Tax Controversy 2024 Comparisons

Tax controversies typically arise following tax assessments. Most assessments follow a tax audit, at the end of which the auditors issue a Tax Audit Report. The latter is a report of findings, delivered by the auditors to the taxpayer and to the Tax Agency, and does not qualify as an assessment. 

Generally, the Tax Administration cannot issue a tax assessment without a prior audit or formal request of information (some exceptions are provided for registration tax). A request of information may be addressed to the taxpayer and/or to third parties. 

If a specific issue arises with respect to a given fiscal year, the Tax Administration always assesses the same finding in all the fiscal years open for assessment.

With reference to multinational entities (MNEs), corporate income tax and regional tax give rise to most tax controversies, given that transfer pricing claims are the most relevant in terms of amounts and frequency. Withholding taxes and value added tax (VAT) are under the spotlight, as well as claims regarding the fictitious interposition of foreign entities. The sale and purchase of going concerns is often challenged with reference to the declared value of the transaction and to its actual nature (ie, recharacterisation of the sale of a going concern as a sale of goods and vice versa). Moreover, taxpayers are facing an extensive assessment activity aimed at recovering the Research and Development tax credit granted in the past fiscal years.

The best way to mitigate any risk of tax controversies is to manage and control tax risks responsibly. A useful tool in this respect is the right of the taxpayer to file ruling requests to the Tax Administration. The ruling request may concern:

• the interpretation and application of tax provisions when there is an objective uncertainty on their correct interpretation;
• the existence of the conditions and the assessment of the suitability of the evidence required by law for the application of specific tax regimes;
• the application of the abuse of law principle;
• the application of transfer pricing rules and the existence of a permanent establishment; 
• the tax regime of new investments in Italy (if the investment exceeds a certain threshold and determines a significant occupational impact); and
• the eligibility for the substitutive tax on the foreign income of the new residents.

The ruling must refer to actual cases and must be filed prior to the execution of the transaction (or to its impact on the tax return of the taxpayer). The Tax Administration has to reply within 90 days; rulings on transfer pricing and international matters have no deadline. 

From 2024, a fee will be charged for requesting a ruling, depending on the type of taxpayer, its income and the complexity of the case.

In addition, before submitting a ruling, “small” taxpayers will have to consult a newly instituted database that can suggest a solution to the interpretation problem based on previous rulings.

In the past years, many measures have been introduced against tax avoidance (ie, BEPS recommendations and especially the EU’s recent measures to combat tax avoidance, the “Shell Companies” Directive, anti-hybrid mismatch rules), with a consequential expansion of the Tax Administration’s operational field. While, on one hand, taxpayers are facing the complicated task of reshaping all their current structures accordingly (and potentially will not always be able to adapt on time), on the other hand, it is believed that since such measures are openly aimed at fighting aggressive tax planning, taxpayers are likely to assume a more conservative approach in carrying out their business activities. The number of tax controversies is therefore likely to reduce over time.

All tax assessments require the payment of additional taxes by the deadline for the appeal before the Tax Court. The deadline is 60 days from the serving date and is postponed by law by 90 days (or 30 days in some cases) if the taxpayer lodges an administrative settlement request. If a settlement is not reached and the taxpayer lodges an appeal, it is mandatory to execute a down payment corresponding to one-third of the assessed taxes, plus the related interest for late payment of taxes (but not the penalties). 

There are some exceptions: some registration tax assessments require the down payment of the whole amount, while the abuse of tax law claims does not require any payment pending a first-degree judgment. The taxpayer can ask the Tax Administration and the Tax Court to suspend the down payment. The above-mentioned suspension is almost never granted by the Tax Administration, unless extraordinary circumstances exist. The Tax Courts can suspend the payment if:

• after a brief analysis of the reasons for the appeal, the Tax Court holds that the appeal is in principle grounded (fumus boni iuris); and
• at the same time, the payment could cause a serious and irreparable damage to the taxpayer (periculum in mora). 

The latter requirement is theoretically subject to an assessment by the Tax Court of the amounts claimed in relation to the economical and patrimonial condition of the taxpayer. However, the Tax Courts often consider such a requirement as fulfilled if the amounts required are very high, regardless of the condition of the taxpayer (periculum in re ipsa).

If a mutual agreement procedure (MAP) pursuant to EU Directive 2017/1852 has been opened and the relevant tax litigation has been suspended, the payment is suspended by law.

Under certain circumstances and subject to certain thresholds, both the infringement of tax payment obligations and violations related to income and VAT reporting may trigger a criminal proceeding.

The frequency of tax audits is established by law and internal regulation issued by the Tax Administration. With regards to those identified as “large taxpayers” (ie, annual turnover above EUR100 million), audits are usually carried out within the year following the one in which the tax return has been filed, also taking into consideration the specific risk profile. Theoretically, these taxpayers should be substantially audited on a “continuous basis”.

Other taxpayers are audited based on a selection carried out through specific risk profiles and automatic cross-checks performed by the Tax Administration through dedicated software databases, which monitor discrepancies in the taxpayers’ behaviour.

General risk profiles are identified with:

• the absence of any tax audits in the previous years;
• a loss position or low profitability for multiple subsequent years; and
• the risk of VAT avoidance. 

The guidelines also identify high tax-risk areas and positions as potentially leading to aggressive tax planning, certain tax base erosion schemes through tax refund claims and undisclosed permanent establishment of foreign entities.

The tax system provides a set of mandatory deadlines for the tax authorities to issue and serve tax assessment. Indeed, a tax assessment served beyond the expiry of the statute of limitations is null and void. For fiscal years prior to 2016, the statute of limitations expired at the end of 31 December of the fourth year following the one in which the tax return was filed. 

In cases in which the tax return had not been filed, the deadline was 31 December of the fifth year from when it should have been filed; such a statute of limitations was doubled if the alleged tax violations could imply a criminal violation. The 2015 ordinary deadline expired on 31 December 2020.

From fiscal year 2016, the statute of limitations expires on 31 December of the fifth year following the one in which the tax return was filed (31 December of the seventh year if no tax return was filed).

If the tax return is amended (dichiarazione integrativa), the ordinary statute of limitations is calculated from the filing of the amended tax return but limited to the amended items.

However, due to the COVID-19 pandemic, all the assessment activities and statutes of limitations were suspended for a period of 85 days (from 8 March 2020 to 31 May 2020). According to the Italian Tax Authorities such a rule implied that all the ordinary statutes of limitations for all the fiscal years whose assessing terms were pending during such a period are now extended by 85 days. In other words, for the fiscal years from 2016 to 2020 the statute of limitations will expire on 26 March (25 March in a leap year) of the fifth (or seventh) fiscal year following the one in which the tax return was filed (or should have had to be filed). However, this interpretation is questionable and some recent case law declared null and void the deed of assessment issued after the ordinary deadline.

Initiating and Completing a Tax Audit

There is no specific moment in time when a tax audit can be initiated but, given that the commencement of a tax audit does not interrupt the statute of limitations, in practice tax audits rarely start by targeting a fiscal year that is about to expire.

If a tax audit is carried out in the taxpayer’s business premises, it can last a maximum of 30 working days; the period can be extended by a further 30 working days. Such a limit must be verified taking into account each day of physical presence of the tax auditors in the premises and not the overall calendar days since the beginning of the audit. 

There is no final time limit for the completion of the audit activities carried out by the Tax Administration in its own office. This means that a tax audit could theoretically stand for years if the physical presence in the taxpayer’s premises is kept under the above-mentioned limit of number of days.

Tax audits could be carried out at the taxpayer’s premises as well as at the Tax Administration’s office, depending on the difficulty of the case, the need for evidence and the activity to be actually performed. Auditors analyse both printed documents and digital data as long as such documentation is helpful to investigate the taxpayer’s behaviour. One very effective tool is the forensic back-up of the taxpayer’s computers and/or server that is taken by the auditors for investigating all the available documentation as well as the email conversations.

In any tax audit the formal requirements, the mandatory fiscal books and the general ledger are scrutinised. There are no rules or limitations as to the substantive issues that the audit may address as they might vary depending on the purpose of the specific audit, the industry in which the audited taxpayer operates and the most recent developments in the Tax Administration’s audit activities. The Tax Administration usually issues yearly specific guidelines identifying the areas and the transactions to be audited.

There has been an increasing prevalence of rules concerning cross-border exchanges of information and mutual assistance between tax authorities is increasing the chances for the Tax Administration to challenge potential tax issues. Moreover, simultaneous and joint tax audits are both tools in the hands of the Tax Administration. The former are audits carried out: (i) towards different taxpayers located in different jurisdictions; and (ii) by different Tax Administrations (Italian with other European tax agencies). These audits are performed on a regular basis under the co-ordination of the Italian Central Directorate of the Revenue Agency jointly with the corresponding foreign body. 

In a joint tax audit, two or more tax administrations join together to examine one or several transactions or issues of one or more related taxable persons with cross-border business activities in which the tax administrations have a common interest. Such audits are ruled by Council Directive 2011/16/EU, as amended by Council Directive (EU) 2021/514. Italy adopted and published the relevant rules in March 2023 effective from fiscal year 2023.

As a general rule, a co-operative attitude always pays higher dividends than an obstructive one. Nonetheless, it is important to disclose data and to describe activities smoothly, balancing the concepts and, as much as possible, replying in writing. A written answer is normally more accurate and precise, and avoids the risk that a brief oral description may draw a picture that involuntarily leads the tax auditors on a wrong path.

Moreover, it is important to bear in mind that all documents whose exhibition is refused cannot be used in favour of the taxpayer in all the following phases (administrative and litigation). Such prohibition applies only if the taxpayer voluntarily refuses to submit the documents, and it does not apply if the documents are lodged with the first-tier appeal and the taxpayer declares that it was impossible to produce them; documents (different from the mandatory books) that are not available to the taxpayer when the audit was carried out are not subject to such a rule.

Also, failure to disclose documents that will be found crucial to the court’s decision could preclude the possibility of reimbursement of the litigation costs.

As a general rule, the administrative claim phase is mandatory before a tax assessment is issued following a tax audit. The Tax Administration is obliged to serve a draft of the tax assessment before the issuance of the final one. Then, the taxpayer can prove that they are not liable for the additional tax in one of two ways: by submitting their observations within 60 days from the draft serving date (contraddittorio); within 30 days in a settlement procedure (accertamento con adesione). If the taxpayer fails to do so, the Tax Administration delivers the final tax assessment. If the taxpayer has not filed a request for settlement procedure after receiving the draft assessment, the submission of the request can be made within 15 days from the receipt of the final assessment. In this latter case, the deadline for lodging an appeal is postponed by 30 days.

During the settlement procedure, both parties (taxpayer and Tax Administration) are entitled to discuss the case and try to reach a compromise for the solution of the case. Such a compromise must follow a legally acceptable rationale and therefore it is not possible to settle based simply on a forfeit amount. Any settlement must be justifiable and grounded on tax rules. If a settlement is achieved, the penalties linked to the confirmed higher taxes are reduced to a third of the minimum, therefore they could range from 30% to 45% (depending on the nature of the claim) of the settled taxes (in most cases, this would result in penalties for tax return violations dropping to 30% of the higher taxes due). Any fiscal year is independent from another and it is theoretically possible to settle a case that has already been decided by a Tax Court; however, once a favourable decision is issued, it is always hard for the tax authorities to disregard its outcome.

See 3.1 Administrative Claim Phase.

A judicial tax litigation starts at the initiative of the taxpayer who challenges a tax-assessment notice served by the Tax Administration before the first-instance judge (Tax Justice Court of First Instance).

The litigation starts with an appeal served by the taxpayer to the tax office that issued the tax assessment (or refused to grant a refund).

The appeal must be mandatorily filed within 60 days from the serving date of the challenged deed. If the tax administration does not reply to a request for a refund or to a request for internal review in mandatory cases (autotutela obbligatoria) submitted by the taxpayer within 90 days of the request, it is considered that the tax administration has implicitly refused the refund or the request for internal review. The implicit denial of refund may be challenged within ten years. On the other hand, the implicit denial of internal review may be challenged within one year of the tax assessment becoming final. 

If at any time the Tax Administration adopts and serves a formal denial of the refund or internal review request, the ordinary 60-day deadline to file an appeal from the serving of the formal denial should be observed.

Once the appeal is notified to the office, it must be lodged by the taxpayer before the Tax Justice Court within the following 30 days. A delay in challenging the appeal or in lodging it before the Tax Court will make the appeal inadmissible. The Tax Administration has 60 days from the receipt of the appeal to lodge its observations (controdeduzioni) before the Tax Justice Court to defend its position.

Documents and Hearings 

Tax litigation is a “documental” process: it is exclusively grounded on the documents and pieces of evidence provided by the parties. Since 2023, it is now possible to also provide written testimonies, which can be presented only on facts and circumstances that are not otherwise proved by a report completed by a public official (which could be disregarded only with an ad hoc procedure – querela di falso). Their admission to the trial can be requested by one party, and the judge can admit them without the approval of the other party. They do not, therefore, assume value automatically, but rather need preliminary scrutiny by the Court on their relevance. If the written testimony is admitted, the requesting party must createa form with specific questions and the witness must answer them all – or otherwise indicate the reasons for their inability to respond. 

A public hearing – in person or via remote connection – to discuss the case in front of the panel of judges is optional, in the sense that any of the parties may request it. If no such request is made, the case is decided by the Court based on the documental evidence and written arguments presented by the parties.

If one of the parties so requires, the procedure provides for a discussion hearing, during which the parties present the case and the related evidence, and the Tax Court may ask questions. Therefore, aside from exceptional circumstances, there is only one discussion hearing. After the hearing, the panel of judges casts the decision, and should release the final decision immediately (or, in any case, within the next seven days; see 5.2. Stages in the Tax Appeal Procedure). The hearing is usually scheduled after a period ranging from six to 18 months from the day on which the appeal is lodged to the Court.

Both parties have the right to:

• file further documents, until 20 “free days” prior to the hearing; and
• file further written observations to highlight specific topics or to respond to the other party’s observations, until ten “free days” before the hearing. 

The “free days” period means a number of days disregarding the first and the last day (ten free days are thus equal to 11 days in standard counting); moreover, if the period ends on a weekend or on a public holiday, the term falls on the first working day before.

Even if written testimony has been introduced, tax litigation is still a process that is mainly based on documents. Consequently, producing the appropriate documentary evidence is necessary to prove the correctness of the taxpayer’s position. Third parties’ written statements, appraisal, evaluation, expert opinions as well as other information can be filed in Court to corroborate the party’s position. Relevant documents can be submitted directly when filing the appeal at the beginning of the tax litigation or during the litigation, up to 20 “free days” before the hearing of the discussion.

In general, the litigation system provides that the burden of proof should be borne by the party claiming its right. With the introduction of Law No 130/2022, the legislature has specifically clarified that the burden of proof is fully on the Revenue Agency. This element may seem redundant to some, but it was relevant to underline that the Tax Administration must provide, during the trial – and not simply in the investigation phase – precise elements to identify why more taxes are due and especially in what amount. On the other hand, the taxpayer is not required to demonstrate the “inexistence” of the factual bases of the claim against them but can overturn the evidence provided by the Revenue Agency with different elements. Indeed, it was common practice to consider certain elements – such as the ability to deduct costs – as a taxpayer right, with the consequence that the related burden of proof of cost deductibility was placed on the taxpayer.

However, in refund trials, the burden of proof for entitlement to a refund lies with the taxpayer. There are also some cases in which the law provides for an inversion of the ordinary rules on the burden of proof: for example, Italian citizens that have moved their fiscal residence to blacklisted countries are presumed to be Italian residents unless the opposite is proven.

In a criminal procedure, it is always the State (represented by the public prosecutor) that is required to prove the illegality of the taxpayer’s behaviour.

The way to manage a litigation processdepends on the specific case. It is not possible to set a standard procedure, but experience helps in selecting the best path to follow.

The first strategic decision concerns whether or not to pay the advance down payment (normally corresponding to one third of the assessed taxes). As stated in 1.5 Additional Tax Assessments, the taxpayer can request the Tax Court to suspend the advance payment obligation. If both requirements are met (fumus boni iuris and periculum in mora), asking for a suspension is probably the most appropriate strategy; otherwise, it is probably better to avoid filing a request that will most likely be rejected by the Court. The rejection of a suspension request (which is now challengeable) is not advisable for the following reasons:

• upon rejection of the request, the payment will qualify as a late payment and the taxpayer will face a higher payment, increased by the collecting fees;
• although the decision on the suspension request does not address the merit of the case, it is never advisable to start a litigation judgment with a negative decision, even on a preliminary issue, as this might influence the Court negatively for the subsequent discussion on the merit; and
• it is possible that the Court will charge the taxpayer the court fees linked to the suspension phase.

The timing for producing documents and evidence depends on their availability and on the complexity of the case. Generally, it is better to file all the evidence with the appeal to provide the judge with a more accurate and complete initial statement right from the start. This is particularly important since, from 2024, the judge could make a simplified decision when assessing the request for suspension of advance payment, based only on the evidence submitted with the appeal. However, if the case is extremely complex (and the appeal is a very long document), it could be helpful to summarise certain arguments and preserve part of the relevant documentation for a defensive brief later on. 

If a technical evaluation is needed, the Tax Court could appoint an expert; the taxpayer can ask the Tax Court to do this, but there is no obligation on the Court to satisfy such a request.

Settlement

Even during the litigation phase, the taxpayer and Tax Administration may discuss and reach a settlement. The discount in terms of penalties is lower than that which applies if a settlement is reached prior to the start of the litigation process – a 40% reduction in first-degree judgments, 50% in second-degree judgments, and 60% in Supreme Court judgments.

While tax judges usually take into consideration domestic case law, especially when coming from the Supreme Court, and jurisprudence from the European Court of Justice, they are often reluctant to rely on international guidelines and jurisprudence.

The first-tier decision may be appealed before the competent Tax Justice Court of Second Instance. Both parties (the Tax Administration and the taxpayer) have to appeal the first-tier decision within the mandatory deadline of six months from the issuance date. The deadline may be reduced to 60 days if one party serves the decision on the other. The appeal can be submitted once; the arguments of the appeal that had been presented during the first degree of litigation are lost if they are not repeated in the second degree.

The stages of the tax appeal procedure are almost identical to those provided for the first-tier judgment.

The appeal must be notified to the other party by the mandatory deadline (see 5.1 System for Appealing Judicial Tax Litigation) and then lodged before the Tax Justice Court of Second Instance within 30 days. The appealed party can lodge its observations to the Tax Justice Court of Second Instance within 60 days from the receipt of the appeal. 

The Tax Court then schedules the date of the hearing of the discussion, normally between one and two years from the submission of the appeal. 

Once the date of the hearing is set, both parties can submit further documentation until 20 “free days” before the hearing; it should be noted that from 2024 it will no longer be possible to file new documents in the appeal procedure that could have been submitted in the first instance trial.

Likewise, both parties can deposit further observations to highlight specific topics in their defence or respond to the other party’s observations until ten “free days” before the hearing.

The parties have the right to request that the case is discussed in a public hearing before the Tax Court – physically in court or via remote connection. If such a request is not made, the case is decided by the judges based on the written arguments and evidence presented by the parties. See 4.2 Procedure for Judicial Tax Litigation.

Issuing a Decision

From 2024, the Tax Court must release the verdict immediately after the hearing (or at least, within 7 days). Thereafter, within 30 days, the Tax Court must issue the decision, together with the reasons for it. However, as in the past legal framework, there are no consequences if such deadlines are not met. It is therefore not guaranteed that such deadlines will actually be met: so far, the Tax Court has issued its decisions after varying periods of time (from a few days to several months, usually between one and three months).

Decisions of the Tax Justice Court of Second Instance can be appealed before the Italian Supreme Court (Corte di Cassazione), which is the highest level of jurisdiction, and whose mission it is to ensure uniformity of jurisprudence and legal certainty. However, it is possible to file an appeal only if the decision of the Tax Court violates a law or suffers from major inconsistencies and lack of motivation. Conversely, it is not possible to request before the Supreme Court a full re-examination of the merits of the case.

The appeal before the Supreme Court must be filed by the same appeal deadline (see 5.1 System for Appealing Judicial Tax Litigation) and the other party has the right to file a counter-appeal within 40 days of the serving date. It takes a significant period of time before a decision is issued by the Supreme Court: this ranges from six to eight years.

Tax disputes in the first two degrees are dealt with by judges who are specialised in tax matters but not professionals (the role of a member of first and second-instance Tax Courts is honorary, not a professional career). From 2023, an important reform has changed the way in which these judges will be appointed in the future: they will be selected after a public competition (the first one is scheduled for 2024) composed of several tests, written and oral, to assess their knowledge and ability to apply tax law, civil or commercial law, and procedural law. The remuneration and pension treatment of tax judges is to all intents equal to that of ordinary ones. Those who are currently honorary judges can hold their office to guarantee a smooth transition to the new system. However, no new honorary judges will be appointed.

Tax Courts of first and second instance are independent bodies, normally deciding in panels of three members. Since 2023, however, issues of minor value have been decided by a monocratic judge.

The Tax Courts are organised in different chambers to which the judges are appointed. Each Tax Court has a president who is in charge of assigning the appeals to individual sections. The control over the general functioning of the Tax Courts (transfer of judges, assessments of incompatibility, disciplinary measures, legislative proposals, professional training) belongs to the High Council for Tax Judiciary, a self-governing body, the members of which are elected every four years between the Tax Court judges (11) and the members of parliament (four).

The third and last degree of judgment is managed by the Supreme Court and is organised into multiple chambers, each chaired by a president and specialised in a specific field of the law: ie, civil, criminal, labour. A specialised chamber for taxation issues has been formally created with Law No 130/2022, reinforcing a specialisation which, to some extent, was de facto already happening. The tax chamber decides in panels of five members (who are all career judges).

Many ADR mechanisms are available for the taxpayer to resolve the dispute without resorting to litigation. 

• Before any assessment takes place, the taxpayer can opt for the voluntary correction of tax violations (ravvedimento operoso), which grants the possibility of rectifying omissions or irregularities made when completing and submitting the income tax return, and when making the payments. A voluntary amendment of tax violations entails a reduction of the minimum applicable penalties (from one tenth to one fifth of the ordinary applicable penalty, depending on the circumstances).
• Upon receipt of the draft assessment, the taxpayer can submit observations to the tax authority (contraddittorio) regarding their lack of liability of the additional tax.
• Once a tax audit report or a tax assessment is served or alternatively to the contradditorio, the taxpayer may request the opening of a settlement procedure (accertamento con adesione) aimed at settling the case. If the discussions have a positive outcome, the procedure ends with the signing of a settlement deed issued by the office and accepted by the taxpayer. The settlement grants the right to enjoy:
1. the reduction to one third of the minimum penalties calculated based on the settled taxes;
2. the reduction of the penalties envisaged for tax crimes (up to one half) and the non-application of accessory sanctions, if the settlement is signed and the amount paid before the criminal trial starts; and
3. the closing of the whole fiscal year for the relevant tax (unless new and material elements emerge).
• A negative outcome of the settlement procedure does not limit the taxpayer’s right to pursue the tax litigation without any material downside. However, if the parties do reach a settlement, the outcome of the settlement may not be appealed against by the parties.

• After an assessment deed is issued, in cases of blatant unlawfulness, any mistakes must be self-amended by the Tax Administration, and this obligation is enforceable through judicial appeal; in other cases, the Tax Administration may review its assessment, possibly upon a specific request filed by the taxpayer.

Tax Mediation

Tax mediation (mediazione tributaria) aimed at preventing and avoiding disputes that could be settled without going to court, taking into account the guidelines of the law and therefore of the reasonably predictable outcome of the trial. Mediation was enforceable and mandatory on tax claims of a value not exceeding EUR50,000. However, from 2024 onwards, tax mediation is repealed.

Judicial Settlement

Judicial settlement (conciliazione giudiziale) pending the first, second-degree and third-degree litigation allows the parties to close a tax dispute. With the judicial settlement the taxpayer obtains a reduction of the penalties equal to 40% of the minimum if the litigation is pending before the Tax Court of First Instance, 50% of the minimum if the litigation is pending before the Tax Court of Second Instance, and 60% before the Supreme Court. 

The judicial settlement leads to a decrease of the penalties envisaged for tax crimes, avoids the application of accessory penalties and compensation of the expenses incurred for the judgment. A particularity of the judicial settlement with respect to the settlement procedure is that it allows the parties to carry out a partial settlement; ie, to settle only part of the claims in litigation and continue to litigate on those that have not been settled.

See 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction.

See 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction.

The ruling (see 1.3 Avoidance of Tax Controversies) is an opinion issued by the Tax Administration; if the taxpayer acts in conformity with the ruling, the Tax Administration cannot challenge its behaviour. An advance ruling is therefore an effective tool for reducing tax litigations.

However, it is worth underlining that a ruling is just an administrative measure, and it could theoretically be revoked at any time by the Tax Administration. However, this occurs very rarely and, even where it does, no penalties would apply.

It is not possible to apply for an arbitration procedure. The only ADR mechanisms are those described in 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction.

There is no ADR mechanism specifically for transfer pricing that is different from those described in 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction.

Most tax claims entail the application of an administrative penalty, normally proportionate to the amount of assessed higher taxes. Some exceptions are provided, as for the transfer pricing violations, which are not subject to penalties if the taxpayer has duly drafted the specific documentation in a timely manner and applied for penalty protection (which requires a specific flagging in the income tax return).

The criminal proceeding is independent from the administrative one and may be triggered only if the behaviour of the taxpayer infringes specific criminal statutes, which for certain criminal offences also require that specific thresholds are met. If the tax auditors believe that the taxpayer under audit has incurred criminal violations, they are required to report the case to the Public Prosecutor’s Office, which has the duty to analyse the case and possibly start a criminal proceeding and subsequent trial.

The litigation process regarding the tax assessment and the possible criminal proceeding run in parallel and in principle do not necessarily affect each other. The criminal proceeding may move forward irrespective of the status of the tax appeal filed by the taxpayer against the assessment deed and vice versa. It is therefore, in principle, possible that the outcomes of the two proceedings may differ, even though often the settlement of the administrative proceeding entails a reduction of criminal penalties. However, a reform of the relationship between the two proceedings is under discussion and, if approved: (i) the tax court final decisions will be evidence in proof of the factual circumstances in the criminal proceeding; and (ii) the criminal court final decisions of acquittal will be binding on tax courts.

Tax authorities are legally required to report to the Public Prosecutor’s Office any potential criminal violation every time they find evidence of such a violation. This normally occurs in the context or at the end of a tax audit. Therefore, administrative tax audits often trigger an administrative infringement process and a criminal tax proceeding.

With regards to the stages of a tax administrative infringement process, please refer to 4.1 Initiation of Judicial Tax Litigation, 4.2 Procedure for Judicial Tax Litigation, 5.1 System for Appealing Judicial Tax Litigation and 5.2 Stages in the Tax Appeal Procedure.

The courts in charge of criminal tax cases are different from those deciding the corresponding tax adjustment/assessment. In fact, criminal tax cases are handled by specialised criminal courts and tribunals (Tribunale and Corte d’Appello) composed of professional judges.

The payment of the additional assessed taxes or the settlement of the administrative proceeding determines the reduction of potential criminal penalties.

The payment of the assessed taxes, plus interests and penalties, allows a criminal tax trial to be prevented or stopped only with reference to the failure of payment of:

• withholding taxes declared or certified by the withholding agent;
• VAT declared by the taxpayer; and
• taxes linked to an undue compensation of a non-existing tax credit. 

In such cases, the taxpayer is required to make the payment before the declaration of the opening of the first-degree hearing of the trial (dichiarazione di apertura del dibattimento di primo grado). 

A criminal tax trial could also be prevented in the case of a fraudulent tax return exploiting invoices for non-existent transactions or other artifices and an unfaithful or omitted tax declaration, if the taxpayer pays all the amounts due within the deadline for filing the tax return relating to the next fiscal year compared to the one in which the violation occurred, provided that any access, inspection or audit has not begun.

The first-tier decision may be appealed before the competent criminal courts (Corte d’Appello). Both parties (the public prosecutor and the taxpayer) must appeal the first decision by the mandatory deadline of 15, 30 or 45 days depending on the time and formality to write the motivation of the decision.

The second-tier decision issued by the second-tier court (Corte d’Appello) can be appealed before the Supreme Court, which is the highest level of jurisdiction, and whose mission is to ensure uniformity of jurisprudence and legal certainty. However, it is possible to file an appeal only if the decision violates a law or suffers from major inconsistencies and lack of motivation. Conversely, it is not possible to submit a request to the Supreme Court for a re-examination of the merits of the case.

The application of the general anti-avoidance rule (GAAR) and specific anti-avoidance rule (SAAR) does not lead to criminal charges, as well as transfer pricing claims. It is possible to challenge a criminal violation only if the taxpayer did not book (and declare) revenues or booked (and declared) non-existent costs, which cannot be the case in such a claim.

If a double taxation situation occurs, it is common to challenge the deed of assessment before the Tax Court (a late challenge of the deed will imply its finality). Once the appeal is lodged, the taxpayer may require the opening of a MAP provided by the double tax treaty or by the European Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (90/463/EEC). 

As for the new international dispute resolution tools, Italy has not ratified the MLI yet, while the EU Tax Disputes Directive was transposed into the Italian regulatory framework in August 2020 and is applicable to fiscal years from 2018 onwards. Although the first cases ruled by the new Directive have been opened, it is too soon to assess its effectiveness. 

Furthermore, the taxpayer is entitled to ask for a unilateral adjustment of his income in case of a transfer pricing claim if alternatively:

• a specific agreement has been achieved in a MAP;
• the claim is the outcome of an audit carried out in the context of an international co-operation activity and its outcome has been approved by the participating states; or
• the transfer pricing adjustment is final, compliant with the OECD transfer pricing guidelines, made by a foreign state with which there is in force an effective exchange of information, and a specific instance is filed.

There are no general mandatory guidelines for the application of GAAR and SAAR in cases where there is a bilateral tax treaty. There have been cases in which Tax Courts have acknowledged the treaty protection (non-discrimination clause) against the SAAR concerning the alleged non-deductibility of blacklisted expenses. On the contrary, the GAAR has been invoked for tackling cross-border schemes built on the treaty’s provisions and aimed at achieving an undue tax saving (ie, stock lending and dividend washing schemes). 

The Tax Courts have often confirmed claims grounded on the lack of beneficial ownership or, more generally, on treaty shopping, following a substance-over-form approach and, to some extent, regardless of the strict interpretation of the laws; the authors expect that the principle purpose test (PPT) and the amendment of the DTT preamble will significantly ease the tax authorities in proving the infringement of the DTT provisions. It will therefore be paramount for taxpayers to adopt a conservative approach in exploiting the DTT.

There is no specific rule with reference to transfer pricing adjustments. Taxpayers usually open a MAP in all the cases involving EU member states in which the European Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (90/463/EEC) is applicable. Indeed, such a convention should guarantee the solution of the case in a relatively short timeframe. For the implications of the MLI and EU Tax Disputes Directive, please refer to 8.1 Mechanisms to Deal With Double Taxation.

Taxpayers are required to pursue tax litigation in all other cases when it is not possible to open an international dispute resolution mechanism, as well as in cases where the counterparty is not resident in an EU member state. In such cases, it might not be possible to achieve a positive outcome to a MAP in a reasonable timeframe.

Advance pricing agreements (APAs) are an effective means to avoid or mitigate litigation in the transfer pricing (TP) field. They are becoming more common, but recently suffered a setback, mainly due to the time required to reach an agreement with the Tax Administration.

The procedure requires the taxpayer to file a specific application, in which the perimeter of the agreement is outlined. In the case of bilateral and multilateral APA applications, taxpayers are required to pay a fee that can vary from EUR10,000 to EUR50,000 depending on the total turnover of the group to which the taxpayer belongs. Fees are reduced by half in the case of a request for renewal of the prior APA.

The Tax Administration opens the procedure and verifies, also through interviews with the employees, the correctness of the facts and circumstances described in the taxpayer’s application, the functional and risk profile of the taxpayer, and all other items that are relevant for TP purposes. 

Once the analysis is concluded, the parties reach an agreement that is binding on the Tax Administration for the fiscal year in which it is signed and the following four, unless it is proven that the factual circumstances are materially different from what has been agreed in the APA. Moreover, if the factual and legal circumstances underlying the APA are the same in all the open fiscal years irrespective of the date of the filing, the taxpayer is entitled to require a carry-back of the APA’s effects. In particular:

• for unilateral APA, the taxpayer has the right to ask for the retroactive application of the APA provided that no audit activity has started at the time of execution of the APA;
• for bilateral and multilateral APA, in addition to the aforementioned condition, it is necessary that the taxpayer has requested the retroactive application in the APA submission, and that the competent authority(ies) of the foreign jurisdiction(s) involved agree to extend the effect of the APA to previous years.

See 1.2 Causes of Tax Controversies.

The European Commission has repeatedly declared certain tax concessions incompatible with the ban on state aid. For example:

• the three-year income tax exemption for SpA majority held by local authorities (Commission decision 2003/193/EC of 5 June 2002); and
• the exemption from ICI (Real Estate Tax) granted by Italy to non-commercial entities which carried out, in the buildings in their possession, certain activities such as educational or hotel activities (Commission decision 2013/284/EU of 19 December 2012).

There is not a general procedure for the recovery of state aid. Special rules are issued from time to time to address the recovery of specific state aid. Sometimes the recovery is carried out by the Revenue Agency according to the ordinary procedures of assessment and collection provided for by income taxes; in other circumstances, the taxpayer is required to spontaneously refund the higher taxes due, without interest and penalties.

The taxpayer cannot challenge the legitimacy of a decision of the European Commission before national courts during a litigation concerning the enforcement measures taken by the national authorities. It is possible to ask for the suspension of the collecting activity if two conditions are jointly satisfied: (i) serious reasons for the illegitimacy of the recovery decision, or an error in identifying the person required to pay back the state aid or in calculating the amount to be recovered (limited to the part exceeding the amount due); and (ii) the payment would imply an irreparable harm for the taxpayer.

Compensatory actions before national courts are allowed and may be claimed by:

• the beneficiary’s competitor against the State; 
• the beneficiary against the State;
• third parties against the State; and
• the beneficiary’s competitor against the beneficiary itself.

Italy opted for mandatory binding arbitration.

Some of the DTTs signed by Italy provide for an arbitration procedure that can be activated only if:

• a proper exchange of notes between the contracting states has been accomplished; and
• both the competent tax authorities are willing to activate the procedure with reference to specific controversy. 

This has implied a wide discretion in handling the procedure and the ineffectiveness of this tool in solving tax disputes so far.

Italy has reserved the option to apply Article 19(12) of the MLI to its covered tax agreements, which grants Italy the right to not submit a case to arbitration or to terminate the relevant process if a decision on the same issue has already been issued by a court or administrative tribunal of either of the contracting states.

Italy opted for the Baseball Arbitration and made the reservation under Article 23(3) of the MLI to not open any mandatory binding arbitration with parties that have not taken the same option. If this is the case, the competent authorities of the contracting states shall endeavour to reach an agreement on the type of arbitration process that shall apply with respect to that DTT. Until such an agreement is reached, the mandatory binding arbitration shall not apply.

It is likely that the reason for such a choice is pursuing the easier possible procedure. Indeed, the “baseball” or “final offer” arbitration process requires that each party submits its best offer to the arbitrator, who chooses one of the two, without the possibility of amendments. This process therefore encourages the parties to propose the fairest solution and at the same time simplifies and speeds up the arbitrator’s activity.

The EU Directive on Arbitration was transposed into the Italian regulatory framework in 2020; it applies to MAPs filed since July 2019 and concerning fiscal years 2018 onwards.

The MLI has not been ratified by the Italian Parliament.

See 8.1. Mechanisms to Deal With Double Taxation.

Italy is a member of the OECD/G20 Inclusive Framework on BEPS. As far as Pillar One is concerned, a significant portion of it will be in force jointly with the MLI.

Pillar Two, on the other hand, has been implemented at EU level through Directive 2523/2022 in December 2022, and required member states to approve the relevant domestic legislation no later than 31 December 2023.

The Directive is, for the most part, in line with Pillar II of GloBE and provides for a Global Minimum Tax equal to 15% for multinational enterprises (MNEs), with aggregated revenues equal to or higher than EUR750 million. In essence, if the effective tax rate applied to the income of entities located in a given country does not reach the above-mentioned threshold, the “top-up tax” is applied by the country of the ultimate parent entity through the enforcement of the Income Inclusion Rule – or residually by other entities of the group through the Undertaxed Profit Rule. 

The effectiveness of these measures for companies will start in part after 31 December 2023, and in part after 31 December 2024; Italy implemented the EU Directive through Legislative Decree No 209/2023.

Until the transposition of the EU Directive in the Italian legal framework, the outcome of a MAP was confidential. The new legal framework provides that, for MAPs subject to the EU Directive, the competent authorities may agree to publish decisions in full, with the consent of the taxpayers and of all the stakeholders. If such consent is not granted, a summary of the decision is published with a description of the case, the subject, the date, the fiscal years concerned, the legal basis, the industrial sector, a brief description of the final outcome and of the arbitration method chosen.

See 8.1. Mechanisms to Deal With Double Taxation.

It is common practice for an Italian taxpayer to hire a tax adviser specialised in this topic in order to handle the procedure vis-à-vis the Italian Tax Administration. The latter does not hire independent professionals and relies on its specialised officers.

There are no costs associated with the administrative litigation phase.

The mandatory unified contributions for first and second-tier judgments are identical and based on the value at stake in the proceeding. They range from EUR30 to a maximum of EUR1,500 (when the value exceeds EUR200,000). Such contribution is paid by the party introducing the judgment: 

• in the first-tier litigation, it is paid by the taxpayer; or
• in the appeal before the Tax Court of Second Instance, it can be paid by the Tax Administration or by the taxpayer, depending on who is serving the appeal. 

The contribution must be paid at the beginning of the judgment. 

The Tax Court must condemn the losing party to refund the expenses incurred by the other party; however, the judges must rule that the winning party bears (at least part of) its own cost if (i) there are serious and exceptional reasons that must be explicitly justified, and (ii) the party has won the case on the basis of decisive documents that it produced only in the course of the judicial proceeding.

Without prejudice to the fact that each party can always ask for the reimbursement of the costs incurred, it is possible to ask for an indemnity if it appears that the unsuccessful party has acted or resisted in court with bad faith or gross negligence.

In general, the use of an ADR mechanism after the commencement of a tax litigation entails that each party bears its own costs, in particular with reference to the contribution paid at the beginning of the judgment.

The average number of cases discussed in a hearing by a judge of first instance in 2022 was 101.3 (93.6 in 2021). The number of pending cases in first-instance courts as of 31 December 2022 was 158,993, and new cases total 145,972 with a total value of approximately EUR14.7 billion. The number of pending cases in second-instance courts as of 31 December 2022 was 110,876, and new cases 41,051 with a total value of approximately EUR8 billion.

The number of cases initiated in 2022 (first-instance judgment) was as follows.

• Individual income tax: 23,213.
• Regional tax on productive activities (Irap): 4,276.
• VAT: 10,911.
• Registration fee: 6,349.
• Mortgage and cadastral taxes: 4,065.
• Tax on corporate income: 5,767.
• Custom duties: 1,094.
• Tax litigation duties: 1,510.
• Others: 29,628.
• Taxes on real estate: 29,966.
• Waste taxes: 17,059.
• Road tax: 8,735.
• Advertisement tax: 570.
• Public soil taxes: 383.
• Other local taxes: 5,401.
• Total cases: 145,972.

The number of cases terminated in 2022 was as follows.

• Individual income tax: 21,487.
• Regional tax on productive activities (Irap): 4,627.
• VAT: 9,455.
• Registration fee: 6,315.
• Mortgage and cadastral taxes: 3,616.
• Tax on corporate income: 6,686.
• Customs duties: 1,096
• Tax litigation duties: 974.
• Others: 18,685.
• Taxes on real estate: 32,074.
• Waste taxes: 16,827.
• Road tax: 7,193.
• Advertisement tax: 929.
• Public soil taxes: 660. 
• Other local taxes: 4,678.
• Total cases: 135,302.

For 2022 the trend in first-instance judgments shows:

• a 51.2% success rate for tax authorities;
• a 27.6% success rate for taxpayers;
• 9.8% as a partial success;
• 0.4% for judicial conciliation; and
• 11% for other outcomes.

The trend in second-instance judgments shows:

• a 52.8% success rate for tax authorities;
• a 29.3% success rate for taxpayers;
• 8.8% as a partial success;
• 0.3% for judicial conciliation; and
• 8.8% for other outcomes.

In order to define the most effective strategy in handling a potential tax litigation, the first crucial phase has to be a rigorous checking of the facts; it is paramount to understand whether the case revolves around a mere issue of legal interpretation of the applicable rules or if it is also necessary to ascertain the facts with respect to the applicable rules (eg, effectiveness and/or economic reasons of a given transaction, or beneficial ownership of a specific payment), or a quantitative issue (eg, evaluation of a going concern or a transfer pricing issue). Only once a rigorous analysis has been performed is it possible to assess the strengths and weaknesses of the taxpayer’s position. In carrying out the analysis, it is also important to perform a proper check of the previous case law, which – notwithstanding the fact that precedents in a civil law system such as the Italian one do not have the same strength of common law systems – is often respected by the tax courts, especially if it is a decision of the Supreme Court.

Once the analysis of the strengths and weaknesses of the tax case is completed, it is appropriate, even if the taxpayer’s position is perceived as very strong, to attempt a dialogue with the Tax Administration; any tax litigation is long and, to some extent, uncertain, and it is possible that the Tax Administration would be interested in avoiding a dispute and achieving a reasonable settlement. The issues that are litigated are often complex, especially if they involve multinational taxpayers and transnational issues. Such issues are a challenge even for the most experienced judges; and more so given that, even if in order to resolve complex technical issues it would theoretically be possible for the Tax Court to appoint technical consultants, judges are usually reluctant to lengthen the process and accumulate costs.