Introduction
It has come to our attention that the Italian Revenue Agency (Agenzia delle Entrate, ‘AE’) is conducting investigations into the VAT charged on charter fees by certain charter/yacht owning entities in relation to charter contracts signed before 1 November 2020. In these cases, the AE contested the use of flat-rate reduction of the VAT tax base, indicative of the presumed use of the vessel outside EU waters, in compliance with AE’s circular letters.
The AE argues that the use of this flat-rate reduction of the tax base is allowed only in the event that actual navigation in non-EU waters could not be documented. The AE reconstructs the actual charter routes of the vessels in Italian waters and in non-EU-waters, recalculating any higher VAT due in relation to navigation in Italian waters, while charging interest, fines and, in some cases, also criminal penalties that would apply to the directors of the owning entities.
Possible grounds for defense
These assessments can be often challenged in several respects, in accordance with Italian law. For example, prior to 1 November 2020, no Italian rule explicitly stated how the proportion of navigation in Italian waters was to be determined with respect to that in non-EU waters, i.e. whether on the basis of miles travelled or on the basis of time spent. Therefore, whichever criterion the AE used, it must be considered arbitrary. Secondly, irrespective of the criterion used, the AE may have made material errors in the calculation of the charter routes, so that it may be advantageous to oppose the reconstruction of the charter voyages carried out independently by the audited company. Finally, the AE may have committed formal procedural errors that invalidate the assessment under Italian law.
How to counter the AE’s claims
The company receiving the assessment has mainly two possibilities to assert its reasons:
- Assessment with adhesion (accertamento con adesione)
It is a procedure that can be activated by both the taxpayer and the AE, which allows the parties to negotiate on the amount of VAT assessed. If the agreement is reached, fines are reduced to 1/3 of the applicable minimum amount according to law (1/18 for assessments notified by 31 March 2023 and for which the agreement is not reached before 31 December 2022).
- Appeal before the tax court
If no agreement is reached, the AE assessment notice may be challenged before the tax court within 60 days of notification. The 60-day time limit is suspended for 90 days from when the Assessment with adhesion, if any, has been initiated. The process can go up to three levels of judgment and in case of defeat, there is no discount on penalties.