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74 • Fifty Shades of Tax Dodging Italy “Gone are the days of thinking that those who consider themselves cunning will prevail.” Matteo Renzi, Italian Prime Minister, November 2014 731 General overview Over the last 12 months tax issues have been high on the political agenda in Italy. In March 2014, the Italian government got a legislative mandate from the Parliament to reform the taxation system. 732 Legislation on tax expenditure, sanctions, patent boxes and international tax rulings, among others, has since been reviewed. At the same time, in July 2015 Italian Prime Minister Matteo Renzi announced what he called a “Copernican Revolution” for the Italian tax system, in which the country’s taxes will be reduced over the next three years by €45 billion – a goal that is difficult to meet without major expenditure cuts against the country’s still high budget deficit. 733 Italian prosecutors and tax authorities have continued to investigate relevant cases of tax avoidance, including cases widely reported in national media and involving well-known individuals (such as singers Umberto Tozzi 734 and Gino Paoli 735 ). Entrepreneur Flavio Briatore 736 was this year sentenced to 23 months probation for a €3.6 million tax scam involving his super yacht – he says he will appeal – while Italy’s World Cup winning football captain Fabio Cannavaro 737 has had property seized while the authorities investigate his tax affairs. Major corporations, including companies in the football and IT sectors, have been subject to investigation while in March 2015, Italian prosecutors reportedly wrapped up investigations into €879 million of taxes thought to be saved by Apple in Italy by structuring its investment through Ireland, a move that could open up for a formal court case. 738 More generally, the Italian government claimed that its action against tax dodging managed to detect €14.2 billion in 2014. 739 Nevertheless it should be pointed out that very few people are imprisoned in Italy for economic and financial crimes, including tax crimes. In 2011, just 156 people were jailed for these crimes in Italy, which is 0.4% of the population, compared to the average of the 4.1% in Europe. 740 Media attention on tax dodging issues further increased due to the SwissLeaks and LuxLeaks scandals. Almost 7,500 clients associated with Italy were revealed in the SwissLeaks database. Well-known entrepreneurs, such as Flavio Briatore and Valentino Garavani (better known just as Valentino), figured prominently in the list and Italy ranked seventh among the countries with the largest dollar amount in terms of files. 741 Dozens of major Italian companies and banks and financial intermediaries were also among the companies exposed in the LuxLeaks documents. 742 While domestic taxation has been the focus of much attention in Italy, there has been little attention paid by the Italian media and the public to tax justice and development issues, including key international processes such as the UN Financing for Development conference. Tax policies A working paper by Istat, Italy’s National Statistical Office, has found that the tax burden on businesses in Italy fell by 9.9 per cent in 2014, providing savings to businesses of €2.6 billion. Istat found that, while 57.3 per cent of companies benefited from the lower tax burden, the government’s measures had little effect on reducing taxes for commercial businesses and small- and medium-sized enterprises, for which tax burdens are said to remain relatively high. 743 Changes in 2015 in the taxation law have significantly limited the definition of tax crimes by raising the threshold below which tax evasion is not regarded as a crime any longer. According to the government such a troubling development is necessary to better align with the principle of proportionality in punishment. 744 More troubling still, in April 2015 new legislation on tax avoidance was introduced by the government – and approved by the Parliament in June 2015. It defines tax avoidance as an “abuse of right”, which means it can only give rise to administrative sanctions. 745 This is a change compared to previously, where certain cases of tax avoidance could be a criminal offence in Italy. Furthermore, the statute of limitations concerning cases of alleged tax avoidance has been shortened, raising concerns that it will not be possible to bring to justice those behind a number of past violations. The government strongly supported these changes, arguing that it would strengthen the rule of law. The decision triggered several critiques by opposition forces as well as leading magistrates in the country. 746
Fifty Shades of Tax Dodging • 75 Italy has a so-called black list of tax havens, and to discourage trade with these it does not recognise costs related to transfers with these jurisdictions as deductible. 747 However, over the course of this year, this tool against companies’ tax dodging has come under increasing pressure. First, the government introduced a draft decree in 2015 – approved by the Parliament in June 748 – which seeks to soften this approach by limiting the non-deductible part of the cost of the transfer to that which is above any market price. 749 Second, after signing information exchange agreements, a long list of problematic jurisdictions have been removed from Italy’s blacklist in 2015, including Switzerland, Guernsey, Isle of Man, Monaco and Mauritius. 750 At the end of 2014 the government introduced a voluntary disclosure procedure to incentivise capital repatriation by 30 September 2015. Several questions still remain about the effectiveness and adequacy of this proposal given that only a small number of requests have been filed so far. 751 Italy provides tax incentives for research and development (R&D), which primarily consists of tax credits and accelerated depreciation, benefiting both small- and medium-sized enterprises as well as large corporations. Overall, the support as a percentage of Gross Domestic Product (GDP) is lower than in most other EU countries. 752 It should be noted that, in a recent review covering 12 EU Member States, Italy is by far the country with largest reduction in government revenue through tax incentives (tax expenditure) as a share of GDP (8.1%). The bulk of this is related to tax expenditures from personal income tax and value added tax (VAT), while less than 1 percentage point is from corporate income taxation. 753 Tax expenditures have been reviewed by the government at the end of 2014 and further adjustments are in the making to comply with the annual budget law. Tax rulings A unilateral Advance Pricing Agreement (APA) procedure is provided for by Italian law since 2003. 754 According to the European Commission, Italy had 47 APAs in force at the end of 2013, with 18 of these granted alone in 2013, indicating an increase in use. 755 In April 2015, the Italian government issued an implementing decree of its “investment package”, including a review of the international tax ruling legislation in order to allow ad hoc and ex-ante agreements between foreign companies willing to invest in Italy and the government on specific investments above €30 million. 756 The decree “for the growth and internationalisation of companies” was approved by the Parliament in June 2015. 757 The new rulings will help to give certainty to foreign investors by assuring them that they will be able to avoid tax audits and challenges by tax authorities and, according to a tax advisor at a major international law firm, they could become “a very interesting means of enhancing the attractiveness of investing in Italy.” 758 The decree also covers new expanded opportunities for multinational companies already based in Italy on a range of issues, including the use of tax treaties. It is a paradox that Italian authorities are on the one hand quite active in challenging multinational companies on their tax payments, while at the same time promoting this new regulation, which limits the possibility of the tax administration to challenge these in the future. Special Purpose Entities (SPEs) Trusts are hardly incorporated in Italy, given that specific legislation to establish trusts does not exist and only international conventions apply in that regard, as well as fiscal procedures by the national tax authority. 759 Special Purpose Entities (SPEs) follow under the supervision of the Italian Central Bank. As a matter of fact, these entities are primarily used in securitisation operations by financial intermediaries (better known in these cases as special purpose vehicles). According to the OECD, SPEs are neither present nor significant in Italy. 760 Patent box Italy is the most recent EU member to implement a patent box, with the decree to implement the tax reductions signed in August 2015. 761 The Italian government has already aligned its practice to OECD Base Erosion and Profit Shifting (BEPS) requirements under action point 5 (the so-called “modified nexus approach”). 762 In March 2015, the government introduced a new law on the matter. 763 New provisions allow up to 50 per cent of income related to intellectual property (IP) to be excluded for five years from the tax basis if a tax treaty is in place between Italy and the company’s home country. 764 This could make it significantly easier for multinational companies to lower their tax bill in Italy and abroad and represents a worrying development. Tax treaties Italy has a relatively high number of tax treaties with developing countries (49). 765 The Ministry of Finance reports that Italy’s treaties are based primarily on the OECD model, but that the UN model is another source of reference. 766 The latest treaty with a developing country was entered into with the Republic of Congo in mid-2014. 767 Italy’s oil giant ENI is a major investor in the Congo and, during a state visit from Prime Minister Renzi one month after the signing of the tax treaty, he oversaw the signing of a new expansion agreement between ENI and the government of the Congo. 768
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Contents Glossary 4 Executive summa
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