Tax Guides – 18.11.2013 Italian Reporting Requirements For Transactions Involving Black Listed Countries

1. INTRODUCTION

   The constant attention of the Italian Tax Administration for exchanges made with operators established in the so called "black-listed" countries and the difficulty, for the tax payer, to obtain the disapplication of the rules enforcing the non-deductibility of those costs, make the discipline foreseen by article 110, paragraph 10 of the Republic Presidential Decree nr. 917 dated December 22nd 1986 a recurrent theme of tax assessments and particularly sensitive for those companies working with foreign suppliers.

2. ENFORCED LAWS

   The main rule regarding the deductibility of costs deriving from transactions incurred with "black-listed" countries is included in the paragraph 10 of article 110 of the Italian General Tax Law (T.U.I.R.) that provides: "Expenses and other negative incomes deriving from exchanges incurred with enterprises resident or located in countries or territories different from the ones included in the (white) list identified by the article 168-bis of this Republic Presidential Decree, are not deductible from corporate income for tax purposes. This deduction is allowed for exchanges incurred with enterprises resident or located in European Union member states or within the European Economic Space included in the list of the mentioned decree".

   The discipline of black-listed countries is applicable to all subjects running an enterprise within the Italian territory.

   Under some clarification of the Italian Tax Agency this discipline is applicable also to exchanges incurred with:

   the Permanent Establishment of an enterprise incorporated in a country with ordinary taxation regimen, placed in a black-listed country (i.e. the PE of a French enterprise, established in Hong Kong); the Permanent Establishment of an enterprise incorporated in Italy, placed in a black-listed country (i.e. the PE of an Italian enterprise, established in Cayman Islands); Non deductible costs are, in example:

   expenses suffered to purchase goods and services; amortizations and depreciations of assets purchased from a black-listed country; social security and pension contribution; losses on goods and credits; accruals for risks on credits and currencies exchanges; In general are not deductible all costs and expenses deriving from exchanges incurred with a black-listed enterprise or professional.

   The above limitations become not applicable when the enterprise resident in Italy is able to demonstrate that those exchanges (purchases) have been made without any intention of evading Italian taxes on income.

   In particular the non-deductibility can't be applied when the company:

   includes deducted amounts in its Income Tax Return showing them separately from all the other costs (the income tax return form foresees a specific box to outline those black-list expenses)1; within 90 days from the request by the Italian Tax Agency is able to demonstrate with appropriate supporting documents: that the foreign seller located in a black-listed country runs a commercial business (first exemption);

   that exchanges incurred have been made under a specific economic interest and have been concretely executed.

   The Tax Administration is not obliged to consider has satisfactory the proofs and demonstrations given by the tax payer, but, in this case, they have to motivate their decision within the assessment notified to the company.

   Moreover the Italian enterprise can ask for the disapplication of this law with a pre-emptive request under the rules set by article 21 of the Law nr. 413 dated December 30th 1991 ("interpello") submitting in...