TAX UPDATE #1 – Voluntary Disclosure

VOLUNTARY DISCLOSURE OF OVERSEAS ASSETS

“Voluntary Disclosure” means the return of assets (funds, valuables, property) from overseas to Italy, and will soon be defined by an amendment to the Financial Stability Act now before the Italian parliament.

The first drafts of the amendment provide for a reduction of penalties by half,  if the assets are held in whitelist countries, and only reduced by a quarter if it were hidden from the Italian tax authorities  in the blacklisted countries. There will also be a shield from criminal prosecution for offences such as non-declaration ordinarily subject to 1 to 3 years’s jail, while for the most serious crimes of fraudulent misrepresentation and false invoicing or accounting the penalty is reduced by half, from a minimum of 18 months to 9 and a maximum of 6 to 3 years imprisonment.

It is important to note that it is not a tax shelter nor an amnesty, and it does not guarantee anonymity. There will be time to begin the process of disclosure up until 30th September 2016.  There are situations  in which the procedure for voluntary disclosure will not be possible, for example, when the taxpayer is aware of forthcoming inspections, audits, or after commencement of any administrative or criminal proceedings for violations of tax laws relating to assets held abroad.

What to do: taxpayers have to take the  first step in making voluntary disclosure that allows the return of capital.  In practice, any interested party must submit a request to the revenue agency that will indicate all of the investments and activities consisting of, or held abroad.  At the same time they must provide all documents and information necessary for the reconstruction of income. For fraudulent claims and false documents there is likely to be a sentence of six months to a year in prison.

The voluntary disclosure is a procedure that provides for:

Self-disclosure by the taxpayers (including both Italian nationals and foreigners) resident in Italy in relation to all economic activities and financial assets held abroad ( the self-denunciation must be total and not partial) and, consequently, the loss of anonymity;

The payment of all taxes relating to the activities and foreign investment have not been declared;

More favorable treatment for the application of sanctions against the taxpayer who wants to join;

The possibility to use it for an unlimited period of time (it is not set to expire ) .

On 31 July 2013, the Internal Revenue Service Circular No . 25 / E, as part of the international fight against tax evasion, identified through the UCIFI ( Central Office for international tax offences) the structure responsible for developing initiatives to encourage voluntary disclosure of economic activities and investments held illegally abroad by any person residing in Italy. There is a decision pending which will provide clarifications on the procedure.

The steps of the procedure

At the preliminary phase, the taxpayer meets with an accountant and provides a complete picture about the assets held abroad and not declared.

The UCIFI will issue notices of assessment in which are indicated the sums due by way of tax, penalty and interest;

The taxpayer pays what has emerged from the assessment notices and starts to officially declare assets held abroad.

The covered tax years are those ascertained in accordance with the current rules . In particular :

Investments and assets held in countries with which there is an exchange of information :

In the event of a filed declaration the assessment must be issued within the fourth year following the year of presentation (until January 1, 2014, the last ascertainable period is December 31, 2009)

In the event of omitted declaration the assessment must be issued by the fifth year following the year in which the declaration should have been made (until January 1, 2014 the last ascertainable period will be the 31 December 2008) .

Investments and assets held in tax haven countries (so-called black list countries)

In the event of a filed declaration, the assessment must be issued within the eighth year following the year of presentation (until 31 January 2014, the last ascertainable period will be December 31, 2005 ) .

In the event of omitted declaration, the assessment must be issued by the tenth year following the year in which the declaration should have been made (from January 1, 2014 the last ascertainable period will be December 31, 2003 ) .

Taxes

In the absence of information or instructions , the taxes due can be calculated by using :

the analytical method ;

the presumptive method or flat rate.

The analytical method requires a detailed reconstruction and demonstrable of all income received by the taxpayer over the period ” ascertainable .” Depending on the type of earned income ( dividends , interest, etc.). , Taxed at ordinary degree or in its stead . The presumptive method the  application of  average reference rate  set by the ECB . The income is then taxed in the ordinary way . It should be noted that the voluntary disclosure requires the full payment of taxes and accrued interest.

Penalties

There is reason to believe that sanctions related  to the RW section  will be imposed directly dall’UCIFI while those  relating to not declared and not paid taxes will be turned over to the various provincial offices . At the moment there are no legislative decisions  on applicable penalties. However, it is possible to state the following:

the current legislation allows the taxpayer recipient of a notice of assessment , to pay what is required by taking advantage of a reduced fine under cooperative attitude .

Article . 7 , paragraph 4 of Legislative Decree no. 472/1997 allows the Office , upon the occurrence of exceptional circumstances “showing manifest disproportion between the amount of the tax which the infringement relates and the penalty ,” to reduce up to half the applicable penalty.

It is important to note that the current penalty rules provide that, in the case of undeclared activities held in a tax haven country, all the assets are considered to be the result of foreign income subject to unpaid tax.

Criminal effects

The criminal implications of voluntary disclosure  is one of the most sensitive aspects of the whole procedure . The Legislative Decree no. 74/2000 provides that, above a certain threshold, misrepresentation and the failure to make a declaration constitutes a criminal offence. In this regard, the Italian government will need to pass an appropriate legislative act aimed to protect those who choose to make voluntary disclosure following fraudulent misrepresentation.

For further information or advice on the procedure for voluntary disclosure please contact us.