Italy’s anti-tax evasion measures start with VAT

Italy’s government intends to use value-added tax (VAT) as the fundamental lever to fight evasion estimated at €40 billion annually, double the average of other European Union countries. The measures being studied (which will not concern an increase in VAT rates, Economy Minister Pier Carlo Padoan has assured) will also be needed to meet the EU’s request to cut Italy’s 2017 budget deficit by 0.2%.

To tackle fraud and unpaid VAT tax, the first measure being studied is the extension of the “split payment,” based on which VAT on services supplied to public administration bodies is paid directly by the public administration to the tax authorities, without passing through the pockets of private companies.

The second is the extension of the “reverse charge”, or the inversion of accounting (and contributions). The VAT rates, at least, will not go up. Padoan said this clearly last Thursday.

VAT also remains a fundamental lever that the government intends to use to respond to the EU Commission’s requests for corrections to Italian public finances.

What is being outlined is a two-pronged approach that tries to nip two of the main forms of VAT evasion in the bud: fraud and lacking contributions.

The first measure being studied is the extension of the split payment mechanism.

Introduced on January 1, 2015, it foresees that VAT on services supplied to the public administration is paid directly by the administration in question. The disadvantage, that already emerged a few years ago, is that in this way suppliers are paid without the tax and they lose some liquidity even if just temporarily.

But there is no doubt that, from the point of view of those who manage public coffers, the mechanism seems very appealing. In 2015, the first year of its application, it took in €7.2 billion. In 2016 the figure had reached €9.5 billion in November already, and the final figure for 2016 is expected to be well over €10 billion, using the current trend as a reference.
Clearly these sums include reimbursements. Nevertheless, the net amount will remain high.

While it is true that the large majority of public administration suppliers would have paid VAT, it is also evident that the split payment nullifies the element of evasion that derives from unpaid taxes and that, based on the latest estimates from the Economy Ministry, is worth €8.4 billion to the whole economy (2014 figures).

The most likely option at the moment is that of extending this mechanism to state-owned companies. But the government will have to wait for the green light from Brussels and they will also have to evaluate “collateral effects” of a widening of the measure, both in terms of the financial profile and the repercussions on the entire VAT system.

The other idea involves a possible extension of the reverse charge, which moves taxation from the seller to the buyer and at the European level has been “authorized” for sectors which have a high documented risk of fraud.

In coming weeks goldsmiths could become subject to the reverse charge measure for some types of operations, and sellers of cereals that are not destined for selling to consumers.

The setback from Brussels’ blocking of the application of the reverse charge to large retail chains is weighing, however. This rejection was due to a lacking indication on the type of fraud that authorities intended to fight with the reverse charge for suppliers of hyper and super markets.

While waiting to see what form the VAT measures will take, it is certain that the total of this tax evaded: the estimated tax gap amounts to €40.1 billion a year – offers ample margins of recovery.

At the same time, it is true that the measures contained in the last budget targeted VAT, aiming to reduce the times between declaration and payment of the tax. The move should make life more difficult for evaders, and should bring €2.1 billion extra to public coffers from this year already (also counting the emergence effect on other taxes).