The most recent information published by the Italian Ministry of Economy and Finance shows that the evasion of taxes and social security contributions cost Italy €83.6 billion in 2021. This includes losses of approximately €73.2 billion in revenue from tax and €10.4 billion in revenue from social security contributions. Although these figures are less than the previous year, they remain high, and the Italian government is continually looking for new ways to recover lost tax revenue. This has led to the new tax assessment reform, the aim of which is to combat tax evasion by progressively motivating taxpayers to make more accurate returns, thereby increasing voluntary adherence to tax obligations. In this article, we will explore more about what the tax assessment reform is, its main aspects and its entry into force.

What's in this article?

• What the tax assessment reform is
  
• Key aspects of the reform
  
• The tax assessment reform's entry into force
  

What the tax assessment reform is

In Italy, taxpayers are responsible for calculating their own taxes by filing a tax return voluntarily in accordance with legal obligations. This process involves a tax assessment being carried out by the Italian Revenue Agency, which may result in a notice of assessment being issued. This allows the government to monitor taxpayers' behaviour with regard to taxation and to issue any penalties.

On 21 February 2024, the Official Gazette of the Italian Republic announced the entry into force of Italian Legislative Decree no. 13 of 12 February 2024, which introduces new provisions concerning tax assessment and the two-year arrangement with creditors. In other words, it is a tax assessment reform. Let's delve deeper into what it is about and the key aspects of this reform.

Key aspects of the reform

The decree has two parts: the first deals with tax assessment, while the second concerns the establishment of the two-year arrangement with creditors. Here is an overview of the key aspects of the reform:

• Tax settlement and preventive cross-examination
  
• Digital domicile notifications and communications
  
• International cooperation
  
• Preventing and combatting value-added tax (VAT) evasion and fraud
  
• Revision of the limitation and prescription periods for tax assessment
  
• Regulation of the two-year arrangement with creditors
  

Tax settlement and preventive cross-examination

Regarding tax assessment, the main change concerns the new provisions that seek to coordinate the procedure for establishing the tax settlement (provided for by Italian Legislative Decree no. 218/1997) with the provisions that govern the obligation to carry out a preventive cross-examination as established in the Italian Bill of Taxpayers' Rights (Italian Law no. 212/2000) – and introduced, in turn, in implementation of Italian Enabling Law no. 111/2023. First, it is important to clarify the meaning of "tax settlement" and "preventive cross-examination".

Article 1 of Italian Legislative Decree no. 13 provides for the establishment of income tax and VAT assessments, along with the recovery of unduly offset credits which are not dependent on a previous assessment, with the taxpayer's agreement. The tax settlement is an "agreement" that the taxpayer and the government can come to either prior to or following a notice of assessment, provided that the taxpayer does not file an appeal before the tax court. It allows both parties to amend the tax claim through a preventive cross-examination and therefore avoid a dispute. Following a successful tax settlement, the taxpayer can take advantage of an additional benefit, in the form of the reduction of penalties to one-third of the minimum.

All taxpayers, including private individuals, partnerships, professional associations, corporations and entities, are eligible for tax settlement. Tax settlement applies to all direct taxes and most significant indirect taxes, regardless of the dispute amount.

Preventive cross-examination refers to the procedure through which the Italian Revenue Agency, prior to initiating tax assessment proceedings, must inform the taxpayer of its intentions and reasons for the assessment. This is important, as it aims to balance the rights of the taxpayer to make their case (before the government takes action that affects them directly) with the need for efficiency on the part of the administrative authority. The Italian Bill of Taxpayers' Rights had already introduced preventive cross-examination – overcoming restrictions previously proposed – depending on the type of tax, the assessment methods and the submission of, or failure to submit, valid observations at the discussion stage.

With the changes introduced by the tax assessment reform, taxpayers will have two options upon receiving an outline of the preventive cross-examination:

• They can submit observations within the following 60 days.
  
• They can file a request for tax settlement within 30 days following the notice of assessment.
  

Only the first case will trigger the preventive cross-examination process. If unsuccessful, the issuing of the final assessment will expedite any further assessment with acceptance, provided that the parties have addressed the reasons for the dispute at the cross-examination stage.

Digital domicile notifications and communications

The tax assessment reform broadly extends the ability of the Italian tax authorities to serve tax documents to all taxpayers with a digital domicile via certified email. Previously, the only recipients of notification by certified email were incorporated businesses, professionals included in the relevant registers and lists, bankruptcy administrators, judicial liquidators and public administrations – in addition to private, unobligated individuals who had expressly requested this means of communication.

The new law also clarifies and reorganises the rules for delivering the notification successfully and simplifies the handling of anomalies or the inability to deliver the message sent, differentiated according to the recipient. With regard to documents, notices and orders that the law requires the government to serve, if the digital domicile intended to receive the communication is full, the authority must make a second attempt at delivery at least seven days after the first.

If, even after the second attempt, the mailbox or authorised certified delivery service is full, or if the digital domicile intended to receive the communication is not valid or active, the tax authority may, for individual taxpayers, apply the ordinary notification provisions. And, for businesses and professionals, the tax authority may file the act electronically in the private area of the InfoCamere S.C.p.A.'s website. The reform also provides for the publication of the relevant notice on the same website, no later than the second day following the day of filing, for a duration of 15 days. The authorities will also notify the recipient of the communication by registered post, without any further formalities on its part.

International cooperation

The main change introduced by the tax assessment decree with regard to international cooperation primarily concerns the exchange of information upon request. It establishes that the tax authorities may exchange necessary information with other competent authorities of EU member countries and third-country jurisdictions with which a treaty for information exchange exists. This is to ensure the proper assessment of any tax type collected by or on behalf of the tax authorities and territorial departments, including local authorities.

One of the most significant provisions establishes that the authorities will not exchange information if it could reveal a commercial, industrial or professional secret or business process – or pose a threat to public order if disclosed. Another reason for the refusal to exchange information may be when the competent authority of the requesting EU member country is unable, for reasons of fact or law, to provide the same type of information.

Preventing and combatting VAT evasion and fraud

The main change in preventing and combatting VAT evasion and fraud concerns the inclusion of a stricter rule for individuals who apply to register with the VAT Information Exchange System (VIES) in Italy, who do not reside in a member country of the EU or the European Economic Area. Individuals can only register upon issuance of an appropriate guarantee. The Italian Ministry of Economy and Finance will establish the criteria and procedures for the issuance of the guarantee by decree.

The commencement or change of activity – which contains a declaration to include the VAT number in the database of taxable persons carrying out transactions – is submitted by a tax representative to the Italian Revenue Agency. This tax representative must verify that the documentation produced by the taxpayer is complete and matches the information in their possession, under penalty of an administrative fine ranging from €3,000 to €50,000.

Revised limitation and prescription periods for tax assessment

The tax system establishes specific time limits for tax audits, beyond which the tax administration can no longer initiate a tax assessment. Italian Legislative Decree no. 13 revises the limitation and prescription periods for tax assessment, as well as the deadlines for filing late returns. The main deadlines are as follows:

• The tax authorities shall consider all tax returns filed within 90 days of the deadline to be valid (with administrative penalties for late filing applied). The tax authorities shall consider all returns submitted more than 90 days after the deadline to be invalid. However, they will remain a reference for collecting taxes due based on the taxable amounts stated therein.
  
• In the case of a false tax return, the Italian government may no longer take action on tax assessments after 31 December of the fifth year following the year in which the taxpayer filed the false return.
  
• In the case of a withheld tax return, the Italian government may no longer take action on tax assessments after 31 December of the seventh year following the year in which the taxpayer should have filed the return.
  
• Beginning with returns filed for the 2024 tax year, the Italian government may no longer take action to obtain taxes declared but unpaid, and the related interest and penalties, after 31 December of the third year following the year in which the taxpayer filed the return. After those three years, starting from the day of the final tax settlement, the government may no longer take action to apply tax surcharges.
  

Regulation of the two-year arrangement with creditors

As part of its tax assessment reform, the Italian government has implemented a new two-year arrangement with creditors to combat tax evasion. Its aim is to recover as much revenue as possible and to encourage businesses to join this new tax initiative voluntarily. But what is the two-year arrangement with creditors? And how does it work?

With the two-year arrangement, the Italian Revenue Agency will be able to present a tax settlement to the taxpayers concerned on an estimated basis, in advance and covering two years: the year in which the taxpayer enters into the agreement and the following year. The following are eligible to take part in this arrangement:

• Individuals or legal entities who are engaged in business activities, arts or professions to which the "Indici sintetici di affidabilità" (ISA, or summary reliability indices) apply.
  
• Taxpayers who are eligible for the flat-rate tax regime. In this case, the taxpayer must have been carrying out their activity for more than two tax years.
  

The following cases detail specific grounds for exclusion, which prevent taxpayers from entering into this arrangement:

• If they have social security or tax debts in excess of €5,000 (except for those who have an instalment or suspension measure in place)
  
• If they have not filed a tax return in the last three years of the arrangement being in place
  
• If they have been convicted of money laundering, self-laundering or false corporate communications in the last three years of the arrangement being in place
  

The agreement will also become void if:

• The taxpayer amends the tax returns and, consequently, also the value of production and income declared in the context of the agreement
  
• The return contains errors that exceed the allowable limit of 30%
  

Taxpayers must enter into the two-year arrangement with creditors by 15 October 2024, by filling in the appropriate sections of the income tax return form (Form CPB for ISA taxpayers and Section VI, LM framework of the PF income model for flat-rate taxpayers, which will be available online in the updated version as of 15 June 2024).

In determining whether to enter into the two-year arrangement with creditors, businesses must weigh up the advantages and disadvantages. The payable taxes are set for two years, so businesses with higher revenues than reported will pay less tax. On the other hand, there will be no refunds, including in the case of underreported revenue. It is therefore recommended to consult an accountant when deciding whether to take up this option.

The tax assessment reform's entry into force

The tax assessment reform came into effect on 22 February 2024. However, it is worth noting that the provisions relating to the assessment reform with preventive cross-examination came into effect with the acts issued as of 30 April 2024. Meanwhile, those related to the two-year arrangement with creditors will apply as of the tax year following the one in progress on 31 December 2023.