Italian Tax Alert - 2010 Tax Audit Policies

Recent guidance for tax inspectors in Italy shows greater focus on cross-border transactions.

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1. Executive summary

   The circular letter No. 20/E of April 16, 2010, containing the tax audit policies for the calendar year 2010, illustrates the continuing interest of the Italian tax authorities in international transactions.

   Companies should, in particular, review the documentation supporting intercompany crossborder transactions with specific reference to the 2007 and 2008 taxable periods.

2. Introduction

   On April 16, 2010, the Italian tax authorities released the circular letter No. 20/E containing the policies for tax assessments to be followed by tax offices in 2010.

   We summarize below some of the highlights of the letter.

   2.1 Tax audits on large-sized companies

   According to the recommendations made by the Italian tax authorities, for large companies, including those taxpayers with a turnover with more than 25 million Euro, the following transactions should be carefully analyzed by tax offices during 2010 tax audits:

   transactions aimed at exploiting international tax arbitrages: e.g., with hybrid instruments or hybrid entities; extraordinary and uncommon cross-border re-organizations; transfer pricing. Tax offices should also pay specific attention to significant changes in the taxpayers' taxable income and to the creation of net (tax) operating losses. The authorities believe that such changes might stem from aggressive tax planning schemes by taxpayers aimed at moving their taxable base from one country to another, in the context of the financial crisis.

   The circular letter points out the importance of co-operation by the Italian authorities with the tax authorities of other countries.

   Finally, the 2010 audit by tax offices should focus on the 2007 and 2008 taxable periods.

   2.2 Tax audits on medium-sized companies

   According to the circular letter, tax audits on companies with a turnover of 25 million Euro or less should be significantly increased.

   Specific attention should be paid to taxpayers with a low or nil taxable income over a number of years, or with a VAT turnover not in line with the type of company or, finally, with a VAT credit position not justified by the type of business.

   In addition, the following should attract the attention of the tax offices when...