The Italian Supreme Court states that the customer who receives a taxable invoice, instead of an exempt (with or without right to deduct) or excluded from tax invoice, is not entitled to VAT deduction
Prepared by Davide Accorsi and Paola Bramato
With the recent decision of the Supreme Court, the scope of application of Article 6, paragraph 6, second sentence, of Legislative Decree no. 471/1997, introduced by Law no. 205/2017, has been clarified.
The mentioned provision gives the customer the right to deduct VAT applied in excess by the supplier, with the imposition of a fixed penalty ranging from 250 euros to 10,000 euros.
Specifically, the deduction is allowed, with the imposition of the aforementioned fixed penalty, when:
- the wrongly applied VAT has been paid by the supplier; and
- the violation is not carried out in the context of a tax fraud.
Since its entry into force, the above-mentioned provision has been subject to differing interpretations.
In fact, the concept of “VAT applied at a higher rate than the effective one” could be abstractly applied both to the scenarios where the supplier applies a rate higher than the correct one, and the scenarios in which he/she applies VAT instead of exempting the transactions.
However, while the applicability of the rule in case of a higher rate has always been undisputed, the same cannot be said for cases of incorrect qualification of exempt (with or without right to deduct) or excluded from VAT transactions.
In particular, the Italian tax police (i.e. “Guardia di Finanza”) circular letter no. 114153 of 13 April 2018, and the Association of Italian Joint Stock Companies (i.e. “Assonime”) circular letter no. 12 of 31 May 2018, are in favor of the possibility to deduct VAT applying a fixed penalty also in case of incorrect qualification of exempt (with or without right to deduct) or excluded from VAT transactions.
On the contrary, Italian first and second instance tax Courts had denied the deduction for exempt transactions (with right to deduction), qualified as taxable by the supplier (C.T. Prov. Milan 3 December 2018, no. 5497/10/18, C.T. II degree Trento 28 February 2019, no. 20/1/19), as well as for those excluded from VAT transactions, qualified as taxable by the supplier (C.T. Reg. Milan 13 September 2019, no. 3483/21/19).
In accordance with the relevant case law, the recent judgment of the Supreme Court no. 24289 of 3 November 2020, with specific reference to exempt transactions (with right to deduction), has restricted the scope of application of Article 6, paragraph 6, second sentence, of Legislative Decree no. 471/1997, based on the specific wording of the provision.
Therefore, as clarified by the Court, the aforementioned provision applies only to the case of taxable transactions where VAT is erroneously charged on the basis of a higher rate than that actually due.
In cases of erroneous qualification of a taxable transaction as exempt (with or without right to deduct) or excluded from VAT, the customer cannot deduct the VAT charged to him/her. In case of wrong deduction, he/she would be liable to an administrative penalty equal to 90% of the amount of the deduction made.
It follows that the customer, who pays to the supplier the wrongly applied VAT instead of receiving an exempt (with or without right to deduct) or excluded from VAT invoice can only recover such VAT from the supplier pursuant to art. 2033 of the Italian Civil Code, within the ten-year limitation period for civil proceedings. Alternatively, if the action against the supplier is impossible or excessively difficult to pursue (for example in the case of insolvency of the supplier), in line with the provisions of the Court of Justice of the European Union, the customer could act for reimbursement directly against the tax authorities (see judgments C-35/05 (Reemtsma Cigarettenfabriken GmbH) and C-427/10 (Banca Antoniana Popolare Veneta)).
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