Budget Law 2023 (L.197/2022 of Dec. 29, 2022) introduced an amendment to Article 110 of Presidential Decree No. 917/1986 (“TUIR”) regarding the deductibility of expenses and other negative components arising from transactions that have been concretely executed and occurred with companies residing or located in countries considered non-cooperative for tax purposes. As of January 1, 2023, in fact, such costs are deductible only if incurred at their normal value.
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The regulatory intervention is aimed at ensuring Italy’s compliance with the political commitment made by all EU states as part of the work of the Ecofin Council in 2019. In that Council, in fact, the defensive measures to be taken by each Member State toward jurisdictions included in the European list as “non-cooperative” for tax purposes, i.e., whose tax systems are not considered in line with the principles of good fiscal governance by the European Union, were established.
The novelty of the Budget Law 2023 (or a return to the previous regime?)
The regulatory intervention contained in the Budget Law 2023, which, as mentioned, contains a provision that places a “squeeze” on the deductibility of costs arising from transactions with companies located in countries or territories that are not cooperative for tax purposes, does not represent a real novelty in our system. In fact, the provision reinstates the tax rules that were in force until 2015, which were then repealed as of tax year 2016: in fact, already in the past, black-listed expenses were allowed to be deducted within the limits of the corresponding normal value of the goods or services purchased, determined in accordance with Article 9 TUIR.
Currently, the rule requires the taxpayer to verify a double level of control for the deductibility of negative income components “arising from transactions that have been concretely executed” against so-called “black-listed” entities:
- the costs for the purchase of the good and/or service are deductible up to the limit of its normal value (paragraph 9-bis of Article 110 of the Tuir);
- while the portion of the cost exceeding the normal value is allowed to be deducted if the transaction carried out responds to a real economic interest (paragraph 9-ter of the same provision).
However, the innovative element of the Budget Law 2023 provision is present, and it is represented by the way black-listed countries or territories are identified. These, in fact, are no longer established by a ministerial decree, but are indicated by a list updated twice a year by the Council of the European Union, containing precisely the list of jurisdictions that maintain an inadequate standard of tax governance or that have not fulfilled their commitments with the EU for the implementation of the necessary reforms toward forms of fiscal transparency, fair taxation and implementation of international standards aimed at preventing the erosion of the tax base and the transfer of profits from Member States.
Countries included in the “black list”
As of the effective date of the Budget Law 2023, the 12 countries included in the EU “black list” were:
- American Samoa;
- Trinidad and Tobago;
- Turks and Caicos Islands;
- Virgin Islands of the United States;
However, in its decision of February 14, 2023, the Council of the European Union added Russia, the British Virgin Islands, Costa Rica and the Marshall Islands to the list of non-cooperative jurisdictions for tax purposes, thus bringing the number of states on the list to 16.
Consequently, with respect to individuals resident in the first 12 countries on the list, the introduced provisions of Article 110 of the TUIR become applicable as of Jan. 1, 2023, and only for the 4 added countries will the provisions apply as of Feb. 14, 2023.
The return to disclosure in the Income Form
From an operational point of view, black list costs will have to be separately disclosed in the income tax return. Thus, the operational indications already contained in the declaration models in force until the 2015 tax period are restored: in fact, it will be necessary to expose:
- among the upward changes, the total amount of negative income components incurred in relation to transactions with parties resident in black-listed jurisdictions
- among the downward changes, the same amount of costs (if deductible), with separate indication of the portions of costs exceeding the normal value of the goods and/or services purchased (if the transaction carried out responded to a real economic interest) and the total amount of deductible expenses that had in any case been concretely executed by the taxpayer.
The new provision on black list costs, as seen above, requires a comparison with the relevant normal value in order to allow their deductibility for income tax purposes. It is noteworthy how the legislator’s use of this phrase may recall the analyses carried out on Transfer Pricing issues, considering that the same principle governs the valuation of income components arising from the execution of intercompany transactions (ex art. 110, paragraph 7 of the Tuir). It will therefore be interesting to understand, pending clarification, whether the determination of normal value to identify the threshold of deductibility of black list costs may take into account the criteria and methods of valuation of transactions on Transfer Pricing issues, thus broadening their scope of application.