Businesses Selling in Italy Must Prepare
Over the last few years, Italy has proposed a series of tax reforms intended to close their substantial “VAT Gap.” At the beginning of this year, Italy finalized their plans to impose a significant new compliance obligation on businesses selling in Italy, B2B eInvoicing. Businesses will need to deploy solutions to meet this new requirement and should do so with an eye towards what the future may hold.
The VAT Gap – A Global Problem
The ‘VAT gap’ is the overall difference between expected VAT revenue and the amount actually collected. Part of what contributes to the €151.5billion VAT Gap of EU-28 countries in 2015 is taxpayer fraud and avoidance. The European Union (EU) is taking steps to close the gap and a number of measures to tackle VAT fraud have been considered in recent years. Their focus is on the VAT collection methods that have hardly been changed since VAT was introduced in the EU.
To some extent, the problem is considered systemic. Specifically, the current “transitional” EU VAT regime splits every cross-border transaction into an un-taxed cross-border supply and a taxed cross-border acquisition. Many argue that this approach is both complex and prone to fraud. To that end, the Commission is focusing on solutions that move the EU steadily (but slowly) towards a definitive EU VAT system where cross-border transactions are taxed based on destination principles and collected by the seller.
Italy Works to Close the Gap
Independent of EU measures, Italy is undertaking a series of reforms to improve tax collection. While Italy is a high tax-country with a relatively high and stable tax-to-GDP ratio, its levels of compliance with tax laws are low.
In 2013, the Italian Value-added tax (VAT) gap was estimated at above 30%, substantially in excess of the EU median of 14%. Italy’s VAT gap dropped to 28% in 2014 and to 26% in 2015. This modest decrease can be explained by Italy’s introduction of two significant reforms:
- Adoption of a VAT split payment mechanism and;
- Adoption of a domestic reverse charge for certain transactions
Italy’s split-payment mechanism in 2015 applied only to domestic sales to certain Italian public entities. While the supplier was required to issue invoices showing the relevant VAT due, the public administration purchaser was required to “split” the payment by remitting the sale price to the supplier and remitting the VAT to the Italian Treasury.
However, to put this modest decrease into perspective, during this same period the EU median VAT gap dropped from 14% to 11%.
Motivated by their own progress, in July 2017 Italy expanded its split payment mechanism to all public agencies, companies controlled by the Government or by individual ministries, companies controlled directly by local authorities, and companies listed on the Italian Stock Exchange. However, current studies are mixed on whether expanded split-payment requirements produce substantial economic benefits.
Italy Adopts B2B eInvoicing for 2018, 2019
Heading into 2018, Italy is making another substantial change by introducing an electronic invoicing mandate. This new requirement, which was approved as part of Italy’s 2018 budget bill, comes about in 2 phases:
- July 1, 2018 – Business to Business (B2B) electronic invoicing will become mandatory for companies engaged in hydrocarbon fuel supplies for engines or which provide subcontracting or outsourcing services in public tenders
- January 1, 2019 - B2B electronic invoicing will become mandatory for all private companies. Simultaneously, the obligation to communicate invoice data between Italian companies will be unveiled.
Essentially, the Italian government is moving towards a clearance model where all transactions between private businesses have to be digitally transmitted to the government. Later this year, the Italian Revenue Agency is expected to begin publishing the necessary technical specifications to bring eInvoicing into existence.
eInvoicing and the EU
Italy is a Member State of the EU. As such, they are legally bound to respect the requirements of the EU VAT Directive. As currently written, the Italy proposal appears inconsistent with the EU Directive in three important ways:
- Buyer’s Consent – The Directive states that sellers must obtain the buyer’s consent before substituting a paper invoice for an electronic equivalent. Requiring an electronic invoice eliminates the right to not consent.
- Freedom to Choose Document Format - The Directive affords trading partners the right to choose the format through which they exchange electronic invoices. An e-invoicing rule, which restricts permissible transmittal formats, could be problematic.
- Freedom to Choose an Integrity and Authenticity (I&A) Method - The Directive provides for freedom of choice in selecting an I&A method (e.g. business controls, electronic identification, eSignature.) Under the legislation for B2G invoices, only eSignature is recognizes as valid.
When a Member State proposes a law that violates an EU Directive, the State can request authorization for a derogation. The EU will (and has) authorized derogations when the intent of the proposed law is to simplify tax administration or combat tax fraud and avoidance. Italy has already initiated the process of requesting a derogation and remains hopeful that the tremendous anti-fraud benefits of eInvoicing wins the day.
Governments are hungry for information - specifically for information that can help validate whether a business's tax filings and payments are accurate. Over the last few years, governments have come to understand that information is power and that information along with technology can be a powerful and efficient tool in ensuring that every penny of tax is properly collected. As seen for example in Brazil, Mexico and Chile, implementation of eInvoicing has helped governments to decrease VAT gaps and improve efficiency.
Businesses need to adopt business processes that will support the new rules in Italy as well as whatever might come next across the globe.
Download our Definitive Guide to the New Wave of Technology-Driven VAT Disruption for a comprehensive view of these changes and to learn how Intelligent Compliance mitigates the risks of these mandates.
About the Author
Brendan Magauran is a Junior Regulatory Counsel at Sovos Compliance specializing in international taxation, with a focus on Value Added Tax Systems in the European Union. Brendan received his B.A. and J.D. from Washington University in St. Louis and is licensed to practice in New Hampshire and Massachusetts.More Content by Brendan Magauran