Adoption of IFRS and taxation
Italian tax law provides for two basic principles and some specific rules for taxation of a company adopting IAS/IFRS in the statutory financial statements:
- Derivation principle (‘Principio della Derivazione’): The taxable base of companies is determined starting from the net income arising from the profit and loss, increased or decreased by items directly booked to equity pursuant to the application of IAS/IFRS. To such income, the general tax adjustments set forth by the Corporate Income Tax Law apply. In this respect, as exception to the general tax criteria, the accrual principle, and the qualification and classification criteria stated by the IFRS are relevant for the calculation of the taxable base. Specifications and limitations of the derivation principle can be introduced by means of a Decree issued by the Ministry of Finance.
- Neutrality principle (‘Principio della Neutralità’): Such principle aims to neutralise the effects deriving from the movement to IAS/IFRS (First Time Adoption or FTA). Conversely, such principle does not grant an equal treatment for companies adopting IAS/IFRS or not (in fact, specific rules are applicable only to IAS/IFRS adopters, e.g. taxation of dividend on held-for-trading securities, derivatives).
The following specific rules applicable to IAS adopters must be considered:
- Adjustments or recognitions of transactions made in equity and/or in the ‘other comprehensive income (OCI)’ are relevant for tax purposes, to the extent that such items are in compliance with general tax principles.
- For equity instruments, the legal classification is prevailing over the accounting one (debt vs. equity classification).
- Under certain conditions, unrealised profits and losses recognised in the profit and loss become taxable and deductible (e.g. fair value on securities other than shareholdings and on derivatives transactions).
- The tax treatment of transactions between IFRS adopters and non-IFRS adopters is based on the accounting principle adopted by each company (e.g. financial leasing transaction).
- Depreciation and amortisation are permitted within the rates provided by the tax rules and limited to the amount booked in the profit and loss statement. In this respect, the abolition of the imperative systematic depreciation of the goodwill and its substitution by the goodwill's review for impairment does not affect the tax deduction of the goodwill amortisation that should be made solely for tax purposes.
- Negative components booked in the income statement as expenses for personnel settled with equity instrument under IFRS 2 are, in principle, deductible for IRES purposes (stock options).
- In order to identify financial instruments with hedging purposes, IFRS adopters are allowed to give relevance to the classification made in the financial statement. In particular, financial instruments designated in the financial statement as hedging instruments in compliance with IFRS principles are considered also as hedging instruments for fiscal purposes (hedging accounting approach including the fair value option [FVO]).
Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS)
The FATCA aims to detect and discourage offshore tax evasion by United States (US) citizens or residents for tax purposes in the United States who hold financial assets through foreign financial institutions (FFIs), generally banks, custodial institutions, certain investment entities, and life insurance companies.
In order to simplify the obligations imposed on FFIs, the US Treasury and various foreign governments have entered into intergovernmental agreements (IGAs).
The Italian Inter-Governmental Agreement (i.e. Italian IGA) was signed between Italy and the United States on 10 January 2014, and it has been ratified by the Law n. 95/2015 (i.e. FATCA ratification law) issued on 18 January 2015 and published in the Official Gazette on 7 July 2015.
For countries that have signed a Model 1 IGA, the United States has granted a number of important simplifications, such as the possibility for FFIs to use information collected for anti-money laundering (AML) purposes and for FATCA customer identification and the suspension of most of the penalties (e.g. account closure) for those account holders who refuse to provide the information required for their correct identification (i.e. recalcitrant).
The FATCA implementation Decree (i.e. FATCA Decree) was issued by the Italian Ministry of Economy and Finance (MEF) on 6 August 2015 and published in the Official Gazette on 13 August 2015.
FATCA obligates Italian financial institutions to identify (starting from 1 July 2014) and classify account holders in order to report certain financial information (e.g. name, address, taxpayer identification number [TIN], account balance) related to US persons to the Italian Revenue Agency (i.e. Agenzia delle Entrate). The Italian tax authority will then exchange such information with the US Internal Revenue Service (IRS) by the end of September of each year.
The IGA ratification Law also includes provisions regarding on-boarding and due diligence requirements for CRS purposes.
The CRS implementation Decree (i.e. CRS Decree) was issued by the MEF on 28 December 2015. The CRS Decree includes the Annex C, which lists the reportable jurisdictions (i.e. each European Union member state that is not Italy and each jurisdiction that has signed an agreement with Italy or with the European Union on the basis of which it would receive information on reportable accounts), and Annex D, which lists the participating jurisdictions (i.e. each European Union member state that is not Italy and each jurisdiction that has signed an agreement with Italy or with the European Union on the basis of which it would transmit information on reportable accounts). Annex C and Annex D have been modified by further Decrees issued by the MEF.
Starting from 1 January 2016, Italian financial institutions are required to identify and report non-resident (non-US) account holders to the Italian Revenue Agency, as provided by the CRS developed by the OECD.