Prepared by Andrea Porcarelli and Mario Volpe
The first tax return after issuance of the Circular Letter No. 2/2022 (“Circular”) on hybrid mismatches arrangements by the Italian Revenue Agency (ex art. 6-11 of Legislative Decree 142/2018) is due next November (for calendar taxpayers).
A key matter to deal with is the extent to which a taxpayer must have an appropriate documentary set in place, supporting the “anti-hybrid” analysis performed before submission of the 2022 tax return.
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Throughout the Circular, the Italian Revenue Agency pointed out that as a best practice for tax risk management, taxpayers are encouraged to perform an appropriate anti-hybrid analysis, also by cooperating with associated enterprises, to understand whether any hybrid mismatches arrangements have arisen along their organization structure before submitting the income tax return. The analysis would enable them to collect an accurate probative documentary set (“anti-hybrid Dossier”) explaining the hybrid mismatches’ assessment process they developed and implemented to determine their taxable base for income tax purposes.
As of today, no specific format or reporting/declaration obligation to the Tax Authorities are provided regarding the Dossier. However, a properly structured Dossier may be decisive in case of a tax audit on hybrid mismatches arrangements, as it would allow the tax authorities to identify the role (if any) adopted by the taxpayer in the relevant hybrid mismatch arrangement (this is a key aspect to consider in order to understand the right behavior that a taxpayer should have kept in drafting the tax return).
In a nutshell, the procedural framework that emerges from the Circular in the event of a tax assessment is the following:
- According to Article 11 of Legislative Decree No. 142/2018, the Tax Authority must, before issuing a tax notice and by specific act, indicate its grounding reasons that deem the violation has occurred and request clarifications from the taxpayer. In turn, the taxpayer is given 60 days for providing a reply;
- In this respect, the Circular splits the burden of proof between the Tax Administration and the taxpayers whereby it requires the former to demonstrate the “constitutive facts“of the claim and the latter to “provide evidence that the case does not apply or of the existence of facts preventing or extinguishing said claim“. In this way, the Circular outlines “implicit documentary burdens” on the taxpayer (belonging to Italian or foreign- based groups, thus including also the Italian subsidiaries belonging non-resident groups). However, the Circular also clarifies that the new anti-hybrid rules do not automatically introduce deduction for intercompany costs only if supporting extensive documentation certifying the absence of hybrid mismatches is provided. Instead, the evidence “ordinarily provided to exercise the right to deduct an item of income” is deemed as sufficient.
- Lastly, the Circular specifies that in case of failure to reply or incomplete reply to the request for clarifications (as per point 1 above), the provisions of paragraph 5 of Article 32 of Presidential Decree 600 of 1973 apply: “The news and data not adduced and the deeds, documents, books and registers not exhibited or not transmitted in response to the invitations of the office cannot be taken into consideration in favor of the taxpayer, for the purposes of the assessment administrative and litigation “.
In this case, the Tax Authority may be legitimized to operate on the basis of the information collected, even if they are incomplete due to the inertia of the taxpayer and not for reasons attributable to force majeure.
As observable in the procedural framework described above, the pre-drafting of an accurate probationary anti-hybrid dossier before submitting the tax return could become a, so to speak, “necessary” opportunity for proper tax risk management and for tackling any potential criminal consequences.
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