Tax authorities around the globe are making use of the financial account information they receive through the AEOI regime based on the OECD Common Reporting Standard (CRS); Italy is no exception. The Italian Tax Authorities (ITA) are using the gigabytes of AEOI data collected to confront certain taxpayers who have presumably omitted and/or only partially fulfilled their tax settlement and reporting obligations. Consequently, the ITA are issuing letters of compliance to certain taxpayers with respect to financial assets held abroad in 2017 (and any related income), which encourage them to take voluntary remediation action to meet their obligations. Notably these letters now specifically refer to assets held in Switzerland. The letters aim at highlighting discrepancies between the data taxpayers have filed in their tax return and the data the ITA received through the AEOI mechanism. Such discrepancies do not necessarily reflect taxpayer mistakes as there may well be differences between the AEOI data and the information captured on tax returns. That being said, recipients of compliance letters are strongly recommended to proactively engage with the ITA to clarify their situation, which may mitigate the risk of further inquiries.

Overview

On 6 November 2020, the Italian Revenue Agency released the Director’s Provision No. 348195 clarifying that compliance letters would be sent to Italian taxpayers to promote the voluntary fulfillment of tax obligations in relation to financial assets held abroad in 2017.

The compliance letters target Italian taxpayers who have presumably omitted to report and/or only partially fulfilled the Italian tax settlement and reporting obligations concerning the financial assets held abroad in 2017, as required by the Italian tax monitoring regulations, as well as the related income, if any.

The ITA sent such letters to taxpayers for which they observed the largest discrepancies between the data filed in the 2017 Italian tax return and the data the ITA received through the AEOI mechanism for that same year.

The ITA previously ran a similar exercise for calendar year 2016 (Director’s Provisions No. 299737 of 21 December 2017 and No. 247672 of 12 July 2019). However, given Switzerland enacted the AEOI regime only as of 2017, financial assets held in Switzerland in 2016 were out of scope of that first exercise.

The ITA’s approach aims at promoting taxpayer voluntary compliance by enabling them to benefit from lower penalties and interest through voluntary amendment of the 2017 Italian tax return in light of provisions of the so –called “ravvedimento operoso”.

It is worth highlighting that the compliance letters do not automatically trigger a formal tax assessment. Importantly, there may well be differences between the data collected through the AEOI mechanism and the information captured on tax returns. Accordingly, we recommend that targeted taxpayers proactively engage with the ITA to clarify the highlighted discrepancies.

Examples of potential discrepancies

By cross-checking AEOI data collected with the information captured on tax returns, ITA may identify potential discrepancies with respect to both the taxable income as well as the fulfillment of the monitoring obligations.

An example of discrepancies pertaining to the taxable income – the gross proceeds issue

One of the main discrepancies with respect to taxable income concerns the amount of the gross proceeds reported on Form RT of the Italian tax return, which may be smaller than the amount of the gross proceeds communicated by the foreign tax authorities to ITA for AEOI purposes.

If the difference cannot be explained, this could potentially lead to the ITA making an increased adjustment to the taxable income in the context of a future tax assessment.

In certain circumstances the difference can be explained. For example, it may be due to the fact that the amount of gross proceeds communicated by the foreign tax authorities for AEOI purposes does not take into consideration that there are multiple joint account holders. In other cases, the difference can be explained by the fact that certain types of gross proceeds are not required to be included on Form RT of the Italian tax return as only the respective gain or loss is directly reflected on Form RM or RL of the Italian tax return as applicable (without evidence of the gross proceeds and costs from which it arises).

An example of discrepancies pertaining to the monitoring obligations - the issue related to Controlling Persons (CPs) of Passive Non Financial Entities (Passive NFEs)

The Italian monitoring regulations generally require the Italian beneficial owner (BO) of financial assets held abroad, identified based on AML/KYC rules, to complete Form RW of the Italian tax return to report the value of these assets and the corresponding wealth tax (IVAFE).

In case of financial assets held abroad by a Passive NFE account holder, generally, the BOs correspond to the CPs (from an AEOI perspective). Accordingly, in most cases, information attributed to an Italian CP of a Passive NFE should match the information reported for the same person as BO on Form RW of the Italian tax return.

In certain circumstances the mismatch can be explained by the fact that although the CPs and the BOs are the same person, some of these persons are not subject to the Italian monitoring obligations. Indeed, only BOs with effective economic possession of the income/assets (i.e. availability of the income/assets) are required to complete Form RW of the Italian tax return.

For example, an Italian individual trustee and an Italian individual protector of a Passive NFE trust holding a financial account at a Swiss Reporting Financial Institution (RFI) are subject to AEOI reporting as CPs but are not subject to the Italian monitoring regulations as BOs. This is because they are not treated as economic owners according to the position taken by the ITA.

Another example could concern a Passive NFE legal entity with an Italian managing official who is the BO according to AML/KYC rules. If the Passive NFE holds a financial account at a Swiss RFI, the Italian managing official would be subject to AEOI reporting as a CP. However, this person would not be subject to the Italian monitoring regulations given he/she would not be considered as the economic owner.

An example of discrepancies pertaining both to the taxable income as well as to the monitoring obligations – the issue of management mandates without ownership granted to Italian fiduciaria

Where an Italian taxpayer holds a financial account in Switzerland, which is subject to a management mandate without ownership (“mandato di amministrazione senza intestazione”) granted to an Italian fiduciaria, the latter is responsible for levying and depositing the Italian withholding and substitute taxes due on the financial income pertaining to the Italian taxpayer’s account. Accordingly, the Italian taxpayer is not required to report the respective income on the Italian tax return and is not required to comply with the Italian monitoring regulations for these financial assets. Nevertheless, given the assets are owned by the Italian taxpayer, the Swiss RFI would likely be required to perform the AEOI reporting in the name of the Italian taxpayers. Consequently, the ITA would receive information attributed to the Italian taxpayer through the AEOI mechanism, thus triggering a mismatch with the Italian taxpayer’s tax return.

There are many more situations that could explain potential discrepancies the ITA identifies. Without a good understanding of both the AEOI and Italian tax obligations, Italian taxpayers often find themselves in a world of complexity. Therefore, they may seek assistance from their most trusted service providers, including Swiss RFIs to clarify such discrepancies.

Deloitte's View

It is expected that the level of scrutiny from tax authorities with regard to AEOI data will continue to increase, leading to more queries to both taxpayers and/or RFIs. Therefore, RFIs should put in place a clear strategy and processes in order to keep track of such queries, respond to these in a cost-efficient, yet reliable manner, and potentially support their clients in understanding how the information reported through the AEOI regime aligns with the information provided to them in the context of, for example, traditional client tax statements.

Key contacts

Brandi Caruso - Partner, Financial Services Tax & Legal

Brandi heads Deloitte’s Financial Services Tax team in Switzerland and Liechtenstein. She has extensive expertise in advising the Swiss financial services industry on the implementation of U.S. and international transparency regimes (including QI, FATCA, Section 871(m), CRS, MDR and DAC6). Brandi leads the Financial Services Tax team efforts related to innovative technology solutions. Brandi is a U.S. Certified Public Accountant and has 20 years of experience with Deloitte and has worked in London and San Diego.

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Karim Schubiger – Director, Financial Services Tax 

Karim leads the Tax Transparency team in the Suisse Romande and Ticino markets within the Financial Services Tax & Legal practice, responsible for services related to QI, FATCA, CRS, 871(m) and DAC6. He is a technical advisor and subject matter expert to financial institutions in the banking, trust, and insurance sectors. Prior to joining Deloitte, Karim worked for eight years in support teams of Swiss banks, in particular in areas such as operations, project and change management as well as operational taxes.

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Laura Demurtas – Director, Financial Services Tax Italy

Laura is a Director working in Financial Services Tax in Italy. She is specialized in providing tax assistance to Italian and international banks and asset management companies, she has broad experience supporting Italian banks in tax compliance, tax calculation and related reporting to both clients and local authorities. Laura is a subject matter expert for DAC6, QI, FATCA and CRS.

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Robin King - Senior Manager, Financial Services Tax

Robin is a Senior Manager working in Financial Services Tax. He is currently advising leading Swiss universal and private banks, acting as subject matter expert in the area of QI, FATCA , CRS and DAC6. Robin is the author of several articles on CRS. Prior to joining Deloitte, he worked as a cross-border tax compliance expert at a Swiss private bank.

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Elena Bonsembiante - Manager Financial Services Tax

Elena is a QI, FATCA and CRS specialist and an Italian certified public accountant. She is leading as Manager several QI, FATCA and CRS projects for middle sized banks in the French and Italian speaking areas. Prior to joining Deloitte Switzerland, she worked for Deloitte Italy and other Italian Tax Firms. 

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