EU & Italian International Tax Law Blog : International Tax Lawyer & Attorney : Marco Rossi Law Firm : Italy, New York, European Union, EU

The Foreign Account Tax Compliance Act (FATCA) was enacted by the United States Congress in March 2010 and became effective on January 1, 2013. It is intended to assist US efforts to improve international compliance with US tax laws and will impose certain due diligence and reporting obligations on foreign (non-US) financial institutions which hold financial accounts for US customers. Under the new law, foreign financial institutions will provide to the U.S. tax administration automatic information about their US customers' financial accounts. 

On 26 July 2012, the U.S. Department of the Treasury published a Model Inter Governmental Agreement which will form the basis of bilateral IGAs with jurisdictions that wish to adopt this alternative means for their financial institutions to comply with FATCA while minimizing compliance burdens.

Italy joined the U.S. with a groups of other countries in a Joint Statement announcing that Italy will enter into and use the reciprocal agreement with the United States to implement FATCA and enact a system of reciprocal automatic exchange of information pursuant to which:

- Italian banks and financial institutions will provide the US tax administration with information about Italian banking and financial accounts held by U.S. customers with Italian banks in Italy,

- U.S. banks and financial institutions will provide Italy's tax authorities with information about US banking and financial accounts and investments held by Italian customers with US banks in the United States.        

The Model IGA follows the U.S. Department of the Treasury and Internal Revenue Service's release of proposed FATCA regulations, and the simultaneous announcement of an intergovernmental alternative to FATCA implementation, on 8 February 2012.

On January 17, 2013 the Treasury Department and the Internal Revenue Services issued the set of Final Regulations implementing the information reporting and back up withholding tax provisions of FATCA, with far reaching implications for U.S. taxpayers with Italian bank and financial accounts, as well as Italian taxpayers with US bank and financial accounts,  in addition to foreign financial institutions as well as US banks as explained above.   

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Italian resident taxpayers are required to report to the Italian tax administration their foreign financial investments and assets, which can generate foreign-source income subject to tax in Italy. They report their foreign investments by filling out a special part of their annual income tax return referred to as form RW. Taxpayers who are not otherwise required to file an income tax return  (e.g., those who earn only salary income reported on form 730 equivalent to form W-2 in the United States) must file a full return just for the purpose of reporting their foreign investments on Part RW.

Italian international tax reporting through form RW is very extensive in scope and accompanied by very harsh penalties with very limited opportunities to rectify past mistakes or failures. It includes personal assets other than financial investments (e.g. personal residences, boats, jewelry, artworks). One section of form RW is used to report the value of the reportable assets at the end of the taxable year. Two separate sections are used to report outbound, inbound and foreign transfers of money or other assets relating to foreign assets subject to reporting (i.e. additional investments and disinvestments through purchases, sales or transfers of reportable assets).    

Reporting may be particularly complicated when foreign investments and assets are held through trusts or other foreign entities. Depending on the tax classification and treatment of the entity or trust the taxpayer may be exempt from reporting, required to report his or her own interest in the trust or entity itself, or required to report his or her own undivided ownership interest in the underlying assets held through the entity, with totally different results.

The duty to report revolves around several fundamental tax concepts: tax residency of the taxpayer, ownership of the asset, and tax nature of the asset and associated income.

Italian tax residency rules are far reaching and often based on technical and heavily factual tests. As a result, many non-Italian nationals who spend significant time in Italy for personal or business purposes or have personal, investments or business interests in Italy should act very carefully, especially now that the Italian tax agency is stepping up its enforcement actions in the effort of collecting additional revenue.

Indeed, if it turns out that they should be treated as resident of Italy for Italian tax purposes, they would automatically face the issue of not having reported their non-Italian assets, with all potential penalties associated with it, in addition to the main issue of having failed to file and their tax returns and to pay any taxes due.

International tax reporting rules are very technical and complex to administer. Italy’s tax administration issued a general guidance on international tax reporting of foreign assets and investments with Circular n. 45 of September 13, 2010. 

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With its Ruling n. 3769 issued on March 9, 2012, the Italian Supreme Court significantly departed from its previous line of decisions on the issue of characterization of a foreign-owned Italian company as the permanent establishment of its foreign parent.

The case in which the ruling has been issued involved Boston Scientific S.p.A., an Italian joint stock company ("BS SPA") whose stock is  owned for 99 percent by Boston Scientific B.V. ("BS B.V.") a Dutch company  and for the remaining 1 per cent by Boston Scientific Corporation, a U.S. corporation ("BS USA"), which in turn controls BS B.V.

BS USA was engaged in the business of designing, manufacturing and selling medical equipment and devices. BS SPA operated as commission agent for BS B.V. for the purpose of the marketing and sale of the products of BS USA in Italy and the EU. 

From the summary of the facts as reported on the Supreme Court Judgment it appears that BS SPA acted under the management direction and control of BS B.V,, operated exclusively for BS B.V. as its only  client  and signed sales contracts with customers under its own name although in the interest of and pursuant to the final approval from BS B.V.    

The Italian tax agency took the position that BS SPA lacked economic and legal independence from BS B.V. and it operated as agent of BS B.V. according to the substance of its business dealings with its principal and final customers, even though it normally signed the contracts in its own name.  As a consequence, the tax agency re-characterized BS SPA as the permanent establishment of BS B.V. in Italy and assessed additional taxes and penalties on BS B.V., which should have accounted separately for its sales of products carried out in Italy through BS SPA, file its own Italian corporate tax return and pay the Italian corporate income tax on its net profits from its Italian sales accordingly.

Both the Italian Tax Court and the Appellate Court ruled in favor of the taxpayer and rejected the agency re-characterization and tax assessment, motivating their decisions with the fact that BS SPA had its own separate business organization of which it sustained all the costs, had assumed the economic risks of its business operations and was legally bound by the contracts it signed with the final buyers of the products under its own name as seller.

The Supreme Court affirmed the decision of the Appellate Court concluding that it was sufficiently and adequately motivated and that the grounds for appeal set forth by the tax agency were not sufficiently explained and could not be considered.

The Court in particular referred to the provisions of article 5 of U.S.-Italy tax treaty and argued that the Italian tax agency failed to explain the reasons why those provisions should be read in a way to create a permanent establishment when an Italian company contracts under its own name and risks and bears the economic cost of its business organization through which it conducts its business in Italy, for the sole fact that it is owned and controlled by a foreign company and operates under the supervision and directions of its foreign parent company.

Ruling 3769 is very encouraging. Indeed, the ruling seems to depart from the Supreme Court's previously established case law stemming form its 2002 decisions in the Philip Morris case and to provide more clarity for foreign businesses which plan to expand their operations into Italy. 

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Il 17 Settembre scorso ad un convegno organizzato dalla American Chamber of Commerce in Italy a Milano abbiamo illustrato i principali aspetti legali e fiscali che le imprese italiane che investono sul mercato americano si trovano ad affrontare. Gli Stati Uniti, grazie alla loro competività e flessibilità, ad un mercato dei capitali estremamente evoluto, alla totale assenza di discriminazioni e barriere e a una grande propensione a premiare le capacità, lo spirito imprenditoriale ed il merito,   offrono formidabili opportunità di crescita e sviluppo del business alle numerose imprese italiane di piccole e medie dimensioni dotate di prodotti o servici unici o di alta qualità e di know how e tecnologia che le pongono in posizione di vantaggio competivo rispetto alla concorrenza. Allo stesso tempo, il sistema legale e fiscale USA richiede estrema attenzione e professionalità sia al momento dell'ingresso sia nella fase successiva della gestione del proprio business negli USA, e non tollera improvvisazione. Tra gli aspetti da curare vi sono quelli contrattuali, relativi ai contratti di distribuzione, agenzia o collaborazione commerciale stipulati con partners commerciali e ai contratti con i clienti, gli aspetti societari, amministrativi e organizzativi (scelta della migliore forma societaria, costituzione e capitalizzazione della società, apertura conti bancari, assunzione del personale e libri paga, assicurazioni, gestione della contabilità e dei bilanci, licenze e permessi, eccetera), e gli aspetti fiscali relativi  alle imposte sul reddito, federali e statali, e alle imposte indirette sulle vendite e sui consumi. Alleghiamo la nostra presentazione con la discussione dei suddetti aspetti, su cui è bene sollevare il livello di allerta ai fini di una corretta gestione ed esecuzione del proprio piano di business negli Stati Uniti.

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In data 17 Maggio 2012 presso l'Università degli Studi di Roma Tre, nel contesto del master per Giuristi e Consulenti di Impresa gestito dal Prof. Tinelli, lo studio MQR&A ha riferito sul tema "Aspetti internazionali della fiscalità americana di interesse per gli investitori esteri".

La relazione, sia pure sintetica, ha inteso offire un breve excursus sui principi fondamentali di diritto fiscale internazionale americano applicabili agli investimenti e alle attività estere negli Stati uniti.

Gli Stati Uniti costituiscono tuttora il maggiore mercato del mondo di destinazione di attività e investimenti internazionali e attraggono costantemente imprenditori, professionisti, personale d'azienda e investitori esteri. La conoscenza del regime fiscale applicabile a questa categoria di soggetti ed attività è cruciale, in un contesto sempre più difficile e complesso di crescente globalizzazione e maggiore attenzione da parte delle amministrazioni fiscali.          

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In data 14 Maggio 29012 lo studio MQR&A ha presentato alle imprese italiane interessate presso l'Associazione delle Piccole e Medie Imprese di Torino una relazione dal titolo "Fare Business negli USA - Casi di studio e analisi dei principali profili legali e fiscali".

Le imprese italiane che fanno business con o negli USA sono numerose. Le forme di business variano dalla esportazione diretta dall'Italia o vendita tramite agenti e distributori locali, alla fornitura di beni con prestazione di servizi accessori (installazione, assistenza post vendita) tramite proprio personale in loco, alla costituzione e gestione di società di diritto locale controllate dalla capo-gruppo o casa madre italiana.

Ciascuna forma presenta peculiarità e aspetti giuridici e fiscali che devono essere gestiti in maniera consapevole onde evitare rischi. Il sistema legale e fiscale americano è complesso e non consente di operare in maniera improvvisata.

La presentazione aveva lo scopo di fornire una disamina sommaria dei suddetti aspetti che consenta alle imprese di mettere in atto il giusto set up e la corretta struttura di gestione legale e fiscale dei propri affari e delle proprie attività negli Stati Uniti.

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We provide below the link to an article on the U.S. Offshore Voluntary Disclosure Program appeared on the section LEGAL of the Italian newspaper FINANZA & MERCATI:

http://dl.dropbox.com/u/55738639/Finanza%26Mercati.pdf

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On January 9, 2011 the Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion.  This program will be open for an indefinite period until otherwise announced.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply.  However, the terms of the program could change at any time going forward.  For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”



 

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The Internal Revenue Service (U.S. tax administration) issued guidance (in the form of Fact Sheet FS 2011-13) on international tax reporting requirements for U.S. citizens or dual citizens residing outside of the United States.

In essence, the Guidance provides that U.S. citizens or dual citizens living and working abroad with (1) no tax balance due on their U.S. income tax returns (due, for example, to foreign tax credits for foreign taxes paid on their unreported foreign income earned in a foreign country, which offsets any U.S. tax due on that income, or U.S. foreign earned income exclusion excluding from U.S. tax certain employment income earned outside of the U.S.) or (2) a tax balance due but where the failure to report foreign income and pay associated residual U.S. taxes on it was due to reasonable cause (lack of proper advice or knowledge about the duty to report and tax such income), can file delinquent or amended tax  returns and rectify past mistakes and will not be assessed late filing or late payment payment penalties. In addition, there will be no penalties assessed on those same individuals with respect to late filings of their Foreign Bank Account Reports reporting foreign financial assets if their failure to file was also due to reasonable cause.

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