activity permanently performed abroad is
taxable on the basis of salaries determined annually by a decree of the Ministries of Labour and Social
Security, instead of the salary actually received. This applies only if the activity performed abroad is the
exclusive object of the employment and the employee stays abroad for more than 183 days in the
contractual year. The base for the application of paragraph 8-bis are three.
439 G. Melis, La nozione di residenza fiscale delle persone fisiche nell’ordinamento tributario italiano, cit., p. 1063.
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First of all, the activity must be permanently performed abroad, it means that the activity should
be performed abroad without interruption, with stability.
Another important character is that the activity performed abroad should be the exclusive
object of the employment. The activity abroad can not be collateral of the activity carried out in Italy,
the interest of the employer should be accomplished with the activity abroad. Tax office requires a
specific contract providing for the carrying out of activity abroad.
The third element for the application of paragraph 8-bis is that the permanence abroad should
be longer than 183 days during 12 month. The Ministry of Finance in a circular letter issued in 2000441
decided that the element of the 12 month is not referred to tax year but it is referred to the period in
which worker stays abroad442. In the same circular letter the Ministry of Finance established that
annual holiday, weekly rest day, and other public holidays are included in the computation of days
abroad independently from the fact that the worker physically spend those days in the foreign
countries443. The taxable base of employment income abroad is constitute of salary determined
annually by a decree of the Ministries of Labour and Social Security. Tax office asks to employer to
place workers abroad in a special list for workers abroad. This conventional remuneration of income
repeal in part the analytic determination of employment income and the cash basis. In this conventional
remuneration are also included fringe benefits. Employment income, so determined, according to Art.
3 of ITC merge into aggregate taxable income with others kind of income.
Art.51, paragraph 8-bis, of ITC, is applicable in different situation if there are conditions
requires by the provision :
- transfer of worker: a stable modification of work’s place;
- hiring abroad: the contract indicate a foreign place to carry out the activity;
- detachment: the employer temporary transfer an employee to another work’s place. In this
case there is the application of 8-bis if is a temporary transfer and the transfer is for an employer
interest.
Paragraph 8-bis is not applicable in case of temporary transfer of worker: a change in the place
where work is performed which are purely temporary. If a worker is temporary transfer for a period
440 During years between 1997 and 2001 employment income earned abroad would have been not included in taxable base. 441CM 16 November 2000, n. 207/E. 442 F. Marchetti, Tassazione dei redditi di lavoro dipendente all’estero,cit., p. 6. 443 F. Marchetti, Tassazione dei redditi di lavoro dipendente all’estero, cit., p. 7.
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longer than 6 month, the foreign income is taxable in the source State and in resident state the income
is determined according to general rule of Art.51(1-8). For example subsistence have a daily forfeit
exemption of EUR 77,47; others kind of exemption are regulated in paragraph (5) of Art. 51. The last
consideration is that paragraph 8-bis is not applicable if the employee carries out his activity in a foreign
State when Italy have stipulated, with this foreign State, a double taxation convention in which
employment income shall be taxed in source State444. Provisions of international treaty prevail on
domestic law because they are special in comparison to domestic law. But at the same time Art. 169 of
ITC provide for the application of Italian domestic law if more favourable than treaty provisions.
Indeed, according to Italian case law445 and authors, tax treaties provisions prevail on domestic ones .
3.2.2.1 Withholding
Employment income is subject to a withholding tax by the employer. This withholding is a
prepayment of income tax which is creditable against the recipient’s income tax liability. The tax is
withheld applying the ordinary income tax rates corresponding to the brackets adjusted according to
the period for wich the payment is made446. The personal allowances and credits available to each
taxpayer are taken into account. Usually there is an advanced withholding tax which is creditable against
the recipient’s income tax liability. Residents are subjected to withholding by his employer. For
employment income abroad, computed in compliance with paragraph 8-bis, the withholding is made by
the employer according to Art. 23(1-bis) of the Presidential Decree 600/1973. The withholding is
commensurate to the conventional remuneration determined by the annual Ministry decree. The
employer deduct at this moment also the foreign tax credit.
3.2.2.2. Deduction of social security contributions
According to Art.51, ITC, a full deduction is granted for social security and welfare
contributions paid in accordance with the law or voluntarily paid to the mandatory pension plan. But in
compliance with paragraph 8-bis, for the determination of employment income abroad others
444 F. Marchetti, Tassazione dei redditi di lavoro dipendente all’estero, cit., p.8. 445 Corte. Cost., june 1989, n. 323. 446 G. Chiesa, Italy – Individual taxation, in IBFD database – country surveys, banca dati on line consultabile su internet all’indirizzo www.ibfd.org aggiornato al 2007, B.6..
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paragraphs of Art.51 ITC are not applicable. So there is not a full deduction for social security and
welfare contribution and for medical assistance contributions. To avoid this situation the Ministry of
Finance in 2001, with a note, decided that social security and welfare contribution paid in accordance
with law are deductible, according to Art. 10 (1) letter e) of ITC, at the moment of annual tax return.
The deduction of social security contribution is generally made by the employer with a withholding. To
avoid the burden of the annual tax return for expatriate, in order to have this deduction, Ministry of
Finance admitted social security contributions deduction at the moment of the withholding.
The situation is different with respect of medical assistance contributions. In this case the
deduction is granted only by Art. 51 of ITC, and not by Art.10. So when we apply paragraph 8-bis for
foreign employment income the deduction is not possible for medical assistance contributions447.
3.2.2.3. Double taxation relief
Resident individuals are subject to individual income tax on their world wide income .So there
is a risk of double taxation on employment income that is taxable in resident State and in source State.
Solutions at this problem are unilateral if the source State have not a bilateral treaty with Italy, and
conventional if the source state have a bilateral treaty with Italy.
Unilateral relief is predisposed in order to avoid international double taxation: a foreign tax
credit is granted for residents deriving income from foreign sources. The recoupment of credit for
foreign taxes takes place in two different way.
The first one is at the moment of the balance at the end of tax year and is made by the
withholding agent in accordance with Art. 23(3) of the Presidential Decree 29 September1973, n.600. If
income earned abroad is included in the computation of aggregate income, taxes definitively paid
abroad shall be allowed as credits in an amount equal to the taxes on foreign income. If income
produced in more than one foreign State is included, the tax credit shall be applied separately with
respect to each state (per country limitation principle).
The second one operates at the moment of presentation of the annual tax return by the
employee in accordance with Art. 165 of ITC. If income earned abroad is included in the computation
of aggregate income, taxes definitively paid abroad upon such income shall be allowed as credits against
447 F. delle Falconi, G. Marianetti, Fissati i livelli di retribuzione convenzionale per il lavoro prestato all’estero, in Corr. Trib., n.12/2006, p.925.
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net tax in an amount equal to that part of the Italian tax which is proportional to the ratio between
foreign source income and aggregate income, not taking into account losses carried forward from
previous years. The definition of income produced abroad derived from an interpretation a contrario of
Art. 23 of ITC which deals with the concept of income taxable in Italy by non-residents: income is
deemed to be produced abroad whereby the requirements provided for by Art.23 of ITC are not met.
If foreign-source income is derived from more than one foreign country, the foreign tax credit
is applied separately with respect to each country. Even in this case tax credit is applied on a per
country basis. Tax credit must be claimed, upon penalty of forfeiture, in the return for the tax period in
which the foreign taxes are definitively paid. If the tax due in Italy for the tax return relating to the tax
period in which the foreign income was included in the taxable base has already been settled, a new
settlement shall be prepared taking into account any increase in foreign source income, and the credit
shall be applied to the tax due in the tax period pertaining to the annual return in which it was claimed.
If the period of limitation for assessment has already expired, the credit shell be limited to that part of
the foreign tax proportional to the part of foreign source income subjected to taxation in Italy. There
shall be no right to a credit in the event of failure to file a tax return or to report income produced
abroad in the tax return.
For the application of credit method it is really important that the foreign taxes are definitively
paid. According to the tax authorities a tax is definitively paid when no partial or total reimbursement
may be obtained. The tax payer have to file same documentation to claim the foreign tax credit. The
circular letter issued by the Ministry of Finance448 require:
- a copy of the foreign tax return,
- the request of repayment if it is not included in the tax return,
- the receipt of foreign tax payment,
- a certification from the employer.
The last paragraph of Art. 165, ITC, says that when the income earned abroad is included in
part in the computation of aggregate income, also the foreign tax shall be reduced in the correspondent
amount.
The question is if this provision could be apply to a taxation of employment income
determined in accordance to paragraph 8-bis, a taxation based on a lump sum. According to same
448 CM n. 50/E del 2002.
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author449 there is a conceptual difference between “forfeit determination” of income and “partial
inclusion in computation“ of foreign income. In fact according to paragraph 8-bis income is
determined with different criterions but after the computation, income is totally included in the
aggregate income. Instead, we have partial inclusion in computation when income entirely taxable is
taxed only in part because of law. An example of this is for the cross border worker: income is
determined according to general rule of Art.51(1-8) but it is included in taxable income only up to EUR
8,000. Determination of income come first in a logical order than computation of the same income in
the taxable base. The conclusion is that the last paragraph of Art. 165 is not applicable when income is
determined in accordance with paragraph 8-bis.
3.2.2.4. Non-application of 8-bis
Employment income is not determined according to paragraph 8-bis when there are not
conditions require in the provision: when the activity is performed abroad but non permanently, when
activity abroad is not the exclusive object of the employment and if the employee doesn’t stay abroad
from more than 183 days.
In this situation employment income is determined with the rules of Art.51(1-8). For example if
the employment abroad is no longer than 183 days the income is determined in accordance with 51(7):
there is a 50% exemption from the taxable base of the subsistence till the soil of EUR 4,648.
3.2.2.5. Double taxation convention and OECD Model
The problem of double taxation is solved in a bilateral way with convention against double
taxation. Under the double taxation treaties signed by Italy with third countries, Italy normally provides
for the avoidance of double taxation in accordance with the OECD Model Convention.
As in the domestic legislation, the general method for avoiding double taxation is credit
method, which is quite similar to the domestic foreign tax credit. However there are same differences,
for example the treaties do not require, for granting the credit, that the foreign taxes must be definitely
paid abroad.
449 F. delle Falconi, G Marianetti, Fissati i livelli di retribuzione convenzionale per il lavoro prestato all’estero, cit., p. 928.
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In double taxation convention, there are distributive rules for the allocation of taxation power
between two contracting States. Income from employment is regulated in Art. 15 of OECD Model.
The income derived by a resident of a Contracting State in respect of an employment shall be taxable
only in that State unless the employment is exercised in the other Contracting State. If the employment
is so exercised, such remuneration, as is derived there from, may be taxed in that other State. The
income shall be tax in resident State if the activity is carried out in resident State, and may be taxed in
source State if the activity is carried out in that State. In this case it is possible to have double taxation
solved with exemption or credit method. According to paragraph (2), Art. 15, OECD Model,
remuneration derived by a resident of a Contracting State in respect of an employment exercised in the
other Contracting State shall be taxable only in Resident State if:
- the recipient is present in the other State for a period or periods not exceeding in the aggregate
183 days in any twelve month period commencing or ending in the fiscal year;
- the recipient is paid by, or on behalf of, an employer who is not a resident of the other State;
- the remuneration is not borne by a permanent establishment which the employer has in the
other State.
The first condition is that the exemption is limited to the 183 day period. It is further stipulated
that this time period may not be exceeded "in any twelve month period commencing or ending in the
fiscal year concerned". This contrasts with the 1963 Draft Convention and the 1977 Model Convention
which provided that the 183 day period should not be exceeded "in the fiscal year concerned", a
formulation that created difficulties where the fiscal years of the Contracting States did not coincide
and which opened up opportunities in the sense that operations were sometimes organised in such a
way that, for example, workers stayed in the State concerned for the last 5 1/2 months of one year and
the first 5 1/2 months of the following year. Those create opportunities for tax avoidance. In applying
that wording, all possible periods of twelve consecutive months must be considered, even periods
which overlap others to a certain extent450. The formulas to use to calculate the 183 day period, is the
"days of physical presence" method. The application of this method is straightforward as the individual
is either present in a country or he is not. The calculation of the days it is quite different from the
calculation of days in application of Art. 51(8-bis) of ITC. In OECD Model are computed only the days
450 OECD Commentary on article 15, 4.. For instance, if an employee is present in a State during 150 days between 1 April 01 and 31 March 02 but is present there during 210 days between 1 August 01 and 31 July 02, the employee will have been present for a period exceeding 183 days during the second 12 month period identified above even though he did not meet the minimum presence test during the first period considered and that first period partly overlaps the second.
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physically spend in foreign countries in which the activity is carried out. The following days are
included in the calculation: part of a day, day of arrival, day of departure and all other days spent inside
the State of activity such as Saturdays and Sundays, national holidays, holidays before, during and after
the activity, short breaks (training, strikes, lock-out, delays in supplies), days of sickness (unless they
prevent the individual from leaving and he would have otherwise qualified for the exemption) and
death or sickness in the family. However, days spent in the State of activity in transit in the course of a
trip between two points outside the State of activity should be excluded from the computation. It
follows from these principles that any entire day spent outside the State of activity, whether for
holidays, business trips, or any other reason, should not be taken into account. A day during any part of
which, however brief, the taxpayer is present in a State counts as a day of presence in that State for
purposes of computing the 183 day period451.
The second condition is that the employer paying the remuneration must not be a resident of
the State in which the employment is exercised452.
Under the third condition, if the employer has a permanent establishment in the State in which
the employment is exercised, the exemption is given on condition that the remuneration is not borne
by that permanent establishment. The phrase "borne by" must be interpreted in the light which is to
ensure that the exception provided for in paragraph 2 does not apply to remuneration that could give
rise to a deduction, having regard to the principles of Article 7 (business profits) and the nature of the
remuneration, in computing the profits of a permanent establishment situated in the State in which the
employment is exercised453.
There could be a problem when the definition of employer is different between the two
Contracting States. According to Art. 3 of OECD Model for the application of the convention any
term not defined therein shall have the meaning that it has at that time under the law of the State
applies the convention, unless the context otherwise requires. However a definition of employer is
contained in the Commentary at the OECD Model: the term "employer" should be interpreted in the
context of paragraph 2. In this respect employer is the person having rights on the work produced and
bearing the relative responsibility and risks. Employer is not only the ones with which employee have a
contract, but also the subject who put on the risk and liability of the work. In cases of international
451 OECD Commentary on article 15, 5.. 452 OECD Commentary on artiche 15, 6.. 453 OECD Commentary on article 15, 7..
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hiring-out 454of labour these functions are to a large extent exercised by the user. In this context,
substance should prevail over form, each case should be examined to see whether the functions of
employer were exercised mainly by the intermediary or by the user.
The provision of Art. 15 paragraph 2 include salaries, wages and other similar remuneration.
3.2.3. Cross-border worker
Cross-border workers are workers who live in a zone close to the border between two States
and carry on their occupation beyond the border of the State in which they reside.
In the field of taxation455 there exist no rules, at European Community level regarding the
definition of cross-border workers, the division of taxing rights between Member State or the tax rules
to be applied. Neighbouring Member States, with many persons crossing borders to work, often agree
special rules for cross-border workers in their bilateral double taxation conventions. Since these rules
reflect the special situation between two Member States and are the result of negotiations between
them, it follows that these rules vary from one double taxation convention to another. Income earned
by a cross-border worker may be taxed in one or both of the Member States concerned, depending on
the tax arrangements. In the latter case, tax paid in the Member State where the work is carried out
would normally be taken into account when determining the tax liability in the Member State of
residence, in order to avoid double taxation. There are no rules which guarantee the cross-border
worker the right to the most favourable of the tax regimes of the Member States involved as we can see
in the Gilly case456.
454 OECD Commentary on article 15, 8.. There is international hiring-out of labour when a local employer wishing to employ foreign labour for one or more periods of less than 183 days recruits through an intermediary established abroad who purports to be the employer and hires the labour out to the employer. The worker thus fulfils prima facie the three conditions laid down by paragraph 2 and may claim exemption from taxation in the country where he is temporarily working. 455 In the field of taxation there are not provision, stictu sensu, regarding cross-border workers; but in the field of social security the European Court of Justice elaborate an extensive definition of cross-border worker. 456 In the Gilly case the European Court of Justice examined whether a criterion of nationality used for allocating taxing powers between member states was contrary to Community Laws. Mr and Mrs Gilly reside in France, near the German border. Mr Gilly, a French national, teaches in a State school in France. Mrs Gilly, who is a German national having also acquired French nationality by marriage, teaches in a State primary school in Germany, in the frontier area. The Mrs Gilly employment income, on the basis of FRA/GER Treaty, is subject to tax in Germany but it is also subject to tax in France with a credit. The problem was that Germany tax was higher than France tax, so there was an excess credit. EU Law forbids unequal treatment on the basis of movement of workers in Art. 48 of EC Treaty. Taxation right according to FRA/GER Treaty is based on nationality and EC Law forbids unequal
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In Italy, until 2001, the old Art.3(3) letter c) of ITC was applied to those kind of worker.
Employment income of frontier workers was totally exempted from taxation. When letter c) of
Art.3(3), ITC, was repealed in 1997 (with effectiveness from 2001) the taxation of frontier workers
income has been regulated with the Finance Act 2001457, in Art. 3(2), that provided for a total
exemption for cross-border income. The Finance Act of 2003458, with Art. 2(11), has eliminated the
exemption. Now up to EUR 8,000 of income derived by an Italian resident from employment exercised
abroad on a continuous basis in frontier zones and neighbourning areas need not be included in taxable
income.
Taxes Authorities require that workers cross the border every day. But the “daily” movement is
not requires by the text of the law. It is only an interpretation of tax authorities. In fact, for example,
the convention with Austria refers to workers that “usually”, and not “daily”, cross the border to go to
work. If this special rule for frontier workers is not applicable, income shall be taxed in Italy according
to general rule of Art. 51(1-8) of ITC or according to Art. 51(8-bis) if all the required element of the
provision are present.
Italy had stipulated conventions with same border countries. A special regime for individual
resident in the area close to Swiss border is contained in a treaty with Switzerland concluded on 1974.
According to the treaty, income from employment performed in Switzerland by such individuals is not
subject to tax in Italy, but the Cantons of Graubunden, Ticino and Valais are obliged to pay to Italy a
stated portion of the tax collected on the employment income produced in these cantons by the
frontier workers. Others examples of conventions are the ones with France and Austria. In both
income shall be taxed in resident State, but in the convention with France this provision is applied only
if income is really taxed in resident State. Income lower than EUR 8,000 is not taxed in Italy but it is
taxed in France.
This regime is applicable also to frontier workers carrying out their activity in the Vatican.
treatment on the basis of nationality. The Court said that states are free to divide taxation rights and to chose the connecting factor; even nationality can be taken as connecting factor. Tax treaties do not ensure that the taxation is not higher in ones state than the other. The point is that the tax systems in UE are not harmonized. The allocation of taxation rights in tax treaties is not in conflict with the freedom of movement of workers within the meaning of Art. 48 of EC Treaty as long as such attribution is not unreasonable. 457 Law 23 December 2000, n. 388. 458 Law 27 December 2002, n.289.
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3.3.Taxation of non-resident
3.3.1. Taxation rules
It is very important to verify if a foreign worker that carries out his activity in Italy could be
consider or not an Italian resident, because the taxation basis for expatriate living in Italy, but who are
not classified as residents, is different to the residents’ basis.
Non resident are only taxed on income and gains arising in Italy, compared to worldwide
income and gains for resident. Expatriates living in Italy will be classified as resident if for a period of
183 days in 12 month:
- they are registered with the registry office of the Population Registry;
- has their principal place of business or residence in Italy;
- has his centre of vital interest (for example his family) in Italy.
Non resident individuals are subject to individual income tax on income from Italian sources.
The tax is computed in the same way as it is for resident individuals.
Art. 23 of ITC contains a list of items of income which are deemed to arise in Italy for purpose
of assessing non-residents to IRPEF. Income from employment, including pensions, is subject to
taxation in Italy if work is performed in Italy. Pension and similar allowances and termination payments
are also subject to taxation in Italy if paid by the State, paid by residents of Italy or Italian permanent
establishments of non residents. The determination of the taxation is regulated in Art. 24 of ITC. As a
general rule, income tax is assessed on the aggregate of all these sources of income. Deductions from
aggregate income are allowed only for some specific gifts. A 19% tax credit is granted on the same
conditions set for resident taxpayers for mortgage interest and some specific gifts. No allowances are
granted for dependants. The same rates of tax are applied to a non resident’s income as to a resident’s.
3.3.2. Typology of employment’s contract
There are different typology of employment that a non resident can carries out in Italy. In the
first one the worker is employed to carries out the activity only in Italy. In this case, employment
income is determined in the same way as it is for a resident, according to general rule of Art. 51(1-8) of
ITC. Income tax is assessed on the aggregate income derived from Italy and deduction are allowed only
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for some specific gifts in compliance with Art. 24 of ITC. When the employer is a resident, he is
obliged to withhold taxes. If the employer is a non resident, he is obliged to withhold taxes only if he
has a permanent establishment in Italy. Some authors deem that the employer is obliged to withhold
taxes if he has not a permanent establishment, but however a fixed place of business like a
representation bureau. When the employer do not execute the withhold, taxpayers have to file the tax
return with respect to income which is considered to arise in Italy.
Another typology of contract is detachment.459 With this contract an employee is temporary
transfers to another enterprise. When the detachment is in Italy, if there are no conventions between
States that exclude taxation in source state, employment income is taxed in Italy independently from
the duration of employment. In this case, there are problems with withholding tax. When all
compensation are paid out by the foreign enterprise, there are not withholding tax, but taxpayers have
to file a tax return. The Italian enterprise, where the employee is detached, is a withholding agent if it
paid out compensation.
Fringe benefits are delivered by Italian enterprise where employee is detach and are housing
allowances, cars, schooling and travel ticket. They are taxable according to Art. 51 that included in
employment income not only salaries, but all compensation, whether in cash or in kind, received during
the tax period, including any compensation received as profit-sharing reference to an employment
relationship. In accordance to Art. 51, ITC, to determined taxable income of compensation in kind has
to be to taken into account the normal value460. Special criterion has to be taken into account to
determine taxable income of some fringe benefits like housing allowance and the others (according to
Art. 51(4) ).
3.4.” Repatriation of brain”
Human skilled resources are vital for the development of competitiveness so it is really
important to attract from others countries skilled resources, scientist and researcher, but it is really
459 Referring to a foreign enterprise that detach one of his employees in Italy. 460 According to Art. 9, ITC, normal value means the price or consideration applied on average to goods and services of equal or similar kind, at arm’s length and at the same marketing stage, when and where goods and services have been purchased or supplied and, when lacking, at the nearest time and place. For determining the normal value, as far as possible, it is to be referred to the price lists or tariffs of the person supplying goods or services and, when lacking, to the market-lists of the Chamber of Commerce as well as professional tariffs, taking into account distributor discounts. For goods and services subject to price control, it is to be referred to the regulation in force.
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important also to hold back in our country those kind of people that are Italian or that have studied
here. In last years, there is an increase of brain drain from Italy to others European countries like
Germany, the United Kingdom and France and toward the United States and Canada. Some measures
to avoid brain drain can be predisposed also in fiscal field. Expatriates from foreign countries are
generally not granted any particular tax privilege or benefit. However, in order to promote the
immigration of scientists into Italy, income from employment or self-employment of researchers who
become resident in Italy for tax purpose in 2003 to 2008 is subject to income tax only up to 10% of its
amount and is exempted from IRAP, a regional tax on productive activity exercised. The benefit applies
in the tax year in which the Italian residence for tax purposes is acquired and in the following two tax
years. This measures had been taken with a decree in 2005461.
4. SOCIAL SECURITY CONTRIBUTIONS
Italian pension system is composed of “two-pillar” system, consisting of a
public compulsory scheme, and of a private pension system. All employees must adhere to the
public pension scheme, whereas the private pension system is mainly based upon collective bargaining
and participation is entirely voluntary.
.
4.1. Compulsory social security system
4.1.1. General descriptions
The Italian social security system consists of a series of compulsory contributions stipulated by
the State in the form of social insurance under which employed persons are guaranteed specific services
of an economic or medical nature. A vast range of services falls within the scope of social security:
unemployment benefits, family allowances, protection against industrial accidents, occupational
diseases, sickness benefits and assistance, old-age pensions. The social security system is financed
primarily through contributions levied on employers and employees. Industrial accident and occasional
461 Legislative Decree 1 February 2005, n.18.
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illness allowances, maternity leave, severance pay, unemployment and family allowances are financed
exclusively by contribution from employers, while sickness allowances, disability, old-age, and surviving
relative pensions also require a contribution from employees.
An employee is liable to pay social security contributions as a percentage of earnings. The rate
depends upon the classification of the employer for social security purpose and the position of the
employee. Generally, an employee pays approximately 10% of gross salary whilst the employer’s
contributions is between 28% and 30% of gross salary. Mandatory social security contributions are
deductible from taxable income while those paid to integrative pension funds are deductible under
certain conditions and up to a certain limit (EUR 5,164 for 2007). Social security due in respect of an
employment relationship must be paid by the employer, for both employee and employer. The
contributions are withheld from the employees’ salaries.
4.1.2. Social security and international mobility
Owing to the swift development of the international mobility, Italian Social Security deals with
the problem of retirement pensions for workers who were employed abroad. A succession of important
international measures are used in order to improve the retirement pensions of mobility workers. There
is a complete extension of the insured risks, principles and norms are promoted in order to reduce
inequalities between native and immigrant workers. These measures produced a series of agreements
that are bilateral, or between the EU members (EU social security rules). As a general rule, the social
insurance law of the country in which an employee carries out his activity is the ones applicable. Italy
has reciprocal social security agreements with some 40 countries (including all EU countries, Canada
and the USA). Those agreements provide for totalization of insurance periods in a foreign State with
the period of insurance in Italy. So the State in which employees require social insurance benefits,
should consider periods of insurance performed on its territory and in the other State.
Social security contributions are due in the State in which activity is carried out. Generally, if
you work for an employer in Italy, you are insured under Italian social security legislation and will not
have any liability for social security contributions in your home country or country of domicile. There
are some exceptions to this rule deriving from conventions between States. The purpose of those
conventions is to avoid the creation of different insurance positions in every State and in none of them
the right to an insurance benefit. One of those conventions, for European worker, is the Council
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Regulation (EEC) 1408/71 of 14 June 1971 and the Council Regulation (EEC) No 574/72 of 21 March
1972 laying down the procedure for implementing Council Regulation (EEC) No 1408/71.
According to Art. 13, of Reg. 1408/71, a person employed in the territory of one Member
State shall be subject to the legislation of that State even if he resides in the territory of another
Member State or if the registered office or place of business of the undertaking or individual employing
him is situated in the territory of another Member State. There are some exceptions to this provision.
In accordance to Art. 14 of Reg. 1408/71, expatriates may remain under their home country’s social
security scheme for a limited period if the anticipated duration of work does not exceed 12 months and
if they are not sent to replace another person who has completed his term of posting. If the duration of
the work to be done extends beyond the duration originally anticipated, owing to unforeseeable
circumstances, and exceeds 12 months, the legislation of the resident State shall continue to apply until
the completion of such work, provided that the competent authority of the Member State in whose
territory the person concerned is posted or the body designated by that authority gives its consent.
Such consent cannot, however, be given for a period exceeding 12 months. According to Art. 17 of
1408/71 Member States (the competent authorities of these States or the bodies designated by these
authorities) may provide, by common agreement, for the application of welfare law of one Member
State, instead than the others in the interest of certain categories of persons or of certain persons. For
example EU nationals transferred to Italy by an employer in their home country can continue to pay
social security abroad for one year, which can be extended for another year in unforeseen
circumstances. This also applies to the self-employed. However, after working in Italy for two years,
EU nationals must contribute to Italian social security. This Regulation does not solve every problem
of coordination between social security systems. The Council Regulation coordinates but does not
harmonize different states legislations. It needs to be simplified and updated to increase free movement
of workers.
For extra-European countries, that do not have social security conventions with Italy, it is
applicable Art.1 of law decree462 31 July 1987, n° 317. According to this article, every Italian employee,
that works in extra European countries without social security conventions with Italy, for an Italian or a
foreign employer, is obliged to join national welfare and assistance, complying domestic Italian laws.
The Employer, resident in Italy or abroad, has the duty of registration and payments to the Italian
national welfare and assistance.
462 Changed in law, with law 3 October 1987, n. 398.
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4.1.3. Outbound employment
An Italian resident working abroad pays social contributions in the State in which he works,
unless conventional exceptions. The taxable base to calculate the amount of social security
contributions is the same base used to calculate income tax. Legislative Decree 314 of 1997 had unified
taxable base for income tax and social security contributions, both are determined according to Art. 51
of ITC. But with the introduction, in 2000, of paragraph 8-bis on Art. 51 of ITC there is not always
coincidence of taxable base. When the determination of employment income derives from the
application of Art. 51(1-8) (because activity is not permanently performed abroad, is not the exclusive
object of the employment and the employee does not stay abroad for more than 183 days in the
contractual year) taxable base is the same for income tax and social security contribution. When the
determination of employment income is in compliance with paragraph 8-bis there is a distinction463.
For countries which do not have social security convention with Italy, the conventional remuneration
determined annually by a decree of the Ministries of Labour and Social Security is used for income tax
and for the calculation of social security contributions. For countries that instead have a social security
convention with Italy, the conventional remuneration is used only to determine employment income
and the determination of social security contributions is based on the effective remuneration according
to Art. 51 of ITC. This limitation of the application of paragraph 8-bis derives from a decision of
Minister of Labour in a note of 18 January 2001. According to Minister, the new provision is applicable
only on taxation field and it is not for determination of social security contributions when work is
carried out in a country that have social security convention with Italy. Some authors464 believe that
the interpretation of Minister contrast with the literal provision of paragraph 8-bis. The taxable base for
determination of social security contributions should be the conventional remuneration annually
determined for every worker that carry out activity abroad independently from the fact that the foreign
country has or not social security conventions with Italy.
When a worker carries out the activity abroad, in countries without social security treaty with
Italy, the employer is obliged to pay social security contribution for the employees. This duty was borne
with the Constitutional Court sentence n° 369 in 1985 for Italian employer with activity in a foreign
country 465. This provision was extended also for non Italian employer with a law of 1987466.
463 F. Marchetti, Tassazione dei redditi di lavoro dipendente all’estero, cit., p. 9 e ss. 464 F. delle Falconi, G. Marianetti, Fissati i livelli di retribuzione convenzionale per il lavoro prestato all’estero, cit., p .926. 465 D. Pizzi, Adempimenti contributivi delle aziende operanti all’estero, Milano 2006, p. 2. 466 Law 3 October 1987, n. 398.
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4.1.4. Inbound employment
Non resident individuals working in Italy should pay social security contributions to Italian
entities, because the Italian welfare system act without distinctions based on citizenship, according to
Art.38 of Italian Constitution. These social security payments, made to Italian entities, are not included
in the employee’s taxable base.
Social security contributions, of a non resident working in Italy, can be paid to foreign countries
entities in accordance with conventions between states. In this case, however, employment income is
taxable in Italy. The problem is if it’s possible to deduct social contributions paid to a foreign social
security system. The OECD Model Commentary suggests states to include in their convention a
specific provision that allow the deduction from taxable income of social security contributions paid to
the social security system of the resident state. In treaties concluded by Italy there is not this specific
provision but the deduction is granted by a circular letter 23 December 1997, n. 326/E
4.1.5. Social security and cross-border workers
4.1.5.1. Definition of cross-border
In the field of social security, European Court of Justice define the concept of cross-border
worker for the purpose of determining in which Member State they are entitled to social benefits. The
Court accepted extensive definition of frontier worker. An example is case law C-212/05, Hartmann-
Freistaat Bayern. In accordance with theories of the German Government, the United Kingdom
Government and the Netherlands Government, only the movement of a person to another Member
State for the purpose of carrying on an occupation should be regarded as an exercise of the right of
freedom of movement for workers. A person such as Mr Hartmann, who never left his employment in
the Member State of which he is a national and merely transferred his residence to the Member State of
his spouse, could not therefore benefit from the Community provisions on freedom of movement for
workers. The Court did not accept these theory. For the Court a national of a Member State who, while
maintaining his employment in that State, has transferred his residence to another Member State and
has since then carried on, his occupation, as a frontier worker can claim the status of migrant worker
for the purposes of Regulation (EEC) No 1612/68 of the Council of 15 October 1968 on freedom of
movement for workers within the Community. It does not matter the reason why an individual changes
his residence, the important element is that he lives in a different place from the one in which he works.
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4.1.5.2. EU Case law
An important case law about pensions of frontier workers is Gottardo467 case, in 2002. The
essence of the national court's question was whether the competent social security authorities of one
Member State (the Italian Republic) are required, pursuant to their Community obligations under
Article 12 EC or Article 39 EC, to take into account, for the purpose of entitlement to old-age benefits,
periods of insurance completed in a non-member country (the Swiss Confederation) by a national of a
second Member State (the French Republic) in circumstances where, under identical conditions of
contribution, those competent authorities will take into account such periods where they have been
completed by nationals of the first Member State pursuant to a bilateral international convention
concluded between that Member State and the non-member country. The Court says that the
competent social security authorities of one Member State are required, pursuant to their Community
obligations under Article 39 EC, to take account, for purposes of acquiring the right to old-age
benefits, of periods of insurance completed in a non-member country by a national of a second
Member State in circumstances where, under identical conditions of contribution, those competent
authorities will take into account such periods where they have been completed by nationals of the first
Member State pursuant to a bilateral international convention concluded between that Member State
and the non-member country. On February 2007 the European Commission has opened infringement
procedures against Italy for the non application of this sentence.
467 Mrs Gottardo, who is an Italian national by birth, renounced that nationality in favour of French nationality following her marriage in France to a French national. She worked successively in Italy, Switzerland and France, where she paid social security contributions. Mrs Gottardo wishes to obtain an Italian old-age pension pursuant to Italian social security legislation. However, even if the Italian authorities took into account the periods of insurance completed in France, in accordance with Article 45 of Regulation No 1408/71, aggregation of the Italian and French periods would not enable her to achieve the minimum period of contributions required under Italian legislation for entitlement to an Italian pension. Mrs Gottardo would be entitled to an Italian old-age pension only if account were also taken of the periods of insurance completed in Switzerland pursuant to the aggregation principle in the Italo-Swiss Convention. Mrs Gottardo's application for an old-age pension was rejected by the INPS, by decision of 14 November 1997, on the ground that she was a French national and that the Italo-Swiss Convention therefore did not apply to her.
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4.2. Supplementary pension insurance
4.2.1. Deduction of contributions
As mentioned before, contributions paid to pension founds are deductible. According to Art.8
of Dlgs 252/2005, these contributions are deductible from aggregate income up to EUR 5.164,57, in
compliance with Art. 10 of ITC.
The private pension system is a contribution system, operating through funding coming from
the employees and, generally, from the employers.
Italian’s rules in the field of supplementary pension insurance are changed with the Finance Act
of 2007468. Until 2007 there was a discrimination, because according to Art.10 letter e-bis) of ITC,
supplementary pension insurance payments were deducted from aggregate income of taxpayer only if
they were paid to Italian supplementary or complementary pension schemes. So there was no
deduction for foreign supplementary pension schemes. This situation was confirm by circular letter of
10 June 2004, n. 24/E, issued by Minister of Finance. These rules created a problem of compatibility
with the provision of European Community Treaty. In fact European Community Treaty protect:
according to Art. 39 the free movement of workers, according to Art. 43 the right of establishment and
according to Art. 49, freedom to provide services within the Community. The incompatibility of Art.
39, with rules that provide for different fiscal treatment between contributions paid to national or
foreign supplementary pension insurance schemes, was highlighted by European Court of Justice. With
the sentence of 3 October 2002 , in Case C-136/00. The Court said that Art. 49 EC is to be interpreted
as precluding a Member State's tax legislation from restricting or disallowing the deductibility for
income tax, of contributions to voluntary pension schemes paid to pension providers in other Member
States, while allowing such contributions to be deducted when they are paid to institutions in the first-
mentioned Member State, if that legislation does not at the same time preclude taxation of the pensions
paid by the abovementioned pension providers. In sentence of 30 January 2007 - Commission of the
European Communities v Kingdom of Denmark- Case C-150/04, the Court declares that, by
introducing and maintaining in force a system for life assurance and pensions under which tax
deductions and tax exemptions for payments are granted only for payments under contracts entered
into with pension institutions established in Denmark, whereas no such tax relief is granted for
payments made under contracts entered into with pension institutions established in other Member
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States, the Kingdom of Denmark has failed to fulfil its obligations under Articles 39 EC, 43 EC and 49
EC. Under the influence of European Court of justice’ decisions and according with the evolution of
the European system, Italy, in 2007, changed soon enough its legislation in ones compatible with the
European.
4.2.2. Implementation of European Directive in Italy
Another kind of discrimination came from the fact that workers did not transfer themselves
abroad because of the problem of joining foreign supplementary pension insurance schemes. In 2003
The European Union issued Directive 2003/41/EC of the European Parliament and of the Council, of
3 June 2003, on the activities and supervision of institutions for occupational retirement provision. In
Art. 20 are regulated Cross-border activities. Member States shall allow undertakings located within
their territories to sponsor institutions for occupational retirement provision authorised in other
Member States. They shall also allow institutions for occupational retirement provision authorized in
their territories to accept sponsorship by undertakings located within the territories of other Member
States469.
Italy conformed its provisions to EU Directive with Finance Act 2007, law 27 December 2006,
n. 296, that modify Legislative Decree 5 December 2005, n. 252 on supplementary pension schemes,
introducing Art. 15-bis and 15-ter. Art.-15 bis provide for workability of Italian supplementary pension
schemes, prior communication to the Italian competent authority, so called COVIP470. Art. 15-ter
provide for workability, in Italy, of European supplementary pension schemes, prior authorisation of
the competent authority of the provenance State and communication to COVIP. As a consequence
468 Law 22 December 2006, n. 296. 469 European Union Directive 2003/41/EC, Art. 20 “…2. An institution wishing to accept sponsorship from a sponsoring undertaking located within the territory of another Member State shall be subject to a prior authorisation by the competent authorities of its home Member State, as referred to in Article 9(5). It shall notify its intention to accept sponsorship from a sponsoring undertaking located within the territory of another Member State to the competent authorities of the home Member State where it is authorised. 3. Member States shall require institutions located within their territories and proposing to be sponsored by an undertaking located in the territory of another Member State to provide the following information when effecting a notification under paragraph 2: (a) the host Member State(s); (b) the name of the sponsoring undertaking; (c) the main characteristics of the pension scheme to be operated for the sponsoring undertaking….”. 470 COVIP, Commissione Vigilanza Fondi Pensione.
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contributions paid to European supplementary pension insurance schemes are deductible, from
income, at the same conditions as are deductible contributions paid to Italian’ schemes. Until 2007
Italian legislation discriminate a foreign employee working in Italy because if he/she paid contributions
to a supplementary pension schemes abroad, he/she could not deduct contributions from the aggregate
income, so foreign employees were not attracted in Italy. Now, instead, the European rules are
respected and foreign employee are encouraged to remain in Italy because they can deduct paid to their
origin supplementary pension insurance schemes. At the same time Italian employees can access to
foreign market of complementary pension schemes. So with the Finance Act 2007 Italy align itself with
the European Legislation and cancelled these kind of discriminations.
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TABLE OF AUTHORS:
AA.VV., Manuale di fiscalità internazionale, (a cura di Alessandro Dragonetti Valerio Piacentini
Anna Sfondrini) Milano, 2007;
Acierno R., Il lavoro degli stranieri in Italia (2), Fisco nel Mondo, Rivista Telematica, 5 Agosto
2005;
Chiesa G., Italy – Individual taxation, in IBFD database – country surveys, banca dati on line
consultabile su internet all’indirizzo www.ibfd.org aggiornato al 2007;
Delle Falconi F., Marianetti G., Fissati i livelli di retribuzione convenzionale per il lavoro prestato all’estero,
Corriere Tributario,2006, n. 12, p. 925;
Falsitta G., Manuale di diritto tributario Parte generale, Padova , 2005;
Galli C., Italy – Individual taxation, in IBFD database – country analyses, banca dati on line
consultabile su internet all’indirizzo www.ibfd.org aggiornato al 2007;
Katsushima T., Harmful Tax competition, Intertax vol.27, 1999, p.396;
Lupi R., Diritto tributario Parte speciale, Milano, 2005;
Marchetti F., Tassazione dei redditi di lavoro dipendente all’estero, intervento all’incontro di studio del
18-19 Maggio, Milano, 2006;
Melis G., La nozione di residenza fiscale delle persone fisiche nell’ordinamento tributario italiano, in Rass.
trib., 1995, pag. 1034;
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Piazza M., Guida alla fiscalità internazionale: tassazione dei redditi prodotti in Italia e all’estero, convenzioni
internazionali contro le doppie imposizioni, Milano, 2004;
Pizzi D., Adempimenti contributivi delle aziende operanti all’estero, intervento all’incontro di studio del
18-19 Maggio, Milano, 2006;
Strafile M., La normativa internazionale di sicurezza sociale, intervento all’incontro di studio del 19
maggio, Milano, 2006;
Urbani P., I redditi di lavoro dipendente prestato all’estero, Fisco Oggi, Rivista telematica, 15
Aprile 2004.
