Italy - Response to BEPS
Italy - Response to BEPS
The Italian tax authorities view the completion of the final OECD BEPS reports as a goal achieved with their active participation. This has contributed to perceptions that the BEPS proposals will not greatly affect Italian tax laws, regulations and the tax environment since many BEPS recommendations were already expected. In reality, the OECD BEPS project is spurring a certain degree of change. It could also prompt the Italian tax authorities to conform their approach more closely with the BEPS recommendations, to the benefit of the Italian tax system and Italian taxpayers alike.
The most immediate proof that the Italian tax environment is undergoing change is the implementation of CbyC reporting, which is based entirely on the OECD recommendations on BEPS Action 13. As required by a first set of implementing measures issued in February 2017, CbyC reports should disclose the international company’s revenues, gross profit, and paid and accrued taxes by country, together with additional indicators of economic activities performed.
In line with the OECD recommendations, the first CbyC filings will be for FY 2016. Under an initial set of rules issued in February 2017, these filings are due within 12 months of the end of the corporate year after an election is filed with theannual tax return.
Italy’s CbyC reporting obligation applies to:
- Italian tax residents that:
- are the ultimate parent companies of a multinational group (based on control)
- are required by law to file group consolidated financial statements
- had consolidated turnover in the preceding FY of at least EUR750 million, and
- are not controlled by other than individual persons.
- Italian resident companies controlled by foreign international companies that are required by law to file group consolidated financial statements in a state that:
- has not implemented CbyC reporting
- has no qualifying competent authority agreement to exchange CbyC reports with Italy, or
- fails to meet its obligation to exchange CbyC reports.
Sanctions ranging from EUR10,000 to EUR50,000 may apply where CbyC reports are not filed or are incomplete or untrue.
The OECD BEPS project should not immediately affect Italian tax laws in the area of digital economy but not for lack of trying on the Italian government’s part. Prompted by pressure from the media and the public, the Italian government has repeatedly introduced proposals that aim to ensure digital companies pay their ‘fair share’.
Some of these proposals, which are enacted but not yet in force, disregard the OECD’s BEPS work, contributing to an uncertain and uncoordinated environment.
For example, similar to rules in place targeting online gambling businesses, a September 2016 proposal disdains international tax law principles and unilaterally advances new nexus concepts. The proposal introduces the definition a “hidden PE”, which would exist, regardless of any physical presence in Italy, where a non-resident enterprise carries out more than 500 digital transactions and generates revenue of more than EUR1 million over a 6-month period.
Also, in a measure not restricted to the digital economy, a new law enacted in FY 2017 provides that foreign entitiesexceeding EUR1 billion in consolidated revenues and sales revenue in Italy of EUR50 million annually (together with related Italian entities) may elect into a special form of cooperative compliance, allowing it to disclose any PE in Italy and obtain favorable treatment in terms of penalties and criminal infringements.
It is hoped that such unilateral initiatives will be dropped definitively in favor of initiatives coordinated with the EU or OECD.
The Italian tax authorities were challenging commissionaire structures and artificially fragmented activities (Action 7) well before the OECD’s BEPS project began, so Italian tax law should not need to be amended for this purpose.
Considering the success of the Italian tax authorities in using agency PE assessments and the OECD BEPS project’s emphasis on expanding the factors that create PEs, the Italian tax authorities (and courts) may be less inclined to embrace extreme interpretations. Among others, these extreme interpretations include the concept that merely attending a negotiation meeting is deemed equivalent to the authority to conclude contracts in a dependent agency environment, and stretching of the concept of ‘at disposal of’ for fixed PEs.
While legislative change may not be strictly needed, an approach to PEs that is more consistent with the OECD and EU proposals could benefit the Italian tax system and help revitalize inbound investment.
Italy’s optional patent box regime, introduced in the 2015 Budget Law, substantially complies with the OECD Action 5 principles, except that it also covers trademarks and knowhow. A new decree removed trademarks from the list of qualifying intangible assets, as of FY 2017. However, the list still includes know-how, so the regime does not completely align with the OECD.
Italy’s transfer pricing legislation complies with the OECD guidelines and allows for optional documentation, which may offer penalty protection in the event of an audit.
A recent law decree amended the transfer pricing legislation by replacing the reference to ‘normal value’ with the OECD’s ‘at arm’s length’ value (i.e. conditions and prices that would have been agreed between independent persons operating at arm’s length and in comparable circumstances).
Italy was a member of the ad hoc group that developed the OECD Multilateral Instrument. Italy signed the agreement on 7 June 2017, applying it to 84 out of its 94 tax treaties in force.Italy’s main positions on signing the instrument are as follows:
- Neutralize effect of hybrid mismatch arrangements (Action 2): Italy opted out of Article 4 of the Multilateral Instrument on dual resident entities and Article 3 on transparent entities.
- Prevent treaty abuse (Action 6): Italy adopted the principal purpose test, and many of Italy’s tax treaties already include a principal purpose test rule as described in Article 7(2).
- Prevent artificial avoidance of permanent establishment status (Action 7): Regarding the amended PE definition for dependent agents, Italy reserves the right, for the entirety of Article 12, to not have the new definition to apply to its covered tax agreements. By contrast, for preparatory or auxiliary activities (Article 13), Italy adopted Option A (i.e. listed activities are not per se preparatory or auxiliary and such character must be proved) and applied the anti-fragmentation rule. Italy also opted out of the clause preventing the split-up of contracts (Article 14).
- Make dispute resolution mechanisms more effective (Action 14): International tax rulings and MAPs are already part of the Italian tax system. Under Italian domestic law, as of 2017, corresponding tax adjustments resulting in lower taxable income in Italy apply not only after the conclusion of a MAP but also following audits carried out through international cooperation. Subject to a specific application by the taxpayer, corresponding tax adjustments also apply following a final transfer pricing adjustment, compliant with the arm’s length principle, made in a foreign country with which Italy concluded a taxtreaty allowing for adequate exchange of information. TheItalian tax authorities will approve specific procedural rules in the future. For purposes of the Multilateral Instrument, Italy has adopted the mandatory binding arbitration procedure (Articles 18 and 19).
EU Anti–Tax Avoidance Directive
The ATA 1 Directive5 compels EU member states to implement certain minimum standards in compliance with certain BEPS recommendations. Again, the Italian government claims the country’s tax system largely complies with most of these standards already, as follows:
- Interest deductibility: Deductions for interest expense are already limited to 30 percent of a company’s earnings before income taxes, depreciation and amortization (EBITDA). The ATA 1 Directive provides more relaxed rules by which the borrower can prove that its own equity-tototal-assets ratio is equal to or greater than that of its corporate group. The directive also allows full deduction up to EUR1 million and puts no limits on third-party borrowings.
- Exit taxation: The Italian tax system has incorporated the principles set out in the National Grid Indus case for years. The ATA 1 Directive extends the deferred exit tax payment to transfers of assets to and from a PE/headquarters company and shortens the deferral period to 5 years, compared to the 6 years provided in current Italian tax law
- GAAR: Italy’s GAAR has been in effect since 1 October 2015.
- Controlled foreign companies: Italian tax law related to CFCs is aligned with the ATA 1 Directive, except that Italian law uses the foreign nominal tax rate as a parameter to identify the CFC (the directive refers to ‘actual corporate tax’ paid abroad) and is tighter in some cases (i.e. within the EEA and for financial undertakings). The concept of ‘genuine arrangements’ is also interpreted differently, with the Italian tax authorities referring to definition set out in the European Court of Justice judgment in Cadbury-Schweppes.
- Hybrids: Italy has implemented anti-hybrid rules in line with ATA 1 Directive (as amended by ATA 2), albeit partially and only for hybrid instruments (not entities). As of 2016, income paid by an EU subsidiary that fulfills the conditions of the Parent-Subsidiary Directive to an Italian parent is 95 percent exempt for the amount that is not deductible from the taxable income of the subsidiary. The amount that the foreign payer cannot deduct is subject to tax in Italy (previously, the 95 percent exemption applied only if the income was fully non-deductible to the payer).
In short, the implementation of the OECD BEPS Action Plan and EU ATA Directive is not likely to bring many brand new concepts to the Italian tax system. Nevertheless, these implementations give Italian tax authorities the opportunity to initiate a ‘new normal’ — by abandoning previous aggressive positions that may impede the Italian economy’scompetitiveness.
5 EU Council directive 2016/1174 of 12 July 2016.
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