New Italian VAT split payment 1

Premises Starting from January, 1st the so-called split payment mechanism became effective, which provides that in case of transfer of goods and supply of services towards the Public Administration (PA), the tax is paid directly by the authorities, according to the modalities and terms to be determined with decree released from the Ministry of Economy. Art. 1, par. 629, of the Stability Law 2015 inserted in the DRP 633/72 the new art. 17-ter, named “Operations towards public authorities». This is a special measure, in variation to the ordinary provisions, aimed to simplify the tax collection, with an anti- tax-avoiding function. Awaiting the issuing of the respective decree, the Ministry of Economy and Finance, in the press release n. 7 dated , pointed out that the mentioned decree is "in phase of completion" and, in the meantime, gave some operational clarifications, anticipating the content of the decree. Art. 17-ter DPR 633/72 2

The so-called "split payment" mechanism provides that, in case of transactions towards the Government/State and public entities, VAT is owed by the transferee or customer. The public entity, as addressee of the transaction, pays only the agreed consideration to the supplier and transfers the VAT directly to the Revenue Agency. VAT is therefore directly paid to the Revenue Agency by the public entity and not by the invoice-issuing subject anymore; nonetheless the issued invoice must disclose VAT. MechanismArt. 17-ter DPR 633/72 3

Split Payment ≠ Art. 17-ter DPR 633/72 ATTENTION: Even though the split payment mechanism produces substantially the same effects as the reverse charge, it must be considered separately from the latter. Reverse charge Mechanism Under the reverse charge mechanism the invoice is issued without indication of VAT, but the respective tax is booked both in the VAT purchase and sales register On the contrary under the split payment mechanism, the VAT must be indicated in the invoice but not booked in the purchase register 4

From a subjective perspective, the new provisions regulate transactions, transfer of goods and supply of services, carried out towards: –State/Government; –Governmental bodies, also legal entities; –Territorial public entities and consortiums among them; –Chambers of commerce, industry, handicrafts and agriculture; –University institutions; –Local health service agencies; –Hospital bodies; –Public entities for recovery or health care with prevalent scientific character; –Public institutions for assistance and charity; –Public welfare institutions. Subjective AspectsArt. 17-ter DPR 633/72 It must still be ascertained whether the given list is definitive or rather extendable to other similar public bodies. 5

Objective Aspects Split payment for all purchases from the P.A. With the press release of the Ministry it is clarified that the split payment applies for all public administrations purchasing goods and services, given that these do not act as entities subject to VAT taxation. INSTITUTIONAL FUNCTIONCOMMERCIAL FUNCTION Art. 17-ter DPR 633/72 EXEPTIONS: The only excepted operations are those for which the reverse charge mechanism applies, as well as services subject to withholding taxation (e.g. professionals). = 6 STEP 1) All purchases carried-out by the public administrations both acting in Continues…

Reverse chargeArt. 17-ter DPR 633/72 The public entity is instead obliged to apply the reverse charge mechanism if it operates as commercial (business) subject, with VAT qualification. In such cases the split payment mechanism does NOT apply (i.e. public administration is tax debtor according to DPR 633/72). 7 Therefore it must be carefully evaluated whether the reverse charge mechanism must be applied rather than the split payment. STEP 2) For those purchases for which the public entity results being the tax debtor, as the respective operation is subject to reverse charge, according to art.17 of the DPR 633/72, the latter will be exempted from the split payment application. In such cases, if the transferor / service provider is not resident/established in Italy, the reverse charge mechanism will apply and the split payment will be excluded

Art. 17-ter DPR 633/72Examples Example 1 – A German company supplies to the Municipality of Milan general services not related to the commercial (business) activity of the Public Entity. In this case the split payment mechanism applies, as the authority acts as private entity (institutional function) and cannot pay VAT with reverse charge mechanism, according to art. 17, par. 2, DPR 633/72 (The company must identify itself for VAT purposes in order to issue its invoice under split payment - Subject to confirmation). Example 2 - The company Alfa UE provides for the Municipality of Milan general services related to the commercial (business) activity of the Public Entity. In this case the services are subject to reverse charge according to art. 17, par. 2, of the DPR 633/72. Such operations are related to the business activity of the institution and therefore the latter is considered to be tax debtor for VAT purposes. Example 3 - A German company sells goods to an University related to the business activity of the public entity (e.g. organization of Master classes). In such case the reverse charge mechanism, acc. to art. 17, par. 2, of the D.P.R. 633/1972 applies and not the split payment. 8

Reverse charge/Split payment Summary Resident Neither resident nor established Not resident, with P.E. involved in the transaction Not resident, with P.E. not involved in the transaction Service provider/transferor P.A. Institutional activity Business Activity Split Payment (except for reverse charge application) Split Payment Split Payment Reverse Charge Reverse Charge 9 The service provider/transferor must identify himself for VAT purposes (Split Payment*) *Subject to confirmation Split Payment (except for reverse charge application) The service provider/transferor must identify himself for VAT purposes (Split Payment*)

The Ministry confirmed that «in the draft of the decree of implementation it is specified that the split payment mechanism applies on all transactions invoiced starting from January, 1st 2015, for which the respective tax becomes collectable after such date». Art. 17-ter DPR 633/72Effectiveness Art. 6, par. 4, provides the following >. Transfer of goods These are considered carried- out at the moment of the stipulation of the respective agreement - in case of real property (unmoveable goods) - and at the moment of their delivery or forwarding - in case of moveable goods. Supply of services Service supplies are considered carried out at the moment of the payment of the respective consideration. EU service supplies (acc. to art. 7-ter) are considered to be carried-out at the moment of their completion (exception made for advanced payments of the consideration). Exception: invoice issuing or complete or partial payment of the consideration 10

Those companies who mainly operate with the public administration become chronic VAT creditors, as they do not collect any VAT from their customers. The presence of such VAT credits accrued by the companies requires necessary recovery mechanisms: Art. 17-ter DPR 633/72Problems VAT credit Currently already effective: compensation and refund in the annual return. Proposal of variation: The Ministry will release a provision in order to include the interested subjects among those who utilize priority VAT- refund (quarterly refund). 11

We remind that the effectiveness of the analysed provision is subject to the release of authorization according to art. 395 of the Directive n. 2006/112/CE which provides for the following: «The Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance». In fact the mentioned split payment mechanism is nothing else than a VAT payment procedure. In case of omitted issuance of the exception provisions it is expected that, in spite of the application of the split payment, with provision of the director of the Customs and Monopoly Agency, to be adopted within the , an increase of the excise tax rate on gas and lead-containing gasoline will be deliberated, as well as an increase of the excise tax rate on diesel oil utilized as fuel. Art. 17-ter DPR 633/72EU authorizations 12

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