TURNAROUND ON THE TAX DEDUCTIBILITY OF ‘BLACK-LISTED’ COSTS

As of January 1, 2023, the provisions on the deductibility of costs arising from transactions with entities located in non-cooperative jurisdictions for tax purposes are reinstated, re-proposing a rule already in force until the 2016 Italian Budget Law, which had sanctioned the repeal of the discipline with effect from the tax period following the one in course to December 31, 2015.

Unlike in the past, the identification of so-called ‘black-listed’ countries or territories has an innovative element, i.e. it is no longer entrusted to the issuance of a ministerial decree but to a list updated twice a year by the Council of the European Union, containing the list of jurisdictions that maintain an inadequate standard of tax governance, or that have not fulfilled their commitments to the EU to implement necessary reforms towards tax transparency regimes.

As of the effective date of the Budget Law 2023, the 12 countries included in the EU ‘blacklist’ are: American Samoa, Anguilla, Bahamas, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, Turks and Caicos Islands, US Virgin Islands, Vanuatu.

However, in a decision of 14 February 2023, the Council of the European Union also added Russia, the British Virgin Islands, Costa Rica, and the Marshall Islands to the list of non-cooperative jurisdictions for tax purposes, thus bringing the number of states to 16.

To resident enterprises, to natural persons in the exercise of business activities and to permanent establishments on the Italian territory of non-resident entities that incur expenses and other negative components towards entities resident in non-cooperative jurisdictions (including services rendered by professionals domiciled therein), are made applicable the provisions introduced in paragraphs 9-bis to 9-quinquies of Article 110 of the Consolidated Income Tax Act (for the four countries included in the ‘black’ list on 14 February 2023, the limits on deductibility apply to expenses incurred from that time).

The rule, therefore, requires the taxpayer to verify a double level of control for the deductibility of negative income components ‘arising from transactions that were actually carried out’ with ‘black-listed’ entities:

1. the costs for the purchase of the goods and/or services are deductible up to the limit of the relevant normal value determined pursuant to Article 9 of the Consolidated Act on Income Tax (Paragraph 9-bis of Article 110 of the Consolidated Act on Income Tax);

2. the portion of the cost exceeding the normal value is allowed as a deduction if the transaction carried out responds to ‘a real economic interest’ (para. 9-ter of the same rule).

From an operational point of view, costs incurred in respect of non-cooperative jurisdictions will have to be reported separately in the tax return. Thus, the operational guidelines already contained in the declaration forms in force until the tax year 2015 will be reinstated.

In any event, the taxpayer will have the opportunity to file an interpellation petition if he wishes to receive an opinion on the suitability of the evidentiary framework regarding the actual economic interest for the purposes of overcoming the non-deductibility of negative components exceeding the relevant normal value. Otherwise, in the event of an audit by the Italian Tax Authority, a preventive cross-examination will be held during which the taxpayer will have 90 days to provide evidence on the existence of a real economic interest to justify the expenditure incurred in respect of the company in question.

In terms of sanctions, in the case of omitted or incomplete indication in the income tax return of the expenses and other negative income components arising from transactions with non-cooperative jurisdictions, an administrative sanction equal to 10% of the total amount of the omitted expenses and other negative income components, with a minimum of 500 and a maximum of 5,000 euros, is provided for (Article 8, paragraph 3-bis of Legislative Decree No. 471/1997). If the exigent circumstances to support the deductibility of the costs are established (concrete execution of the transaction and proof of actual economic interest), the sanction will be imposed in relation to merely formal violations for omitted separate indication of income components. Otherwise, the breach will fall within the scope of misrepresentation (Article 1(2) of Legislative Decree No. 471/1997), with recovery for taxation of non-deductible negative income components and administrative sanctions of between 90% and 180% of the higher taxable income (plus interest).