Discussions at this National Roundtable commenced with a reference to the old cartographic practice of marking unknown and dangerous lands with the expression “Hic sunt leones”. It was suggested that, today, the same could be done if charting a hypothetical map of business taxation in Italy: an insidious terra incognita in which that peculiar invention of the judiciary known as “abuse of rights” generates confusion and uncertainty.
The application of the abuse of rights doctrine was singled out as one of the crucial issues that the recent enabling law for tax reform (the so-called delega fiscale) will need to address as part of a comprehensive overhaul of the relationship between Italian tax authorities and taxpayers.
The participants noted that the concept was initially developed as a principle with limited scope by the European Court of Justice, and was then picked up and amplified as a general principle by the Italian Supreme Court of Appeal so as to furnish tax authorities with the power to disallow the tax benefits derived from any dealings which – though strictly-speaking legal – make contrived resort to legal or financial mechanisms to obtain tax savings, without there otherwise being any sound business purpose for their use.
The doctrine was described as essentially serving as a “safety valve” for the legal system, aimed at preventing the law being used to subvert its own principles.
However, the rampant application of this broad principle has given rise to a number of problems of both systemic coordination and practical application.
Indeed, loosely-defined judicially-developed doctrines of this ilk, probably more at home in a common law system, are at odds with a rigidly-codified tax system such as Italy’s, which is effectively based on the principle of “no taxation without representation” (enshrined in Article 23 of the Constitution), hence entailing that only the legislature is empowered to promulgate rules governing matters of taxation. The potential for detriment in terms of creating legal uncertainty is therefore significant.
On a practical level, abuse of rights – as the concept has been fleshed out in national case law – has general application and may be raised ex officio at any stage and level of proceedings. The result is that, in many cases, it is not possible to predict whether transactions yet to be carried out will or will not be upheld as legitimate by tax authorities.
It was stressed that legal certainty (especially in terms of the predictability of the consequences of one’s actions), in addition to being a basic pillar of the rule of law, is an essential ingredient for the country’s competitiveness. Indeed, unlike risk, which is intrinsic to any business activity, uncertainty drives Italian entrepreneurs to take flight and invest elsewhere.
The recent empowerment of the Italian government to enact tax reforms, effected through Law no. 23 of 11 March 2014, was characterized as an attempt to address the consequent need for greater systemic certainty, including by paving the way for the introduction of a prescriptive definition and delineation of the concept of abuse of rights, the institution of a set procedure for raising challenges on the grounds of abuse, the overhaul of applicable administrative and criminal penalties (also so as to make them proportionate with any offense committed), and the establishment of an ongoing dialogue between taxpayers and tax authorities.
Indeed, the overall aim seems to be that of reshaping the relationship between tax authorities and taxpayers by increasing regulatory and transactional certainty, in return for greater transparency on the part of taxpayers (it being envisaged, among other things, that tax risk management will be integrated into internal corporate governance controls).
It was conceded, however, that this approach will not be without its obstacles. On the one hand, it must contend with the direct derivation – through case law – of the concept of abuse of rights from the ability-to-pay principle of taxation enshrined in the Italian Constitution, which constitutional grounding could allow the requirement that tax regulation be effected through ordinary statute law to be bypassed, such that an abuse of rights challenge could potentially be raised ultra legem, thereby undermining the very objectives of the enabling law. On the other hand, it must also contend with the rigid fiscal stance often taken by tax authorities in their relentless efforts to boost revenue performance.
It was thus proposed that in order to avoid this scenario, it will be necessary to: (i) bolster existing extra-judicial mechanisms to deal with abuse of rights claims by putting in place a well-defined procedural process for handling such cases; (ii) proscribe the ex officio entitlement to raise a challenge on the grounds of abuse of rights at any stage or level of proceedings; (iii) accord court rulings on abuse of rights the weight of precedent, thereby lending substance to taxpayers’ right to claim good-faith reliance (in their dealings with tax authorities) vis-à-vis actions taken in compliance with relevant judicial pronouncements; and (iv) ensure that the legislative decree to be issued pursuant to the enabling act stipulates that it represents a direct application of the ability-to-pay principle of taxation enshrined in the Constitution, such that the “interpretative slant” given by the legislature removes any scope for further broad and/or inventive interpretations.
By way of conclusion, it was suggested that there is also a case for taxpayers providing more extensive, timely and ongoing disclosure of business data, under the umbrella of cooperative compliance procedures, in exchange for a more limited application of the principle of abuse of rights, and a smoother and more collaborative relationship between taxpayers and tax authorities.