19 August 2020

Italy implements EU directive to fight aggressive tax planning


Giorgio Vaselli
Special Counsel | IT

On 30 July 2020, Italy implemented new legislation to target aggressive tax planning.

The new rules put into effect the sixth directive on administrative cooperation – “DAC 6” – an EU Directive on the mandatory exchange of information in the field of taxation in relation to reportable cross-border arrangements. DAC 6 is the ultimate mechanism of disclosure of tax information designed at EU level to substantially impact the relations between promoters and advisors of qualified cross border arrangements with their clients.

The new Italian rules are effective from 26 August 2020, and promoters, advisors and taxpayers are required to promptly review their business and investments under the DAC 6 lens.

Background

DAC 6 is a mechanism which strengthens the existing EU legal framework of exchange of information to tackle aggressive tax planning structures aimed at shifting profits to low tax jurisdictions.

More specifically, DAC 6 addresses arrangements designed to circumvent reporting under the OECD common reporting standard for automatic exchange of information on financial accounts (CRS) or aimed at providing beneficial owners with the shelter of non-transparent structures for anti-money laundering purposes (AML).

In essence, DAC 6 relies on Member States’ tax authorities’ capacity to obtain comprehensive and relevant information from intermediaries and taxpayers about potentially aggressive tax arrangements.

A two-step mechanism

DAC 6, as implemented in Italy, consists of a two-step mechanism based on which:

  • qualified intermediaries (firstly) and taxpayers (residually) are required to inform the Italian tax authorities of qualified cross-border arrangements that could potentially be used for aggressive tax planning. Special rules apply in case of a plurality of intermediaries and taxpayers, and selected qualified exemptions apply (eg in case of self-incrimination and legal privilege);
  • following the reporting, the Italian tax authorities share the same information with their peers in other Member States on a quarterly basis. The first exchange of information will take place on 30 April 2021. Selected qualified exemptions apply (eg in case of commercial, industrial or professional secret or of a commercial process, or of information the disclosure of which would be contrary to public policy).

Intermediaries and taxpayers

Intermediaries are broadly defined as any person, resident / established / incorporated / registered with a professional association (for legal, taxation or consultancy services) in Italy acting as either (i) promoters of a cross-border arrangement or (ii) advisors of the cross-border arrangement subject to a so called “reasonably be expected to know test”. Such definition includes not only financial entities already subject to reporting obligations for CRS purposes (eg banks, insurance companies, fund managers, etc.), but also intermediaries and advisors already subject to AML standard obligations (eg lawyers, notaries, accountants, etc.).

Taxpayers are broadly defined as any person, resident or established in Italy or deriving incomes sourced in Italy or carrying out an activity in Italy to whom a cross-border arrangement is made available for implementation, or who is ready to implement a reportable cross-border arrangement.

Cross border arrangement

Arrangements, schemes or projects are considered cross-border if they involve Italy and at least one other jurisdiction (EU or non-EU) in relation to:

  • residency of the participants (including double residency)
  • the activity carried out by the participants (also through a permanent establishment)
  • possible impact on CRS reporting or the identification of beneficial ownership for AML purposes

However, a cross border arrangement is reportable only if it contains one or more “hallmarks” as identified by the law (which is in line with the Directive).

What to report

Reports to the Italian tax authorities should include:

  • details of the intermediaries, taxpayers, associated enterprises (identified by significant influence or qualified shareholding) and other persons involved in the cross border arrangement
  • a description of the cross border arrangement and its hallmarks
  • start date, value and jurisdictions involved
    Such reporting obligations do not prevent or limit the Italian tax authorities from scrutinizing the cross border arrangement at hand.

Deadlines and penalties

Reports to the Italian tax authorities must occur on the following deadlines:

  • intermediaries and taxpayers are subject to a general 30 days term,
  • intermediaries are required to report marketable arrangements (ie those available for implementation for more than one taxpayer without customisation) on a quarterly basis.

However, the following exceptional terms apply:

  • end of February 2021 for cross border arrangements started between 25 June 2018 to 30 June 2020.
  • from 1 to 31 January 2021 for cross border arrangements created between 1 July 2020 to 31 December 2020.
    Intermediaries and tax payers are required to keep information and documents relating to the cross border arrangement for five years (increased to seven if reporting is omitted).

Violations of the reporting duties are subject to a penalty up to 31,500 EUR.

Hallmarks

Please click here to view the table.

International frameworks on exchange of information and tax transparency

It is noteworthy to mention that DAC 6 adds to an advanced international legal framework of administrative cooperation in the field of taxation as follows:

  • CRS provides for the automatic exchange of information on financial accounts held by non-tax residents and establishes a framework for that exchange worldwide
  • Automatic exchange of information on advance cross-border tax rulings
  • Mandatory automatic exchange of information on country-by-country reporting of multinational enterprises between tax authorities
  • Obligation on Member States to give tax authorities access to customer due diligence procedures applied by financial institutions for AML purposes

Moreover, several EU member States have implemented in their jurisdictions (or are about to implement, such as Italy) the register of ultimate beneficial owners for AML purposes relating to corporations and trusts accessible to selected public authorities and private individuals (with some limitations).

What Withers can do for you

The ongoing expansion of the legal framework on exchange of information and tax transparency within the EU and worldwide increasingly requires a technical and experienced review of business and investment schemes from an international tax and AML joint perspective.
Withers, with offices located in many key international jurisdictions, regularly advises clients on their international business and investment structures the relevant international tax implications and AML aspects.

Giorgio Vaselli Special Counsel | Milan

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