By Giuseppe M. Giacomini November 2009
European Law and Italy s Tax Shield Giuseppe M. Giacomini November 2009
European Policy Forum 2009 All rights are reserved. ISBN 978-1-903850-33-6 Published by: European Policy Forum 49 Whitehall London SW1A 2BX Tel: 020 3174 3197 Fax: 020 3137 2040 info@epfltd.org www.epfltd.org
Foreword At first sight the announcement of a tax amnesty may seem to be unmitigated good news. Those whose affairs needed to be regularised have an opportunity and incentive to do so. The tax jurisdiction concerned may receive a revenue boost. Confidentiality is promised to beneficiaries of the amnesty. Yet a moment's further consideration suggests that tax amnesties bring with them many complications and problems. This is specially the case when they have the potential to disrupt the level playing field of taxation which is carefully agreed across a number of states, such as VAT in the European Union. There one member state going it alone and keeping the details confidential from the European Commission may seriously disrupt the tax system across the EU. The recent controversial announcement of a tax amnesty in Italy with far reaching provisions raises exactly these issues. European Policy Forum has asked Advocate Giuseppe Giacomini, a lawyer well versed in European and Italian law in these fields, to examine the position. His report shows that an amnesty which at first sight may seem benevolent may in fact cause serious problems for Italy's European partners and her neighbours as well as for the Italian government itself. As long ago as 2004 the European Commission asked Italy to desist from amnesty measures concerning VAT, considering that a blanket and indiscriminate renunciation of VAT controls and the collection of sums due undermined the function of the harmonised VAT system and with it the proper collection of Community own resources. Similarly the Commission in 2007 took action against Portugal. It determined that the Portuguese tax amnesty of 2005 did not respect the free movement of capital since it discriminated in favour of investments in Portuguese government bonds. The Commission said that this feature of the amnesty constituted a restriction on the free movement of capital guaranteed by Article 56 of the Treaty. The European Commission is rightly vigilant in other cases where approaches to tax policy distort the single market. It has taken action against Finland and Denmark in respect of different tax rates applying to resident and non-resident persons. In those countries domestic pension funds have been taxed at a lower effective rate than non resident investors on company dividends. A tax amnesty may in practice mean that companies controlled by beneficiaries of the amnesty have been placed in an unfairly advantageous position vis a vis their competitors elsewhere in Page 1
the EU through a form of state aid which has not been notified to or authorised by the European Commission, violating articles 87-89 of the Treaty. Tax-related measures which favour companies in one member state at the expense of others are currently the proper subject of Commission complaint elsewhere. It was announced in October 2009 that Spain has agreed to phase out arrangements that permitted tax advantages in favour of Spanish companies investing elsewhere. The EU Competition Commissioner Neelie Kroes commented I welcome the definitive abolition of these long-standing tax incentives, which seriously distort trade in the Single Market by granting unfair advantages to Spanish companies for their investments abroad. In the same spirit the European Commission has recently moved to end discrimination against foreign residents where the complexities and obscurities of domestic withholding taxes mean that investors in practice forego refunds or lower tax rates to which they are entitled. Internal Market Commissioner Charlie McCreevy is on record as saying that "if we are serious about promoting cross-border investments in securities in the internal market, member states will have to simplify their withholding tax relief procedures so that foreign investors receive any tax refunds to which they are entitled more quickly and so that tax rules do not hinder financial investors from getting involved in managing such cross-border investments". It is clear therefore that the European Commission has a consistent approach to a market with a level playing field clear from distortions of rules or procedures. Amnesties provide a particular likelihood, with their suspension of existing rules, that Community law could be infringed and the level playing field could be damaged. This should make those considering them especially careful to stick to the rules, follow existing case law and seek guidance from experts in European law. Advocate Giacomini's scholarship and expertise provides just such an example of advice which should have been taken before rather than after legislating. One of the key problems is that an amnesty, because of its essentially discriminatory nature, is likely to be unfair to other parties. A study from the International Monetary Fund merits attention in this connection. 1 Looking at the economic and political determinants of tax amnesties in states of the USA, Eric Le Bogne concludes that voters saw such amnesties as unfair and punished governors introducing them at the polls: "Tax amnesty programs are perceived by voters as 'unfair' to them since they reward tax evaders with a lower effective rate than that of law-abiding tax payers (thereby breaking horizontal equity)... state governors who ran for another term but lost their re-election bids were more than twice as likely to offer 1 Economic & Political Determinants of Tax Amnesties in the US States, IMF Working Paper 06/222, 2006 Page 2
a tax amnesty during their election years". The same research suggests both that it is states with high tax levels which are more likely to initiate a tax amnesty and that amnesties are more likely to be declared when a state's indebtedness is growing. Countries with high taxes but serious fiscal deficits may be tempted in current conditions to reach for the apparently attractive technique of a tax amnesty. This study, however, clearly demonstrates the need for caution. Amnesties can seriously cut across Europe's level playing field, break Community law, and discomfit and disadvantage other states. They may also generate a profound sense of unfairness among taxpayers, with unpredictable but potentially negative consequences for legislators. Let us hope that these lessons are learned in the debate which has been triggered by the latest Italian amnesty. Graham Mather President, European Policy Forum and former Member of the European Parliament November 2009 Page 3
Author Biography Giuseppe Giacomini was born in Genoa on 22/09/1948 and has been registered in the Lawyers' Register of the Court of Genoa district Bar Association since 1975. The interests and professional expertise of Giuseppe Giacomini are centred on penal law, particularly with reference to areas covering taxation, corporate, environmental and customs matters, as well as community law, which he has been cultivating for twenty years now. Giuseppe Giacomini has made numerous and lengthy trips to France, England, Switzerland, Belgium and the United States for study and work, beyond that in the Popular Republic of China. Over the last two years, his firm has been engaged in proceedings on charges of infringement of Community law before the European Commission relevant to: - failure of the Italian State to acknowledge Directive 1999/5/CE; - hindrance to free supply of teaching services, to right of establishment, as well as failure to recognize educational qualifications by Italy; - hindrance to free supply of services and free circulation of goods in the sphere of maritime transport by Spain; - imposition of a system declared by the Court of Justice as being incompatible with the free supply of services in the sphere of maritime transport by the Italy. The most recent case is the antitrust case (2009/C 131/13) regarding the Commission proceedings against the International Association of Classification Societies Limited ( IACS ). Page 4
Why fundamental aspects of the new Italian tax amnesty law (the so called Tax Shield ) are not compliant with the relevant EU legislation on VAT, State aids and money laundering. Giuseppe M. Giacomini The Italian Government's Law Decree 103/09 (amending Law 102/09) was recently converted into Law n 141/09 2[1]. Thus the Italian legislature has provided for a new tax amnesty plan, the so called Scudo Fiscale ( Tax Shield ) granted to the Italian resident tax payers. This is Italy's third 3[2] tax amnesty for undeclared funds illegally held offshore in only eight years. It does not only provide anonymity for anyone 4[3] who repatriates such undeclared funds, but it also provides immunity from the offences of false accounting and tax evasion and so on, relating to these funds 5[4]. Under this special legislation for anew amnesty, Italian residents - individuals and partnerships 6[5] - holding savings and other assets abroad on 31 st of December 2008 7[6], who are in breach of the obligation to such assets in their yearly tax returns, are offered the opportunity of regularising their position with the Italian Tax Administration by filing a confidential return, via a qualified intermediary, and paying a 5% tax over the total amount of the assets being regularised. With regard to the assets located within the European Union (or within the European Economic Space EES for those countries that activated exchange of information for tax purposes), the tax payer is given the choice between a simple regularisation (keeping the 2[1] As interpreted by the Ministry of the Economy through two circulars - n. 43/E dated 10/10/09 e n. 74/99 protocol dated 12/10/09. 3[2] The new amnesty plan ( Scudo Fiscale, or Tax Shield ) is similar to those already launched in 2001 and 2002. 4[3] Those eligible for the new amnesty are individuals, non-commercial entities, simple partnerships and associations treated as simple partnerships for tax purposes (per Article 5 of the Italian Tax Code), and which may be considered resident in Italy for tax purposes. 5[4] These crimes include issuing false invoices to falsify tax documents, making false tax statements, falsifying company statements, and falsifying various accounting documents. 6[5] Even through under names, or trustee. Page 5
asset abroad) and a repatriation of those assets. For assets located in any country that is not part of the European Union or the EES (in the majority of the cases), the applicable rule states that all assets must be repatriated. Some important issues arise from this legislation as follows: 1. The Tax Shield covers all illicit activities of which the applicant wishes to have assessed without any historic time limit and up to and end date of 31 st December 2008. No penalties may be applied for tax undeclared during that period and criminal offences such as false accounting and failing to file tax returns or submitting false returns cannot be punished. 2. Participation in the tax amnesty gives the applicant anonymity in relation to any Italian administrative, fiscal or judicial authority. 3. Once the process is completed through the payment of the tax levied on the asset or on money repatriated or regularized the procedure provides fiscal and criminal immunity even for the criminal offences which the applicant could have committed with the aim to realize a profit and/or to maintain related assets out of Italian jurisdiction. This aspect is critical when such activities have been realized by shareholders or managers of a company, those individuals are the applicants of the procedure in question and, at the same time, they are the beneficial owners of the company or the partnership. In this case the amnesty applies to the activities of the company as well as to those of the individual applicants. In this regard, the new Italian law provides that - subject to compliance with procedural requirements - some criminal offences shall not be punishable: i.e. several offences connected to tax returns (e.g., making false financial statements both in term of income taxes and VAT) as provided by Italian law 74/2000; several company offences (articles 2621, 2622 and 2623 8[7] of the Italian Civil Code) and some crimes which are punished by the Italian Penal Code (artt. 482, 483, 484, 485, 489, 490, 491bis and 492). 7[6] Capital or assets that have been purchased abroad in 2009 do not qualify for the amnesty. Page 6
4. Although tax payers remain notionally liable for money laundering, this crime is unlikely to trigger prosecutions as a result of (i) the anonymity granted to the applicant and (ii) the impossibility of ascertaining the nature and provenance of the repatriated (or regularised ) assets. This would render investigation impossible in the framework of a common action taken by the Italian or European Authorities. Giving notice to the Authorities is, in fact, not possible for the Financial Intermediary who takes care of the amnesty procedure in the interest of the anonymous applicant. This is the case even if the origin of the assets is unclear, when such a Financial Intermediary would normally be obliged to file a report according to the EU (and Italian) anti money laundering legislation. Having set out this preliminary summary of facts, we need to clarify a few crucial points having regard to the relevant EU legislation. These laws must be respected in full by a Member State whenever a specific sector falls under an exclusive (or even shared) EU competence. It is common ground that the EU Commission is the sole authority in charge for determining the full compliance of a Member State s legislation with the legislation of the European Union. The Commission, as guardian of the Treaties, is also given the power to ensure the correct application of the EU legal principles. It frequently launches infringement procedures against Member States whose obligations toward the Union have not been fully met. The European Commission may institute such an infringement procedure against a Member State on its own initiative or on the initiative of a third person, for alleged non-compliance with the Community law. In the infringement procedure, the Commission determines the degree and the seriousness of the non-compliance and the responsibility of the relevant Member State to eliminate the noncompliance prior to bringing proceedings before the Court of Justice of the European Communities 9[8]. If the non-compliance is not corrected, legal proceedings are instituted before the Court of Justice of the European Communities: the Court ensures the respect and the 8[7] The latter is already abolished by the Italian legislator since 2005. 9[8] The infringement procedure is regulated by Article 226 of the Treaty establishing the European Community (EC Treaty). "If the Commission considers that a Member State has failed to fulfil an obligation under this Treaty, it shall deliver a reasoned opinion on the matter after giving the State concerned the opportunity to submit its observations. If the State concerned does not comply with the opinion within the period laid down by the Commission, the latter may bring the matter before the Court of Justice". Page 7
uniform application of the European Union law in all its Member States and also by the same Member State. Should the Court of Justice determine an infringement, the consequences for the Italian Government and for those who applied for the Tax Shield would be very serious. It is also worth noting that in a very similar case 10[9] the Court of Justice dealt with an earlier amnesty granted by the Italian government in 2002to people with unpaid VAT. It came as no surprise when the Court, in its judgements dated 17 th of July 2008 and 11 th of December 2008, confirmed that this kind of amnesty was incompatible with the regulatory system governing VAT, where competence is given only to the EU legislators. On similar grounds (and with a much stronger impact on Italian tax payers) there have been decisions issued by the Italian Supreme Court ( Corte di Cassazione 11 [10]) which enforced the principles of this ECJ decision and overruled amnesty assessments made by the Italian Inland revenue offices. The result was disastrous since in such circumstances tax payers can not enforce their legitimate expectation and they will be forced to pay any sanctions which would have been due, and further interest, as the amnesty Was void ab initio. As we noted earlier, the Commission, in its role of guardian of the EC Treaty, has the option to commence infringement proceedings, under Article 226 of the EC Treaty, against a Member State, which - in the eyes of the Commission - infringes the Community legislation. Moreover, any person or body may file a complaint before the Commission against a Member State, in respect of any national legislation or administrative practice which is considered incompatible with the EU law. The Commission then decides whether or not further action/sanctions should be taken/applied as a consequence of the complaint, following a well-defined infringement procedure. 10[9] Case C-174/07 European Commission v. Italian Republic. See also Case C-132/06. 11 [10] Corte di Cassazione, judgements dated 18 th of September 2009 in cases n. 20068 and 20069. Page 8
When an infringement proceeding is pursued, the Commission sends to the Member State concerned an initial legal assessment through a letter of formal notice and invites the Member State to present its views regarding the facts. If no satisfactory reply to that letter of formal notice is received, the Commission will issue a reasoned opinion expressing its view that an infringement exists and asks the Member State to remove it within a specified time limit. If the reply given by the State Member is unsatisfactory, the Commission may then refer the case to the Court of Justice. Member States are required to take the necessary measures to comply with a judgment of the Court of Justice establishing an infringement. In the light of the above, a formal complaint is being presented to the EU Commission (to the Directorate General for Competition State aids, to the Directorate-General Taxation and Customs Union and to Directorate-General Internal Market).. The complaint analyzes the various ways by which Italian law n 141/09 potentially infringes EU principles of law Some of the key issues are as follows: 1. The new Italian Tax Shield clearly allows the Italian resident tax payers to evade their commitments towards the due payment of tax income and VAT. In no case could it be legitimate for Italy to allow, on a single and non coordinated basis, evasion of payment of the VAT which is in part due to the EU. and which is an internal tax of the common market. When the EU has an exclusive competence, Member States are prohibited to make their own laws concerning that area. If the EU has a shared competence, both the EU and the Member States may make laws, but EU law has primacy over any adopted national law. 2. From the point of view of the State aids and competition legislation, the Italian national legislation which we are considering also falls foul of the rules. Page 9
Even if a tax is usually levied within the territory of each Member State with a different tax burden for similar goods and services, each Member State can not unilaterally alter the original authorized VAT structure, allowing an individual (personally or through a partnership or a company) to avoid the burden of VAT. To do so would be in a stark contrast with the State aid principles as provided by articles 87-88-89 of the EU Treaty. The same principle also applies to the benefit arising from the amnesty on the income tax. The effect of Italian law 106/09 would seriously harm competition between beneficiaries of the Tax Shield and other people who are not entitled to receive the same benefit (because they did not transfer abroad money or other assets as profit of a sheltered activity or simply because they fully complied with the applicable tax regulation). This issue appears even stronger when it is considered that full anonymity is granted to every applicant (see also point 3 hereunder). 3. The anonymity is clearly not an essential requisite 12[1 1 ] for an amnesty on a tax matter (as in other similar Tax Shields provided by other Member State). There is no doubt that it represents a tool to attract a larger number of applicants making the Tax Shield even more attractive. Anonymity of the applicant makes any further control virtually impossible by the EU authorities which may be seriously interested in verifying if the infringement of the EU legislation - which is allowed by the Italian law has really happened. 4. In addition it should be noted that the new Italian Tax Shield raises a number of issues regarding the potential infringement of the obligation taken by the Italian Government regarding the matter of the money laundering governed by the EU Directive and Regulation. 12[1 1 ] Someone has noted that in similar amnesties in the United States and Britain, the identity of the tax payers is not kept secret and beneficiaries are obliged to pay. Page 10
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