Italy's new Enabling Law for Tax Reform foreshadows positive changes to cooperative compliance program

Executive summary

On 14 August 2023 the Italian government published Law No. 111/2023 (the Enabling Law for Tax Reform or Enabling Law, dated 9 August 2023), which takes the form of a series of high-level guidelines/principles. The Enabling Law delegates the Italian Government to issue, within the next 24 months, one or more legislative decrees that would provide a series of enhancements to Italy's broader tax system,1 including enhancing Italy's existing cooperative compliance program and aligning domestic rules to international tax principles, such as the Organisation for Economic Cooperation and Development (OECD) base erosion and profit shifting (BEPS) Pillar Two provisions.

The Enabling Law aims to reduce the tax burden of corporations and individuals, improve the relationship between tax authorities and taxpayers, increase the degree of legal certainty available to taxpayers, reduce overall levels of tax litigation and ultimately deliver a tax system that the Italian government believes will be more capable of attracting and retaining foreign capital.

Part of a multiyear strategy of the Italian government (which came to power in September 2022) the Enabling Law contains 23 articles across a spectrum of tax policy and tax administration issues (see appendix of this tax alert for the title of each article). As currently drafted, the Enabling Law would represent a comprehensive reform of the Italian tax system across several areas.

The Enabling Law entered into force on 29 August 2023. From the date of entry into force, the Italian government has approximately 24 months to execute the reform through one or more Legislative Decrees (i.e., the final legislative language via which each reform element is implemented).

This Tax Alert focuses on Article 17 of the Enabling Law, which is designed in part to provide a series of enhancements to Italy's existing cooperative compliance program. Under these enhancements, taxpayers actively participating in the cooperative compliance program would be eligible to receive a range of new benefits on transactions reviewed by the Italian Revenue Agency (Agenzia delle Entrate or Agenzia) under the enhanced program scope, including significant penalty relief, a reduced statute of limitations under which the Agenzia may raise new tax assessments, simplified access to the program generally, more in-depth and frequent discussion opportunities with the tax authorities within the program and the possibility to avoid potential criminal tax penalties — except in cases of tax fraud or simulation (i.e., a step or steps within a transaction that a revenue authority deems to have been undertaken that has/have no bona fide commercial purpose but which obtain a tax benefit).

Detailed discussion

Background

Article 17 of the Enabling Law aims to increase the attractiveness of the cooperative compliance regime in a number of different ways. Italy's current cooperative compliance regime was first introduced in 2015 and is currently accessible by companies with turnover exceeding €1 billion, approximately 500 companies within the Italian economy. According to the Agenzia's public website, 93 companies currently participate in the program.2

Like similar programs available in other jurisdictions, the current cooperative compliance program aims to promote improved, ongoing cooperation between the Agenzia and taxpayers, reduce the overall number of tax disputes that occur and prevent costly, time-consuming tax litigation. Under the program, a taxpayer agrees to share information (and documentation) detailing both the components and ongoing efficacy of their Tax Control Framework (TCF), including: (i) tax and finance roles and responsibilities (including board and C-suite responsibilities), (ii) information on how the enterprise assesses the risks associated with each new transaction and (iii) the enterprises' collection of tax controls (including their review and testing). Broadly speaking (and in common with the programs of many other jurisdictions) the definitions of a Tax Control Framework applied by the Agenzia follow those set out by the OECD in its 2016 publication Building Better Tax Control Frameworks.3 Furthermore, the cooperative compliance program may cover all tax types, including transfer pricing.

Under the current program, transactions the taxpayer undertakes are subject to ongoing review and consultation with the Italian Revenue Agency, with all transactions subject to at least annual review, typically prior to filing of the enterprise's annual corporate income tax return. Admission to the program is technically possible within 120 days of applying (though, in most cases, it can take up to one year to complete the application). Participating enterprises may receive three defined benefits in addition to higher levels of tax certainty generally:

1. Fast tracking of certain tax-ruling applications (as regulated under Article 11, para 1 and para 2 of the Law No. 212/2000), with the Agenzia stating4 that a ruling decision should be granted to a program participant within 45 days of receipt of the request
2. Reduction of penalties up to 50% where a tax penalty is applied against a transaction that has been exhaustively reviewed and approved by the Agenzia within the boundaries of the program, penalties may also be applied to an amount not exceeding the minimum provided by law
   
3. No guarantees required to obtain direct or indirect tax refunds

Potential program changes and associated benefits

Under the Enabling Law, a series of enhancements would be made to the cooperative compliance program, including:

• The program entry threshold would gradually be reduced from €1 billion, with the government setting a future eligibility criterion of €100 million turnover. If this final target is achieved, the program would be available to approximately 5,000 companies within the Italian economy (i.e., around a 10-fold increase from present).

• Participating enterprises would be eligible to receive up to 100% penalty relief — but only where a transaction against which a penalty is levied has been fully communicated in advance and reviewed collaboratively and exhaustively with the Agenzia within the program boundaries and to the extent that the TCF has been certified by qualified professional(s) as outlined below (with the exclusion of tax fraud or simulation).

• Similarly, where a transaction has been reviewed during the course of an enterprises' participation in the program, the enterprise would be exempt from tax criminal prosecution arising from the filing of an unfaithful tax return, but not in the case of tax fraud or simulation.

• Participating enterprises would be eligible for at least a two-year reduction in the statute of limitations, provided that no tax fraud or simulation has been committed and to the extent that the TCF is certified by qualified professional(s). Indeed, considering that tax assessments in Italy must generally be issued by 31 December of the fifth year following the filing of the enterprise's income tax return, any tax assessment would be rendered invalid if the participating enterprise were notified three years or more from the filing of the income tax return for the fiscal year under program review.5 In contrast to many other countries, the statute of limitations for transfer pricing issues in Italy is not regulated differently and would similarly be limited to three years.

• The enhanced program would provide for the possibility of managing (i.e., collaboratively reviewing and approving) tax matters relating to tax years prior to the enterprise's admission to the regime (though the Enabling Law does not define how many prior tax years may be covered).

• Any entity within the enterprise's group in which at least one entity meets the eligibility requirements will be eligible to receive program benefits, provided the group adopts an integrated TCF managed unitarily for all companies in the group.

Note too that the revised program requires a qualified review of the enterprise's TCF to secure program participation. Although the exact nature of the qualified review is yet to be defined, it is likely that a qualified review will be defined as review by an independent body (such as a tax-services provider) and not by the program participant (including their internal audit function) themselves.

Other tax-controversy issues addressed by the Enabling Law

In addition to enhancements to the cooperative compliance program, the Enabling Law contains a series of measures that address a spectrum of other issues related to tax enforcement:

• Article 4 of the Enabling Law suggests a set of guiding principles and criteria for the revision of the Statute of Taxpayers' Rights.

• Article 19 aims to make tax litigation less time consuming and more efficient by implementing digitalization processes and improving settlement procedures for controversies pending before the Supreme Court.

• Article 20 aims to reform Italy's tax penalty system across the administrative and criminal dimensions. This reorganization would occur by improving the principle of proportionality and ensuring greater integration between the two sanctioning systems (i.e., administrative and criminal).

• Finally, the Enabling Law significantly restyles the currently enforced tax collection procedures, in addition to simplifying and speeding up tax refund procedures.

Legislative process

As noted, the Enabling Law takes the form of a series of guidelines/principles, not detailed implementing language. The internal commission from the Italian Ministry of Economy is currently creating a first draft of a Legislative Decree. Importantly, the current form of the Enabling Law means it does not need to pass back through the Italian parliamentary system (Chamber of Deputies and Senate) prior to being implemented, though the draft of the Legislative Decree must be made available to the relevant parliamentary commissions that, in turn, publish their opinion(s) within 30 days. Irrespective of the content of that opinion, the legislative decree that is consequently adopted may be moved into its final status by the Italian Prime Minister. The final implementing language of the Legislative Decree should not, however, exceed the scope of the current Enabling Law. If the legislative decree(s) is inconsistent with the principles of the Enabling Law or exceed its content, the Constitutional Court may be called upon to invalidate it.

Implications

Italy's Enabling Law is indicative of a wider push by tax authorities around the world to increase their focus on tax governance. Many national tax authorities are now introducing new tax governance programs as mandatory compliance assurance programs, new voluntary tax governance programs or within their existing cooperative compliance program(s).

Generally speaking, these programs have two objectives. The first is to encourage companies to adopt more robust tax governance approaches; the second is to allow tax authorities to more accurately rate companies in low- and "not-low" categories of tax risk, allocating their tax audit and review resources accordingly.

Within these programs, several national revenue authorities are starting to offer enhanced penalty relief, similar to Italy — and even relief from the possibility of criminal liability (though not in the case of tax fraud or simulation) if the taxpayer is able to demonstrate that it adheres to sound tax governance principles (and in the case of Italy, that the transaction or issue has been exhaustively discussed with the Agenzia within the boundaries of the cooperative compliance program). Conversely, many revenue authorities are actively communicating their increasingly heightened expectations around tax governance, noting that taxpayers have been alerted and should expect to experience more serious consequences in relation to any tax governance deficiencies.

With many national tax authorities now embracing the testing of tax governance, multinational companies should conduct a global assessment of existing programs in the markets in which they operate. They should then develop global tax governance strategies, defining how they will meet each mandatory program and identifying any voluntary programs in which they plan to participate. A global tax governance strategy should prioritize an order for participation and establish a plan for localizing any necessary roles, policies, procedures and controls. Further, companies should consider using platform-based technology tools for the central management of tax controls, including their periodic testing, remediation and documentation.

Appendix

Art. 1 Delegation to the Government for the revision of the tax system and implementation deadlines

Art. 2 General principles of national tax law

Art. 3 General principles relating to European Union and international tax law

Art. 4 Guiding principles and criteria for the revision of the Statute of Taxpayers' Rights

Art. 5 Guiding principles and criteria for the revision of the personal income tax system

Art. 6 Guiding principles and criteria for the revision of the income taxation system of companies and entities

Art. 7 Guiding principles and criteria for the revision of value added tax

Art. 8 Guiding principles and criteria for the gradual elimination of the regional tax on productive activities

Art. 9 Further principles and criteria

Art. 10 Guiding principles and criteria for the rationalization of the registration tax, inheritance tax and donations, stamp duty and other indirect taxes other than VAT

Art. 11 Guiding principles and criteria for the revision of the customs regulations

Art. 12 Guiding principles and criteria for the revision of the provisions in the field of excise duty and other indirect taxes on production and consumption

Art. 13 Guiding principles and criteria for the full implementation of regional fiscal federalism

Art. 14 Guiding principles and criteria for the revision of the tax system of municipalities, metropolitan cities and provinces

Art. 15 Guiding principles and criteria for the reorganization of existing provisions on public gaming

Art. 16 Guiding principles and criteria for the general revision of tax obligations and fulfilments in the field of excise duties and other indirect taxes on production and consumption

Art. 17 Guiding principles and criteria on the procedure for assessment, settlement and spontaneous compliance

Art. 18 Guiding principles and criteria for the revision of the national collection system

Art. 19 Guiding principles and criteria for the revision of the discipline and organization of tax litigation

Art. 20 Guiding principles and criteria for the revision of the tax, administrative and criminal penalties

Art. 21 Principles and guidelines for the reorganization of the tax system through the drafting of single texts and a tax code

Art. 22 Financial Provisions

Art. 23 Safeguard Clause

For additional information with respect to this Alert, please contact the following:

EY - Studio Legale Tributario, Italy

• Maria-Antonietta Biscozzi, Partner — Tax Policy & Controversy

• Michela Antonella Prencipe, Senior Manager — Tax Policy & Controversy

• Francesco Licenziato, Manager

Ernst & Young LLP, United States — New York

• Emiliano Zanotti, Italy Tax Desk Leader

Ernst & Young LLP, United States — Greenville, South Carolina

• Rob Thomas, Director — Tax Controversy

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.