However, non-residents, in particular, often fail to file the annual VAT return necessary to reclaim input Italian VAT. This is usually the VAT return of the second year after the one where input VAT was incurred.
Since the recovery claim is legitimate, it is not unusual for the VAT receivable to then be carried forward to the following year’s annual VAT return, either to be off-set against output tax or for the taxpayer to request a refund.
In such circumstances, Italian tax authorities challenge the VAT recovery right, request repayment of the VAT and apply a 30 percent penalty, with interest. In Notice no. 34 of 6 August 2012, the tax authorities confirmed the correctness of this approach and instructed tax offices to continue to challenge the recovery right.
However they took the view that, if input VAT was completely lost, the general principle of neutrality would be violated. In line with Supreme Tax Court and the Court of Justice of European Union (CJEU) jurisprudence, authorities have subsequently taken the view that the taxpayer is entitled to file a separate VAT claim to obtain repayment of input VAT incurred locally.
In particular, the new position states that the taxpayer should first pay back the VAT wrongly claimed in the subsequent year’s tax return, pay the appropriate penalties and also pay interest. They should then file a special off-return VAT claim that the authorities commit to repay, if the right to recovery is found to be legitimate.
The deadline to file the special refund claim is 2 years from the date the VAT is paid. This coincides with the date the taxpayer repays VAT back to the authorities following the audit, or when, if litigation is pending in front of the court, the taxpayer definitely loses the dispute.
Notice no. 34 marks a change in the approach of the Italian authorities since the previous notice (Notice no. 74/2007) which restricted the recovery right even more. Now, those facing this situation may consider paying back the VAT to the authorities to avoid litigation, notwithstanding the 30 percent penalty. In fact, by avoiding litigation, taxpayers can benefit from a reduction in the penalty to 10 percent, if payment is made within 30 days from the request. Doing so can also accelerate the repayment of input VAT under the special refund claim.