Tax Analysts: Italy VAT reverse charge on goods

Sonia Piazonni, TMF VAT, Milan, Italy, January 2010

Click here to contact the author of this article, Sonia Piazzoni of TMF Milan, if you have any questions

Foreign companies selling goods in Italy under a local VAT registration may suffer huge cash flow delays following new proposals currently making their way through the Italian Parliament.

The extension of the mandatory ‘reverse charge’ procedure is intended to help simplify reporting requirements and comply with EU Directives. However, it will also result in many foreign businesses being left with large VAT credits which can take years to recover from the Italian tax authorities.  This will undoubtedly lead to some companies having to change their business arrangements or even cease trade in Italy.

Whilst these changes have not been formally included in Italian tax legislation, the tax authorities have indicated that they will apply from 1 January 2010.  These proposed changes come in addition to the EU 2010 VAT Package, which changed the place of supply of services rules.

Italy seeks to conform with other EU countries

Currently, foreign companies buying and selling goods within Italy are generally required to register for and charge Italian VAT of 20% to their customers.  Following the deduction of any Italian input VAT incurred in buying any goods or services locally, the trader must pay over the net VAT to the Italian tax authorities.

Over the past few years, a number of other countries within the EU have introduced various simplifications to the above process, including shifting the collection and reporting of VAT from the supplier to the customer.  Unfortunately, these changes vary in the detail, only adding further complexity to the EU rules.  For example, in Spain the responsibility for the VAT on goods transactions is with the recipient, even if the recipient does not hold a Spanish VAT number. In the Netherlands this applies only if the recipient is a Dutch resident company.  Many of these measures have been implemented to simplify bureaucracy and reduce VAT fraud.

Italy has now brought forward draft legislation to introduce a similar mechanism.  The proposals would mean that non-resident companies supplying goods locally would no longer charge VAT to Italian resident companies.  They would still be required to charge VAT to other non-resident companies or private individuals.  This last category would apply to the rapidly expanding international internet retail industry whereby the seller is required to charge local consumers with Italian VAT once they pass the Italian distance selling threshold of €35,000 per annum.  These non-resident traders will still be required to pay VAT on goods and services purchased in Italy.

Under this new regime, any company selling only to Italian resident companies will almost certainly be required to deregister for Italian VAT, and recover any input VAT through an 8th Directive claim.

Aside from non-residents providing goods to other non-resident customers and private individuals, there are a number of other situations where foreign traders would not deregister, including:

  • Intra-community acquisitions and dispatches, which covers the sale of goods to and from Italy from other EU member states; and
  • Exports and imports from outside the EU.

Foreign companies facing years of cash flow delays

Under these proposals, non-resident companies would still be charged VAT on any local purchases of goods.  However, where they will no longer charging VAT, they will now be left with potentially large VAT credits to be reclaimed from the Italian tax authorities.  This will create a long cash flow delay since, unlike most EU Member States, the Italian tax authorities usually take between one and five years to repay VAT credits.  

The VAT credit procedure in Italy is further complicated by the process of applying for the refund.  A company which is VAT registered in Italy may only request credit repayment in February of the year following the receipt of the purchase invoice.   Following a full VAT inspection a three year bank guarantee is also required, from an Italian bank (or authorised foreign bank), for the value of the credit plus an estimation of interest.

For many large corporations, operating international commissionaire supply chain-type operations, this could easily run into millions of Euros being trapped with the Italian authorities.  Many smaller traders may simply walk away from their Italian trade since such delays would make the business unsupportable.

For non-resident companies which have to deregister, they will be required to use 8th or 13th Directive VAT reclaims to recover any Italian VAT incurred.  Although the EU time limit is now 4 months reduced from 6 in January 2010, Italian reclaims nevertheless frequently take 18 months or more.

Implementation date uncertain

The original proposals were approved by the Italian Senate in mid-December 2009.  However, they missed the planned approval in time for 1 January, 2010 - there is a widespread expectation that they will be passed before the end of January.

The Tax Office (circular 58/E, 31/12/2009) has indicated that this change is now in force even though the Italian legislation has not yet been updated.

At present, many companies, especially the large supply chain operators are reviewing strategies to avoid being left with large tax credits or reclaims.  This includes forming local companies to switch to a resident status, and thus permitting the continuation of collecting VAT on sales.  However, there are strict rules on permanent establishment that need to be considered, and companies should tread with caution.

Click here to contact the author of this article, Sonia Piazonni of TMF Milan, if you have any questions


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