Prepared by Lucia Pagliari, Amélie Mammone and Giulia Cannatelli
With the Ruling dated on 3rd January 2022, no. 1/E, the Italian Tax Authorities provide guidance on the VAT treatment of differentials due in execution of contracts related to derivative financial instruments on commodities on the basis of the change of the electricity price, by amending their previous interpretation.
More in detail, the case examined by the Italian Revenue Agency relates to a sale and purchase agreement of a quantity of electricity at a fixed price (so-called “Power Purchase Agreement”) concluded between a wholesaler and the owner of a production plant for a certain period of time in order to cover the risks related to the change of the electricity price.
Pursuant to this agreement, the two companies are committed to pay each other the differential determined by the difference (positive or negative) between the fixed price set out in the agreement and the price provided for in the so-called “PUN” (i.e. the hourly value of the Single National Price). This by making reference to the quantities of the electricity produced and fed into the grid by a newly constructed production plant (using photovoltaic source) located in Italy and subject to another independent sale and purchase agreement between the seller and a third company.
Considering that, based on the fluctuation in the price of electricity, it could happen that it is the purchasing company that has to pay the differential, the latter asked the Italian Tax Authorities to clarify (i) whether the Power Purchase Agreement (as structured by the parties) is a derivative contract (whose function is to “finance” the construction of the above-mentioned photovoltaic plant) and (ii) whether the clarifications of the Ministerial Ruling dated on 16 July 1998, no. 77/E, based on which the differential are out of the Italian VAT scope, continue to apply.
In brief, in the opinion of the Italian Tax Authorities, an agreement such as the “Power Purchase Agreement” providing the sale and purchase of electricity with regulation and commitment to the payment of price differentials, aimed to cover the risk of fluctuation of the electricity price (to be assessed “on the basis of a detailed analysis of the clauses of the agreement, to be conducted case by case, emphasizing individual elements which can be deduced from the contractual agreements”) constitutes a commodity derivative contract and, more precisely, a so-called swap contract.
Moreover, the transactions covered by contracts related to derivative financial instruments on commodities – from which, on expiry, the receipt or the payment by the parties, respectively, of positive or negative monetary differentials may arise – are considered for VAT purposes as supplies related to financial instruments and their taxable base is the differential itself. In other words, the differentials due in execution of contracts related to derivative financial instruments on commodities on the basis of the change of the electricity price are relevant for VAT purposes, even if they are considered VAT exempt.
First of all, in grounding this conclusion, the Italian Tax Authorities recall the civil definition of swap contract provided by the Italian Supreme Court on several times.
According to said jurisprudence, the swap contract is a risk-weighted contract by which the parties oblige themselves to pay, one towards the other and at the expiry of a fixed term, a certain amount of money, which is determined by an uncertain event.
Having made the calculations at the expiry of the fixed term, one of the parties is indebted to the other one and the first party is, therefore, obliged to pay the difference.
Then, in light of this civil law definition, the Italian Tax Authorities deem that the VAT treatment of derivative finance transactions is provided by Article 10, no. 4) of the Presidential Decree dated on 26 October 1972, no. 633, by identifying the related taxable base, exempt from VAT, in the amount of the same monetary differential. This by extending the provision included in Article 4 of Law dated on 8 May 1998, no. 146 for transactions dependent on repurchase agreements.
Last, the Italian Tax Authorities confirm the overcoming of the position previously released in the Ministerial Ruling dated on 16 July 1998, no. 77/E, by clarifying, in conclusion, that: (i) the differentials due in execution of contracts related to derivative financial instruments on commodities on the basis of the change of the electricity priceare relevant for VAT purposes, even if under an exemption regime; and (ii) the relevant taxable amount must be identified in the amount of the monetary differential itself.
Previously, the differentials were considered the subject matter of the contract itself rather than consideration and, as such, they were treated as sums not relevant for VAT purposes due to the lack of a “functional synallagma”.
This new approach is not beyond doubt. Indeed, swap contracts differ in many aspects from repurchase agreements. The tout court extension of the rule, which does not mention price differentials, does not seem obvious.
Moreover, among the other possible comments, it is worth noting that, in some cases, such contracts do not have a prevailing financial cause but are characterised by a particular aleatory nature both in the “an” and in the “quantum” of the potential sum, as may be the case for certain types of derivative contracts.
The Ruling could entail a considerable impact on operators both in terms of the VAT obligations to be fulfilled (even if there is no obligation to issue the invoices for the exempt transactions at stake) and with reference to the consequent limitation of the right of deduction (e.g. pro-rata/separation of activities for operators that also carry out taxable transactions, as typically in the energy sector).
As pointed out in the same practice document under discussion, it is essential to carefully analyse the agreements and the relevant clauses in order to determine whether it is in place a commodity derivative contract to which the above-described clarifications are applicable, in order to evaluate the new impacts.
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PwC TLS Avvocati e Commercialisti
PwC TLS Avvocati e Commercialisti