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 in general since many BEPS recommendations were already expected. In reality, the OECD BEPS project is spurring a certain degree of change. It could also give reason for 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.

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Country-by-country reporting

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 implemented in Italy by Budget Law 2016, which was approved in December 2015, 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 in respect of FY 2016 and due in 2017, probably by 30 September, when companies’ 2016 income tax returns are due.

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.

 

Digital economy

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’, but these proposals have disregarded the OECD’s BEPS work.

In 2013, measures were proposed to attract more revenues in Italy from marketing services promoting web advertising spaces sold to local customers (so-called ‘Google tax’). Eventually, a new PE concept and a conflicting VAT regime were dropped: Only new transfer pricing rules survived, providing that remuneration of such marketing services not be done at cost-plus but according to alternative transfer pricing methodologies.

A more comprehensive proposal to tax online transactions, introduced in early 2015, would have added a definition of ‘virtual PE’, triggered when a non-resident runs online activities continuously for 6 months or more and generates Italian outbound payments of more than EUR5 million in a year.

A 25 percent withholding tax was also proposed on paymentsmade during the period between the set-up and taxation of anItalian PE. The Italian government promised to pass the law in2017 on several occasions, but its silence on the matter overthe last year or so gives reason to suspect the plan may be atleast delayed.

The government’s change in direction may stem from the Italian tax authorities’ success in winning a EUR318 million tax settlement from a major global technology company. PE issues reportedly drove the assessment, and Italy’s criminal law provisions, which apply when omitted tax filings represent more than EUR50,000 in unpaid tax, were also a factor. The Italian tax authorities are rumored to be taking this approach with other global technology companies doing business in Italy.

There seems to be little reason to introduce specific digital tax measures if the old agency PE concept, reinforced by criminal law, remains so effective. It is hoped that such unilateral initiatives will be dropped definitively in favor of initiatives coordinated with the EU or OECD.

Permanent establishments

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’ with respect to 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.

EU Anti-Tax Avoidance Directive

The EU Council’s proposed ATA Directive compels EU member states to implement certain minimum standards incompliance 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 expenseare already limited to 30 percent of a company’s earnings before income taxes, depreciation and amortization(EBITDA). The ATA Directive provides more relaxed rules by which the borrower can prove that its own equity-to-total-assets ratio is equal to or greater than that of its corporate group, that allow full deduction up to EUR1million and that put 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 Directive extends the deferred exit tax paymentto transfers of assets to and from a PE/headquarter company and shortens the deferral period to 5 years,compared to the 10 years provided in current Italian tax law.
  • Switchover clause: Italy already denies a participation exemption on dividend income and capital gains fromdisposal of shares, and foreign branch exemption isdenied if the level of taxation in the source jurisdiction is substantially lower (less than 50 percent) than the level oftaxation in Italy. In some cases, the ATA Directive’s indirect tax credit mechanism may be more generous than the current Italian one.
  • GAAR: Italy’s GAAR is already implemented, in effectsince 1 October 2015.
  • Controlled foreign companies: Italian tax law relatedto controlled foreign companies is aligned with the ATADirective — and tighter in certain cases (i.e. within theEEA).
  • Hybrids: Italy has implemented anti-hybrid rules in linewith the ATA Directive, albeit partially and only for hybridinstruments (not entities).

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's competitiveness.

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