Prepared by Amélie Mammone e Giulia Ripa
With the Answer to the Ruling request no. 119 of last 17 February 2021, the Italian Tax Authorities have analyzed, with regard to a taxpayer case, the relevance of the termination of agreements providing continuous or periodic supplies due to the omitted payment of the considerations for the purpose of credit notes’ issuance under Article 26, paragraphs 2 and 9 of the Presidential Decree 26 October 1972, no. 633 and various additional related issues asked by the claimant.
More in particular, the case submitted to the Italian Tax Authorities by a company operating in the energy and gas sector regards various scenarios. Most of them are characterized by the breach of clients that, before or after the omitted payment of the bills, exercise the right of withdrawal of the agreement pursuant Article 1373 of the Italian Civil Code (i.e. diritto di recesso), by changing in this way the energy and gas supplier (so-called “switching”).
On the basis of the agreements with the clients, in case of omitted payments (of the clients), the claimant company sends a formal notice (i.e. costituzione in mora) with suspension of the supplies in order to obtain the payment of the sums due. Following this and in case of omitted payment, the Company can terminate the agreement in accordance with Article 1456 of the Civil Code by means of a simple written communication sent through registered mail, having included in the agreements with the client the “express termination clause” (i.e. clausola risolutiva espressa).
In the Ruling request under exam, the Company asked the Italian Tax Authorities to confirm that it is entitled to recover the VAT on unpaid invoices following the activation of the express resolution clause in various cases including, among the others, and especially, the ones in which the client carried out the so-called “switching”, in order to determine which reason for terminating the legal relationship between the parties prevails for the purposes of VAT recovery related to unpaid invoices through the issuance of credit note pursuant to the above-mentioned Article 26 of the Presidential Decree no. 633/1972, given the different legal effects of the two legal institutes.
More in particular, the Italian Tax Authorities have been asked to rule on the following cases:
- case in which the customer first changes the electricity supplier and then fails to pay the amounts due;
- case in which the customer, having already failed to pay the amounts due, changes the electricity supplier;
- case in which, although the customer has failed to pay the amounts due, the contractual relationship continues between the parties, and
- the Company continues to provide the electricity service because it is attempting the recovery of the credit, or
- the Company has suspended the supply of the electricity service but it may re-start the supply at any time, as the delivery point (of the electricity, precisely) is still given to it;
- case in which the Company, following the customer’s failure to pay the amounts due, has activated the express termination clause pursuant Article 1456 of the Civil Code, by terminating the agreement.
In addition, the claimant Company requested confirmation on when the condition for issuing the credit notes occurs in case that the agreement includes an express termination clause – as in the cases described above – in order to meet the timing provided by the VAT Law with regard to the exercise of the right to VAT deduction provided by Article 19, paragraph 1 of Presidential Decree no. 633/1972 (and the relevant deadline).
This because of certain previous tax practices in which the Italian Tax Authorities seemed to consider the “event” stated in the express termination clause rather than the formal aspect of the communication of the fulfilling part of its intention to avail itself of it, thus, by suggesting a different relevance of the “formal communication” for civil and fiscal purposes.
In the case under exam, the “event” is to be identified in the useless “expiration of the deadline provided in the formal written notice with suspension of the supply of the service (when this precedes the switching) or the switching itself if it precedes the customer’s default”.
It is important to identify the precise moment starting from which it is possible to exercise the right to deduct VAT on unpaid invoices as, although the issuance of the credit notes due to the activation of the express termination clause is not subject to the time limit of one year provided for by Article 26, paragraph 3 of Presidential Decree no. 633/1972 (since it does not depend on a “subsequent agreement between the parties”), it is nevertheless necessary to comply with the deadline provided by Article 19 of the above-mentioned decree. In addition, in some cases, the customer’s default has occurred in relation to invoices issued even the year following the interruption of the service or the switching (reference can be made to an invoice issued on the basis of estimated data that must be amended or updated on the basis of actual consumption).
Last, the Company has requested the Italian Tax Authorities to confirm that it can activate the express termination clause with the consequent recovery of VAT in accordance with the procedure of the same even when the applicant has already activated the mechanism to recover the credit own towards the defaulting customer through the charge of the so-called C-MOR (i.e. Corrispettivo Morosità) by the new supplier and it has not found satisfaction yet. In this regard, for sake of completeness, it has been also requested to confirm the VAT treatment of the sums recovered through the so-called C-MOR after the activation of the express termination clause.
The payment of the so-called C-MOR takes place through a mechanism provided within the Integrated Information System and it consists in the payment of a forfait sum amount calculated on consumption estimations in favor of the old supplier but applied by the new one in the first useful bills.
The mechanism of C-MOR has been introduced in the sector in order to discourage opportunistic conducts by final consumers who switch for the sole purpose of not paying the amounts due.
The Italian Tax Authorities, in answering the query (which consisted, in the practice, in the analysis of various aspects to be faced/managed day by day by operators of the so-called “utilities” sector), ruled important principles not only for the electricity and gas operators but also for other sectors in which operators provide services on a continuous or periodic basis (e.g. telephone and television operators).
First of all, the Italian Tax Authorities stated that in the case described by the applicant, the time limit of one year provided for the issuance of the credit note under Article 26, paragraph 3, of Presidential Decree no. 633/1972 does not apply, as the non-payments do not depend on a “subsequent agreement between the parties”. In addition, considering that the transactions under exam have been carried out on the basis of agreements to be executed on continuous or periodical basis, the termination of the agreement does not impact on the supplies already carried out between the parties (pursuant to paragraph 9 of the above-mentioned Article 26).
It follows that, once that the invoice has been issued and the obligation to pay the tax has been fulfilled, the operator may issue the credit note without time limits “in relation to the services carried out, and not paid , prior to the resolution (…)”.
Moreover, on the basis of the clarifications provided in Circular Letter no. 1/E of 17 January 2018, the Italian Tax Authorities have highlighted again that: “according to Article 26 and Article 19 of the above-mentioned decree, said procedure must be followed (and, therefore, the credit note must be issued) within the timings provided by paragraph 1 of the aforementioned Article 19.
In particular, taking into account the new wording of Article 19, paragraph 1 of Presidential Decree no. 633/1972, the credit note must be issued (and the higher VAT paid at the time can be deducted), at the latest, by the deadline for the submission of the Annual VAT return related to the year in which the condition for issuing the credit note occurred (please see, with regard to the identification of the year under exam, Ruling no. 89/E of 18 March 2002, confirmed by subsequent Rulings no. 307/E of 21 July 2008 and no. 42/E of 17 February 2009)”.
Therefore, it has been clarified that, in case of supplies of electricity and gas already invoiced and not paid by the final customer who, before or after such default, has changed electricity supplier through the so-called “switching”, the event grounding the issuance of the credit note is the termination of the agreement activated by the supplier, to be intended, according to the principle ruled by the Italian Tax Authorities (in accordance with the documents of practice and case law referred by the applicant Company), in the material interruption of the contractual relationship and of the supplies and included in the communication sent to the defaulting customer, as provided for in the agreements stipulated with the clients, followed by the formal communication.
In this way, the Italian Tax Authorities considered prevailing, as reason of the termination of the legal relationship between the parties for VAT purposes, the termination due to breach through the activation of the express termination clause rather than the withdrawal of the client, as the latter has been not exercised in good faith, by sharing the conclusions of the applicant company
In the situations described, it has been expressly acknowledged that neither the formal written notice of the supplier to the defaulting customer necessary for activating the express termination clause nor the withdrawal of the defaulting consumer – operating at civil level – are relevant from a VAT perspective for the purpose of activating the VAT recovery through credit notes, with the result that the energy supplier may recover VAT on all the unpaid invoices.
This interpretation has been released for the first time by the Italian Tax Authorities, confirming, therefore, the opportunity for the operators concerned, some of whom as a matter of prudence did not operate any deduction in case of “switching” of the customer, to proceed with the issuance of credit notes to recover VAT with relevant financial benefits.
In such a case, as anticipated, although there are no time limits for the issuance of the credit notes, in order to exercise the right of VAT deduction, they must be issued, at the latest, by the deadline provided for the submission of the Annual VAT return related to the year in which the interruption of the supply occurred (as the applicant Company did). The deducted VAT will be included in the settlement/balance of the period in which the credit note has been issued or, at the latest, in the Annual VAT return of the year in which said credit note has been was issued, according to the latest clarification provided by the Italian Tax Authorities in its Ruling no. 192 published on 24 June 2020.
In case that the invoices are issued after the interruption of the supply or after the switching of the customer, the conditions for the issuance of the credit notes must not be found in the activation of the express termination clause (which precedes the material issuance of the invoice and its registration) but in the non-payment that occurs in case of unsuccessful insolvency proceedings or unfruitful individual enforcement actions.
Last, following the clarifications already provided in Ruling dated 9 November 2011, no. 106/E on the C-MOR, the Italian Tax Authorities confirmed that the indemnity amounts paid after the withdrawal of the customer is out of the Italian scope, since they consist in a way through which the creditor recovers its credit having the nature of a mere compensation and not of consideration for VAT purposes. Therefore, such sums are considered as mere reintegration/compensation out of the VAT scope according to Article 2, paragraph 3, letter a) of Presidential Decree no. 633/1972.
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