## _cr16241 ## Source details **Canonical URL:** [_cr16241](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16241.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16241.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16241.pdf.json) --- ### Mission, scope, and purpose - Mission: Fiscal Affairs Department (FAD) technical assistance mission to Rome, October 14–28, 2015, to advise the Ministry of Economy and Finance (MEF) on selected areas of the revenue administration system. - Mission leadership and composition: - Led by Mr. Juan Toro (Assistant Director, FAD). - Team members: Messrs. Thomas Story (Deputy Division chief, FAD), Dave Hartnett, Barrie Russell, and Frank Van-Driessche (FAD external experts). - Principal authorities and organizations consulted: Minister of Economy and Finance Mr. Pier Carlo Padoan; Director General of Finance Ms. Fabrizia Lapecorella; Directors of Agenzia delle Entrate (AdeE) Ms. Rosella Orlandi, Agenzia delle Dogane (AdeD) Mr. Giuseppe Peleggi; Vice President of INPS Ms. Gabriella de Michele; Professor Tommaso Nannicini; General Stefano Screpanti (Guardia di Finanza); SOGEI; SOSE; provincial office visit in Rome; private sector associations. - Purpose: examine organization, governance and operational performance of the tax administration (Agenzia delle Entrate); review tax administration functions of related agencies—collection by Equitalia, audit and tax fraud investigation by Guardia di Finanza; examine governance issues in customs administration (Agenzia delle Dogane). - Report structure: Executive Summary; Section I: Reforms in Tax and Customs Administrations; Section II: Autonomy of Tax And Customs Administrations; Section III: Improving the Performance of the Tax System. ### Key findings on tax administration architecture and performance - Multiple entities perform tax administration functions, creating coordination needs and additional costs: - AdeE administers PIT, CIT, VAT, other indirect taxes, regional business tax, and regional/municipal PITs. - Equitalia performs collection of tax debts. - Guardia di Finanza (GF) conducts audit and tax fraud investigation. - AdeD administers excises. - INPS administers Social Security Contributions (SSC). - SOGEI provides IT support to all agencies; SOSE supports fiscal intelligence work. - Revenue collection performance: - Tax revenues are high but collection performance is mixed across main taxes. - VAT gap has decreased in recent years but remains high—stated at 30 percent—and VAT efficiency is the lowest in the EU; administration of VAT is weak. - Strong reliance on withholding from payments on labor. ### Priority reform opportunities and operational weaknesses - Compliance risk management: - Current input/output operational planning biases weaken taxpayer compliance and risk management. - Major compliance risks, e.g., high-wealth individuals (HWI), are not well addressed through effective compliance plans. - Need for a holistic, targeted compliance strategy (see Section III.A). - VAT management redesign: - Absence of periodic VAT returns is a major flaw for a transactional tax; reliance only on payment information delays detection of compliance problems. - VAT return filing, payment, and reporting arrangements severely restrict control of VAT and indirectly other taxes (see Section III.C). - Tax debt accumulation and collection: - Accumulation of tax debts described as alarming; causes include lag in identifying VAT liabilities, split and duplication of audit/investigations, overly generous installment schemes, limitations in recovery powers, and lack of effective write-off arrangements (see Section III.D). - Fragmentation of audit and investigation: - Duplication across AdeE and GF leads to simultaneous and fragmented actions that hamper effectiveness. Section III.E recommends staged consolidation of audit and investigation responsibility into AdeE. - Simplification opportunities: - Employer withholding and reporting for PIT and SSC involve parallel filing and payment processes to AdeE and INPS despite harmonized tax bases; Section III.F discusses common registration, filing, and payment platforms. ### Box 1 — Summary of Key Recommendations (selected) - Restore autonomy to fiscal agencies by: - Amendments to law with respect to recruitment and promotion authority and the ability to provide a specific grading structure. - Adopting a fixed-term appointment for the director of AdeE and AdeD that is unrelated to the political cycle. - Enhance strategic management by: - Empowering agencies to build five-year institutional visions. - Revising ministry supervision of the agencies, particularly conventions, to achieve a strategic approach and monitoring against strategic goals. - Strengthen compliance risk management by: - Adopting a holistic approach to mitigating compliance risks. - Consolidating risk management and case selection of AdeE at the regional level. - Improve revenue performance of key segments by: - Establishing a dedicated unit to manage compliance by HWI. - Undertaking industry-based compliance improvement projects in high risk sectors. - Redesign VAT compliance management by: - Introducing monthly and quarterly returns and reducing information requirements. - Redesigning filing and payment arrangements to enable early collection. - Address tax debt accumulation by: - Bringing instalment arrangements in line with international trends. - Adopting continuous write-off practices, and removing extended ‘no-action’ periods. - Increase effectiveness of audit and tax fraud investigation by: - Implementing a staged approach to moving full responsibility for tax audit and investigation to AdeE. - Simplify taxpayer obligations by: - Adopting a common registration, filing and payment platform for SSC and PIT and common approaches to compliance management. ### Implementation outlook - Reforms must be implemented as a coherent package requiring legal and administrative changes and will take time to materialize. - Substantive gains in tax administration effectiveness are expected in the medium to long term after steady implementation of the recommended reforms. *Preface and Executive Summary of the IMF FAD technical assistance mission aide-mémoire to the MEF (mission period: October 14–28, 2015).* --- ### Revenue structure and key statistics (Revenue in Percentage of GDP, 2005–14) - PIT and SSC: account for 25 points of GDP in 2014, approximately 58 percent of total revenue. - PIT is the main source of direct taxation—80 percent of the total. - VAT is the main source of indirect taxation, accounting for 40 percent of the total. - Key statistics (each value preserved as in source): - Direct taxes: 2005: 12.9; 2006: 13.7; 2007: 14.5; 2008: 14.7; 2009: 14.9; 2010: 14.3; 2011: 14.2; 2012: 14.9; 2013: 15.2; 2014: 14.7 - PIT: 2005: 10.0; 2006: 10.4; 2007: 10.9; 2008: 11.3; 2009: 11.3; 2010: 11.3; 2011: 11.1; 2012: 11.7; 2013: 11.8; 2014: 11.8 - CIT: 2005: 2.2; 2006: 2.7; 2007: 3.0; 2008: 2.8; 2009: 2.2; 2010: 2.3; 2011: 2.2; 2012: 2.3; 2013: 2.5; 2014: 2.2 - Capital gains and other income taxes: 2005: 0.2; 2006: 0.2; 2007: 0.2; 2008: 0.1; 2009: 0.1; 2010: 0.1; 2011: 0.1; 2012: 0.2; 2013: 0.2; 2014: 0.3 - Property taxes: 2005: 0.4; 2006: 0.4; 2007: 0.4; 2008: 0.4; 2009: 0.4; 2010: 0.4; 2011: 0.5; 2012: 0.5; 2013: 0.5; 2014: 0.5 - Capital taxes: 2005: 0.1; 2006: 0.0; 2007: 0.0; 2008: 0.0; 2009: 0.8; 2010: 0.2; 2011: 0.4; 2012: 0.1; 2013: 0.3; 2014: 0.1 - Indirect taxes: 2005: 13.9; 2006: 14.5; 2007: 14.3; 2008: 13.5; 2009: 13.4; 2010: 13.9; 2011: 14.1; 2012: 15.2; 2013: 14.8; 2014: 15.2 - Taxes on production: 2005: 3.3; 2006: 3.4; 2007: 3.5; 2008: 3.1; 2009: 2.9; 2010: 2.9; 2011: 2.9; 2012: 3.8; 2013: 3.5; 2014: 3.4 - VAT: 2005: 5.7; 2006: 6.0; 2007: 5.9; 2008: 5.7; 2009: 5.5; 2010: 6.1; 2011: 6.0; 2012: 5.9; 2013: 5.8; 2014: 6.0 - Excise taxes: 2005: 3.0; 2006: 3.0; 2007: 2.8; 2008: 2.7; 2009: 2.9; 2010: 2.9; 2011: 3.2; 2012: 3.6; 2013: 3.5; 2014: 3.6 - Stamp taxes: 2005: 0.8; 2006: 1.0; 2007: 1.0; 2008: 0.9; 2009: 0.9; 2010: 0.9; 2011: 0.8; 2012: 0.8; 2013: 0.9; 2014: 0.9 - Other taxes on products and services: 2005: 1.1; 2006: 1.1; 2007: 1.1; 2008: 1.1; 2009: 1.2; 2010: 1.1; 2011: 1.1; 2012: 1.1; 2013: 1.1; 2014: 1.3 - Customs duties: 2005: 0.0; 2006: 0.0; 2007: 0.0; 2008: 0.0; 2009: 0.0; 2010: 0.0; 2011: 0.0; 2012: 0.0; 2013: 0.0; 2014: 0.0 - Social security contributions: 2005: 12.2; 2006: 11.9; 2007: 12.6; 2008: 13.0; 2009: 13.4; 2010: 13.3; 2011: 13.2; 2012: 13.3; 2013: 13.3; 2014: 13.3 - Grand Total: 2005: 39.0; 2006: 40.1; 2007: 41.4; 2008: 41.2; 2009: 41.7; 2010: 41.5; 2011: 41.5; 2012: 43.4; 2013: 43.3; 2014: 43.3 ### VAT performance and compliance issues - AdeE estimates: VAT gap fell from 35 to around 28 percent before the financial crisis; during the crisis it increased again to 30 percent and has persisted at that level. - Italy has the lowest VAT efficiency in the EU and one of the highest VAT evasion rates. - VAT compliance gap estimated among the highest in the EU (31 percent) in 2013 per government report (October 2014). --- ### Governance and autonomy: diagnosis and minimum conditions - 2001 reform (Law 300/1999) granted agency status to tax and customs administrations; modernization gains followed (IT use, services, large taxpayer focus, risk analysis). - Subsequent legal changes weakened autonomy; AdeE and AdeD do not meet recommended minimum requirements for autonomy. - Minimum autonomy conditions summarized (detailed at Appendix 2) include: - Separate and dedicated administrative body with Director control. - Director as nonpolitical fixed-term appointment unrelated to political cycle. - Empowered to administer and enforce revenue laws. - Authority to exercise strategic management and control of operations. - Sufficient autonomy to manage resources including human resources, grading and compensation. - Assessment of autonomy (Box 5 — Conditions Adopted): 1. Fiscal body is a separate and dedicated body with all functions — Partially 2. Director is empowered to administer the revenue laws — Fully 3. Director is a fixed-term appointment, not related to the political cycle — Partially 4. Authority to exercise strategic management — Partially 5. Authority for organizational change — Mostly 6. Budget flexibility — Partially 7. Recruitment and promotion authority — No 8. Determine grading, influence compensation — No 9. Integrity, discipline (including dismissal), and training — Mostly - Immediate gaps: absence of recruitment and promotion authorities and inability to determine grading/compensation (conditions 7 and 8). ### Chronology of measures affecting autonomy (selected) - 2002: Law 145 includes fiscal agencies in public administrations subject to law 165/2001; budget law restricts recruitment and partial replacement of separated staff. - 2003: Legislative Decree 173 changed approval mechanism and reduced director term from five to three years. - 2006: Legislative Decree 262 introduced the spoils system linking directors’ tenure to the political cycle. - 2009: Legislative Decree 150 removed independent collective bargaining power of AdeD and AdeE. - 2015: Constitutional Court ruling prohibits Agencies from making provisional management appointments; Law 157 redefines missions and reduces headcounts by 10 percent. ### Recommendations on autonomy and governance (selected) - Restore, through amendments to Law 300/1999, the autonomy of fiscal agencies with respect to recruitment and promotion authority and the ability to provide a specific grading structure. - Revamp the financing formulae applicable to the allocation of the State Budget to AdeE and AdeD. - Adopt a fixed-term appointment for the director of AdeE and AdeD that is unrelated to the political cycle. - Revise the three year agreements between MEF and the fiscal agencies and the approach to ministry supervision; incorporate monitoring against strategic goals and apply higher level indicators appropriate to measurement of organizational outcomes. --- ### Strategic planning, performance conventions, and indicators - Conventions (rolling three-year agreements updated annually) have become annual operational plans rather than medium-term strategic plans. - Current performance indicators are operationally focused (volume and output measures); agencies and MEF express need to shift to strategic/outcome focus (examples in Box 6). - Recommendation: empower agencies to build five-year institutional visions and incorporate major reforms in medium-term strategic plans; adopt higher level outcome indicators. ### Authority to exercise strategic management and budget flexibility - Some flexibility exists in use and transfer of funds between spending categories within an approved budget cap. - Framework financing formulae established in 2005: - For AdeD: 0.1668 percent of the average amount of collection recorded over three years on specific tax revenue chapters. - For AdeE: 0.8793 percent of revenues collected by AdeE (including amounts provided following Land Agency merger). - Recommendation: revamp financing formulae to account for government cost-control initiatives while leaving cost-saving decisions to agencies. --- ### Strengthening management of compliance risks and penalties regime - AdeE achievements: 100 percent e-filing coverage for core taxes; prefilling of tax returns for individual taxpayers; large scale automated data matching; more than 200 industry sector benchmarks. - Current approach: piece-meal initiatives with an input/output bias; lack of integrated strategy for major risks (e.g., informal economy, HWI). - Checklist for integrated strategies (Box 7) — identify and analyze risk; plan and implement strategy; evaluate effectiveness (detailed questions preserved in source). - Penalties regime findings: - Assessment penalties described as relatively high and applied coercively. - Standard practice: around 90 percent penalty in first instance reduced automatically to 30 percent if taxpayer accepts; full penalty maintained if taxpayer disputes assessment. - Use of penalties as negotiating tool undermines taxpayer confidence. - Penalties regime recommended design features: - Allow remission of penalties in first instance based on objective, transparent criteria: (a) compliance history; (b) genuine error or misunderstanding; (c) reasonable care in records; (d) cooperation throughout audit. - Apply uniformly across all taxes. - Explain level of penalty to taxpayer and provide right to appeal. --- ### Risk analysis and consolidation of case selection - Audit case selection largely decentralized; AdeE has 516 staff in compliance risk analysis and strategy nationally, 292 across 108 provincial offices. - International trend: move to centralized audit case selection; central models should drive national case selection. - Recommendation: - Consolidate audit case selection function to at least the regional level as a first step. - Expected staffing implication: 447 staff available for distribution across 21 regional offices. - Consider further consolidation at central level after evaluating regional consolidation results. --- ### Improving tax revenue performance of key segments - Key segments: large business taxpayers (LBT), high wealth individuals (HWIs/HIIs), informal economy. - Managing LBT: - LBT department manages taxpayers with annual turnover of at least €100 million. - Around 3,200 LBTs across the country. - Distribution for Fiscal Year 2013 (Table 3, preserved values): - Lombardia: Number of Taxpayers 1,238; Total Turnover (In € million) 487,247.7 - Lazio: Number of Taxpayers 377; Total Turnover (In € million) 472,836.1 - Emilia Romagna: Number of Taxpayers 342; Total Turnover (In € million) 100,783.2 - Veneto: Number of Taxpayers 294; Total Turnover (In € million) 87,551.6 - Piedmont: Number of Taxpayers 252; Total Turnover (In € million) 95,917.6 - Toscana: Number of Taxpayers 156; Total Turnover (In € million) 57,725.8 - Campania: Number of Taxpayers 80; Total Turnover (In € million) 15,439.4 - Other: Number of Taxpayers 477; Total Turnover (In € million) 186,194.8 - Total: Number of Taxpayers 3,216; Total Turnover (In € million) 1,503,696.2 - LBT operational notes: - LBT capability maturing with advanced risk profiling. - Cooperative compliance pilot underway; recommended to restrict pilots to very few taxpayers initially. - HWIs/HIIs: - AdeE plans to establish a dedicated high wealth unit next year; recommended to start small with high thresholds. - HWIs characteristics: small number control significant wealth; internationally mobile; complex offshore structures. - Unit design: skilled staff with audit, law, accounting and analytics competencies; personalized relationship management. - Informal economy: - Short-term actions: industry-based compliance projects and wider use of industry sector benchmarks. - Industry-based compliance improvement plan key steps (Box 10) include engagement with industry associations, sample audits, communication, seminars, follow-up audits, publicity, and measurement of effectiveness. --- ### Revamping VAT management — filing, payment, and fraud detection - 2014 VAT collections: 115 billion Euros; account for 40 percent of indirect taxes. - Italy uniquely has no monthly or quarterly VAT reporting obligations; annual VAT filing deadline is September year n+1. - Advance payments: monthly or quarterly depending on turnover; payments due on the 16th day of the month following the tax period; additional advance payment on December 27; final payment due March 16 of following year. - Problems: - Processing delays: returns and payments may be delayed up to one and a half year after taxable period; administration has full picture only in year n+2. - Annual VAT return contains more than 500 information boxes; user guide 100 pages. - Total compliance cost to businesses for VAT returns estimated at EUR 8.8 billion. - Recommended VAT filing reforms: - Introduce monthly and quarterly VAT returns. - Review and significantly reduce information required in periodic returns. - Abolish the yearly VAT return. - VAT fraud and MTIC: - Government report (October 2014): average total tax gap €91 billion (5.6 percent of GDP) over 2007–12, of which around €40 billion represented unpaid VAT (2.5 percent of GDP). - VAT arrears around 35 percent of stock of arrears held by Equitalia in 2014, amounting to €188 billion. - Italy’s VAT compliance gap estimated at 31 percent in 2013. - Missing trader intra-community (MTIC) fraud requires specific intelligence using social network analysis, business rules, predictive modeling and anomaly detection; monthly returns and VIES data are important. - Recommended VAT anti-fraud arrangements: - Develop/acquire risk assessment tools for MTIC using network analysis, predictive modeling, anomaly detection. - Introduce rapid procedure to de-register/cancel VAT number in VIES in suspected fraud cases. - Create one central unit to coordinate risk analysis, preventive and repressive actions nationally, locate unit in AdeE. - Improve registration cleanliness and deregistration speed; currently around 618,000 nil returns and deregistration lags (more than three years for physical persons, more than five years for companies that ceased activity). --- ### Accumulation of tax debts and Equitalia arrears (Table 5) - Total arrears at June 30, 2015: - Total arrears to be collected by Equitalia since 2000: 805.8 (€ Billions); tax: 602.6; other: 203.2 - Collected: 77.9 total; 34,7 tax; 43,2 other - Collected in percentage of total arrears: 10% total; 6% tax; 21% other - Stock of arrears: 727.9 total; 567.9 tax; 160 other - Stock of arrears in percentage of yearly revenue1: 93% total; 116% tax; 54% other - Suspended arrears (e.g., in dispute): 4% total; 3% tax; 7% other - Bankrupt, deceased, out of business: 28% total; 31% tax; 19% other - Insolvent debtors: 10% total; 11% tax; 7% other - Under instalments: 3% total; 2% tax; 5% other - Enforced but not collected: 36% total; 36% tax; 36% other - Under provisions protecting taxpayer's assets: 8% total; 7% tax; 12% other - Net residual stock of arrears: 83.4 total; 59.5 tax; 23.9 other - Net residual stock of arrears in percentage of total: 11% total; 10% tax; 15% other - Sources: Equitalia; and IMF staff calculations. - Footnote 1: Projections 2015—General Government (GDF 2001 Format), 2013–20. - Trends: - Total arrears rose by €79 billion in 2014 compared to €55 billion in 2009. - Total arrears are at 93 percent of total tax revenue and tax arrears at 116 percent of tax revenue. - Collection rate for tax arrears: 6 percent; overall collection rate: 10 percent. ### Uncollectable arrears and write-off weaknesses - Composition of uncollectable arrears: - 10 percent of tax arrears relate to insolvent debtors. - 31 percent relate to bankrupt, deceased or out of business debtors. - 36 percent relate to cases where enforcement actions did not result in collection. - 77 percent of the stock of arrears relates to insolvent, bankrupt, deceased or out of business debtors or to arrears for which enforcement actions have been taken but did not result in collection. - Between 2000 and 2015, only 21 percent of total arrears and 23 percent of tax arrears has been written off. - No effective legislative authority to write-off debts unless all possible recovery actions are taken; current procedures are unlikely to accommodate scale of uncollectible stock. - Around a €100 billion of tax arrears is deemed to be recoverable (note: footnote clarifies €60 billion net stock of arrears and €39 billion under protection of taxpayer's assets). ### Enforcement impediments, instalment schemes, and access to information - Collection enforcement starts too late: AdeE must notify and wait 90 days before sending request to Equitalia; Equitalia notifies taxpayer and executory measures cannot commence for further 180 days—collections effectively start after one and a half years and enforced payment after more than two years. - Legal constraints to seizure of income/assets impede recovery of estimated €39 billion of tax arrears; restrictions enhanced by Law Decree no. 69/2013 led to a significant drop in collections (e.g., yearly mortgages reduced from around 135.000 to 13.000 per Equitalia staff). - Equitalia lacks access to bank account balances/transactions; AdeE has full access for audit purposes but Equitalia can only confirm existence of account. - Instalment schemes: - All arrears under €75,000 are payable over two-to-five years regardless of capacity to pay. - In 2014 only 1.6 percent of requests for installment plans were denied. - In 2014 number of requests for instalments: 979,.082 (source preserved as in table). - Instalments account for increasing share of collection by Equitalia (close to 50%), undermining payment compliance. - Table 6 (selected preserved values): - Total amounts collected: 2010 8,876; 2011 8,623; 2012 7,531; 2013 7,134; 2014 7,411. - Collected by instalments: 2010 3,213; 2011 3,409; 2012 3,066; 2013 3,334; 2014 3,405. - Percentage on total: 2010 36%; 2011 40%; 2012 41%; 2013 47%; 2014 46%. - Number of request for instalments: 2010 571,694; 2011 553,933; 2012 621,484; 2013 732,326; 2014 979,.082. - Percentage of requests denied: 2010 4.7%; 2011 4.2%; 2012 2.7%; 2013 2.0%; 2014 1.6%. - Recommendations: - Put effective write-off arrangements in place. - Redesign filing and payment arrangements to enable early collection. - Review legal constraints to effective seizure of income and assets. - Bring instalment arrangements in line with international trends. --- ### Audit and investigations: fragmentation and proposed transition - Fragmentation: audit and investigations split between AdeE and GF; lack of a single accountable unit and no assurance resources target highest risks. - AdeE is the only agency with authority to issue a tax assessment; GF conducts majority of field audits and forwards findings to AdeE for evaluation. - Field audits (2012–14, Table 10): - 2012: GF 34,118 — 77.2 percent of Total; AdeE 8,365 — 18.9 percent; AdeD 1,687 — 3.8 percent; Total 44,170 - 2013: GF 34,294 — 77.2 percent; AdeE 8,749 — 19.7 percent; AdeD 1,365 — 3.1 percent; Total 44,408 - 2014: GF 33,229 — 76.7 percent; AdeE 8,676 — 20.0 percent; AdeD 1,425 — 3.3 percent; Total 43,330 - AdeE audit mix (2012–14, Table 9): - 2012: Field audits 8,365 — 1.5%; Desk audits 212,368 — 38.5%; Electronic audits 330,492 — 60.0%; Total 551,225 - 2013: Field audits 8,749 — 1.6%; Desk audits 205,950 — 38.2%; Electronic audits 324,970 — 60.2%; Total 539,669 - 2014: Field audits 8,676 — 1.8%; Desk audits 193,230 — 39.9%; Electronic audits 283,102 — 58.3%; Total 485,008 - Recommendation: full responsibility for tax audit function vested in AdeE with staged transition: - Short term (within one–two years): - AdeE to approve and issue assessments; mobilize resources to boost field audit capability (transfers, recruitment, up-skilling); narrow GF mandate to most serious fraud; develop MOU for case selection, referrals, and intelligence sharing. - Medium term (within four years): - When AdeE capability is competent, narrow GF mandate further so AdeE has full responsibility for managing domestic tax compliance including investigation of serious evasion and tax fraud; GF will no longer have tax audit and fraud investigation responsibility. ### Planning and governance for staged transition - Planning should commence now and be part of a three–five year AdeE strategic plan. - Heads of AdeE and GF should be jointly accountable and provide regular progress reports to MEF. - Recommendation: include staged approach to move full responsibility for tax audit and investigation to AdeE in agency strategic plan. --- ### Filing and payment of Social Security Contributions (SSC) and PIT integration - SSC scale: at 13 percent of GDP, or €216.4 billion (Table 1), single largest category of collections; accounted for 28 percent of government revenues in 2014. - SSC payers: - approximately 1.7 million employers (who pay 23.8 percent of employee earnings); - amounts withheld from 20.2 million employees (paying 9.1 percent of earnings); - around 3.9 million self-employed persons (rate varies from 25 to 29 percent). - Bases for SSC and PIT calculation are well harmonized. - Recommended sequencing for integration: - Step 1: Unify the register of payers and provide a single registration process. - Step 2: Finalize a common filing and payment platform (single payment already available). - Step 3: Unify compliance approaches—joint payroll audits and single audits for self-employed. - Timeframe: integration of core processes for registration, filing and payment within 24 months envisaged. - Recommendation: adopt common registration, filing and payment platform between SSC and PIT and common approaches to compliance management. --- ### Appendices highlights (selected institutional/operational data) - Periodicity of VAT Return Filing in EU Member States (Appendix 3): Italy shown as Yearly only. - Organization of audit and tax investigation functions (Appendix 5): - AdeE: around 12,000 staff allocated to desk and field audit activities nationally, with 216 staff dedicated to tax fraud investigations; risk analysis and case selection units total around 516 staff. - GF: around 60,000 staff total; estimated around 21,000 staff involved directly or indirectly in tax enforcement activities. *Preface and Executive Summary of the IMF FAD technical assistance mission aide-mémoire to the MEF (mission period: October 14–28, 2015).* ### Preface ................................................................................................................ ### _cr16241 - Preface ### Mission scope and participants - A Fiscal Affairs Department (FAD) technical assistance mission visited Rome during the period October 14–28, 2015 to advise the Ministry of Economy and Finance (MEF) on selected areas of the revenue administration system. - Mission leadership and composition: - Led by Mr. Juan Toro (Assistant Director, FAD). - Team members: Messrs. Thomas Story (Deputy Division chief, FAD), Dave Hartnett, Barrie Russell, and Frank Van-Driessche (FAD external experts). - Principal authorities and organizations consulted: - Meetings with the Minister of Economy and Finance, Mr. Pier Carlo Padoan; the Director General of Finance, Ms. Fabrizia Lapecorella; the Directors of the Agenzia delle Entrate, Ms. Rosella Orlandi, and Agenzia delle Dogane, Mr. Giuseppe Peleggi; the Vice President of the Istituto Nazionale Previdenza Sociale, Ms. Gabriella de Michele. - Consultations with Professor Tommaso Nannicini (Presidency of the Council of Ministers), General Stefano Screpanti (Guardia di Finanza), executives from SOGEI (Societá Generale d’Informatica S.p.A.), executives and senior staff from the management teams of the above entities, a provincial office visit in Rome, and meetings with private sector associations. ### Purpose and structure of the report - Purpose: examine organization, governance and operational performance of the tax administration (Agenzia delle Entrate); review tax administration functions of related agencies—collection by Equitalia, audit and tax fraud investigation by Guardia di Finanza; examine governance issues in customs administration (Agenzia delle Dogane). - The report represents the final version of the aide-mémoire submitted to the authorities and incorporates IMF headquarters review and authorities’ comments. - Report structure: - Executive Summary - Section I: Reforms in Tax and Customs Administrations - Section II: Autonomy of Tax And Customs Administrations - Section III: Improving the Performance of the Tax System ### Key findings on tax administration architecture and performance - Multiple entities perform tax administration functions, creating coordination needs and additional costs: - AdeE (Agenzia delle Entrate) administers PIT, CIT, VAT, other indirect taxes, regional business tax, and regional/municipal PITs. - Equitalia performs collection of tax debts. - Guardia di Finanza (GF) conducts audit and tax fraud investigation. - AdeD (Agenzia delle Dogane) administers excises. - INPS administers Social Security Contributions (SSC). - SOGEI provides IT support to all agencies; SOSE supports fiscal intelligence work. - Revenue collection performance: - Tax revenues are high but collection performance is mixed across main taxes. - VAT performance: the VAT gap has decreased in recent years but remains high—stated at 30 percent—and VAT efficiency is the lowest in the EU; administration of VAT is weak. - There is strong reliance on withholding from payments on labor. ### Governance and autonomy: diagnosis - Historical reforms: - From 2001, tax and customs administrations were granted agency status within the MEF as part of public administration reorganization under Law 300/1999; this provided greater administrative and operational autonomy coupled with stronger accountability to the MEF. - Resulting modernization gains: intensified IT use for compliance, broadened services, stronger focus on large taxpayers, and introduction of risk analysis. - Current concerns: - Autonomy has been weakened by subsequent legal changes; AdeE and AdeD do not meet recommended minimum requirements for autonomy. - AdeE compares unfavorably with other European and OECD tax agencies where autonomy contributed to sustained improvements in effectiveness. - The agencies’ accountability framework to MEF has become very detailed and operational; conventions (three-year agencies/MEF agreements) function as annual operational plans rather than enabling medium-term strategic planning. - Recommendation emphasis: restoring autonomy is important to enable new compliance approaches (e.g., cooperative compliance) which require ex-ante voluntary compliance actions as well as ex-post enforcement. ### Priority reform opportunities and operational weaknesses - Compliance risk management: - Current input/output operational planning biases weaken taxpayer compliance and risk management. - Major compliance risks, e.g., high-wealth individuals (HWI), are not well addressed through effective compliance plans. - Need for a holistic, targeted compliance strategy; Section III.A provides detailed advice. - VAT management redesign: - VAT return filing, payment, and reporting arrangements severely restrict control of VAT and indirectly other taxes. - Absence of periodic VAT returns is a major flaw for a transactional tax; reliance only on payment information delays detection of compliance problems. - Section III.C advises on redesigning VAT filing and payment, including the need for timely monitoring. - Tax debt accumulation and collection: - Accumulation of tax debts is described as alarming; structural issues need urgent attention. - Causes include lag in identifying VAT liabilities (weak VAT return filing), split and duplication of audit/investigations, overly generous installment schemes, limitations in recovery powers, and lack of effective write-off arrangements. - Section III.D addresses these issues and proposes corrective actions. - Fragmentation of audit and investigation: - Duplication of audit and tax investigation efforts across AdeE and GF leads to simultaneous and fragmented actions that hamper effectiveness. - Section III.E recommends a reform strategy, including staged consolidation of audit and investigation responsibility into AdeE. - Simplification opportunities: - Employer withholding and reporting for PIT and SSC involve parallel filing and payment processes to AdeE and INPS despite harmonized tax bases. - Section III.F discusses options for common registration, filing, and payment platforms to simplify obligations. ### Box 1 — Summary of Report’s Key Recommendations - Improving governance of the fiscal agencies: - Restore autonomy to fiscal agencies by: - Amendments to law with respect to recruitment and promotion authority and the ability to provide a specific grading structure. - Adopting a fixed-term appointment for the director of AdeE and AdeD that is unrelated to the political cycle. - Enhance strategic management at the agencies by: - Empowering the agencies in building their five-year institutional visions. - Revising the ministry supervision of the agencies, in particular the conventions, to achieve a more strategic approach; incorporate monitoring against strategic goals and apply higher level indicators appropriate to measurement of organizational outcomes. - Opportunities for breakthrough improvements in performance of the tax system: - Strengthen management of compliance risks by: - Adopting a more holistic approach to mitigating compliance risks. - Consolidating risk management and case selection function of the AdeE at the regional level. - Improve tax revenue performance of key segments by: - Establishing a dedicated unit to manage compliance by HWI. - Undertaking industry-based compliance improvement projects in high risk sectors. - Redesign VAT compliance management by: - Introducing monthly and quarterly returns and reducing information requirements. - Redesigning filing and payment arrangements with a view to early collection of taxes. - Take concrete actions to address the root causes of the accumulation of tax debts by: - Bringing instalment arrangements in line with international trends. - Adopting continuous write-off practices, and removing extended ‘no-action’ periods. - Increase the effectiveness of the audit and tax fraud investigation functions by: - Implementing a staged approach to moving full responsibility for tax audit and investigation to the AdeE. - Simplify taxpayer obligations by: - Adopting a common registration, filing and payment platform for SSC and PIT and common approaches to compliance management. ### Implementation outlook - Reforms must be implemented as a coherent package requiring changes in legal frameworks and administration practices and will take time to materialize. - Substantive gains in tax administration effectiveness are expected in the medium to long term after steady implementation of the recommended reforms. *Preface and Executive Summary of the IMF FAD technical assistance mission aide-mémoire to the MEF (mission period: October 14–28, 2015).* ### 1. Tax revenues in percentage of GDP are high and have been increasing in the past ### Tax revenues in percentage of GDP are high and have been increasing in the past years ### Revenue structure and key statistics - PIT and SSC are the more significant sources of revenue, accounting for 25 points of GDP in 2014, approximately 58 percent of total revenue. - PIT is the main source of direct taxation—80 percent of the total. - A significant part of total collection comes from the labor market via withholding on employees; compliance by self-employed individuals is low. - On indirect taxation, VAT is the main source, accounting for 40 percent of the total; excises represent the other important source of indirect taxation. - Total revenue (with or without SSC) is well above the EU average (see Appendix 1 Figure 5 in source). Key statistics (Revenue in Percentage of GDP, 2005–14): - Direct taxes: 2005: 12.9; 2006: 13.7; 2007: 14.5; 2008: 14.7; 2009: 14.9; 2010: 14.3; 2011: 14.2; 2012: 14.9; 2013: 15.2; 2014: 14.7 - PIT: 2005: 10.0; 2006: 10.4; 2007: 10.9; 2008: 11.3; 2009: 11.3; 2010: 11.3; 2011: 11.1; 2012: 11.7; 2013: 11.8; 2014: 11.8 - CIT: 2005: 2.2; 2006: 2.7; 2007: 3.0; 2008: 2.8; 2009: 2.2; 2010: 2.3; 2011: 2.2; 2012: 2.3; 2013: 2.5; 2014: 2.2 - Capital gains and other income taxes: 2005: 0.2; 2006: 0.2; 2007: 0.2; 2008: 0.1; 2009: 0.1; 2010: 0.1; 2011: 0.1; 2012: 0.2; 2013: 0.2; 2014: 0.3 - Property taxes: 2005: 0.4; 2006: 0.4; 2007: 0.4; 2008: 0.4; 2009: 0.4; 2010: 0.4; 2011: 0.5; 2012: 0.5; 2013: 0.5; 2014: 0.5 - Capital taxes: 2005: 0.1; 2006: 0.0; 2007: 0.0; 2008: 0.0; 2009: 0.8; 2010: 0.2; 2011: 0.4; 2012: 0.1; 2013: 0.3; 2014: 0.1 - Indirect taxes: 2005: 13.9; 2006: 14.5; 2007: 14.3; 2008: 13.5; 2009: 13.4; 2010: 13.9; 2011: 14.1; 2012: 15.2; 2013: 14.8; 2014: 15.2 - Taxes on production: 2005: 3.3; 2006: 3.4; 2007: 3.5; 2008: 3.1; 2009: 2.9; 2010: 2.9; 2011: 2.9; 2012: 3.8; 2013: 3.5; 2014: 3.4 - VAT: 2005: 5.7; 2006: 6.0; 2007: 5.9; 2008: 5.7; 2009: 5.5; 2010: 6.1; 2011: 6.0; 2012: 5.9; 2013: 5.8; 2014: 6.0 - Excise taxes: 2005: 3.0; 2006: 3.0; 2007: 2.8; 2008: 2.7; 2009: 2.9; 2010: 2.9; 2011: 3.2; 2012: 3.6; 2013: 3.5; 2014: 3.6 - Stamp taxes: 2005: 0.8; 2006: 1.0; 2007: 1.0; 2008: 0.9; 2009: 0.9; 2010: 0.9; 2011: 0.8; 2012: 0.8; 2013: 0.9; 2014: 0.9 - Other taxes on products and services: 2005: 1.1; 2006: 1.1; 2007: 1.1; 2008: 1.1; 2009: 1.2; 2010: 1.1; 2011: 1.1; 2012: 1.1; 2013: 1.1; 2014: 1.3 - Customs duties: 2005: 0.0; 2006: 0.0; 2007: 0.0; 2008: 0.0; 2009: 0.0; 2010: 0.0; 2011: 0.0; 2012: 0.0; 2013: 0.0; 2014: 0.0 - Social security contributions: 2005: 12.2; 2006: 11.9; 2007: 12.6; 2008: 13.0; 2009: 13.4; 2010: 13.3; 2011: 13.2; 2012: 13.3; 2013: 13.3; 2014: 13.3 - Grand Total: 2005: 39.0; 2006: 40.1; 2007: 41.4; 2008: 41.2; 2009: 41.7; 2010: 41.5; 2011: 41.5; 2012: 43.4; 2013: 43.3; 2014: 43.3 ### VAT performance and compliance issues - VAT compared poorly with EU average revenue trends (see Appendix 1 Figure 3 in source). - VAT evasion and VAT efficiency compared unfavorably, with Italy having the lowest VAT efficiency and one of the highest VAT evasion rates (see Appendix 1, Figures 5 and 6). - Agenzia delle Entrate (AdeE) estimates: VAT gap fell from 35 to around 28 percent before the financial crisis; during the crisis it increased again to 30 percent and has persisted at that level. - AdeE VAT evasion rates are consistent with those published by the EC in the 2015 Center for Social and Economic Research (CASE) report (see Figure 6 in Appendix 1). ### Institutional arrangements and administration roles - Seven entities have significant roles in administration functions, reflecting a highly inter-dependent revenue administration system. - AdeE (Agenzia delle Entrate) administers PIT, CIT, and VAT. - Other entities and responsibilities: - Equitalia: collection of tax debts. - GF: audit and tax fraud investigation. - AdeD: administers excises. - Customs administration: customs functions. - INPS: administers SSC. - SOGEI (reports to MEF): provides IT support to all. - SOSE (owned and controlled mainly by MEF): supports fiscal intelligence work. ### Evolution of fiscal agencies and governance model - Law 300 of 1999 established AdeE and AdeD as autonomous bodies; both began to operate on January 1, 2001. - AdeE took responsibility for the Land Registry, cartographic services, and Real Estate Publicity in a merger that took place in 2012. - A “principal-agent” model was adopted: MEF responsible for policy-making; agencies responsible for delivering policy outcomes and managing operations. - Agencies intended to have greater autonomy in office organization, HR management, administrative modernization, and improving transparency and taxpayer assistance. - The Minister of Finance (MEF) has significant governance roles: - Preparation of an annual Guidance Act setting out fiscal policies to be delivered. - Negotiation of a three-year Convention (updated annually) amounting to a principal-agent contract between MEF and each agency. - Monitoring and verification of agency outcomes against plans. - Supervisory function to ensure transparency, impartiality, and fairness. - The Convention translates fiscal strategy into operational objectives and includes: - The services and objectives to be achieved. - General guidelines on management and policy constraints. - Strategies for improvement. - Available resources. - Indicators and benchmarks for performance measurement. - Procedures for verifying performance results. - Steps to ensure MEF access to internal management information. - Approaches to oversee transparency, impartiality, and fairness. Challenges to agency autonomy (chronology of major measures affecting autonomy): - 2002: Law 145 includes fiscal agencies in public administrations subject to law 165/2001; budget law restricts recruitment and partial replacement of separated staff. - 2003: Legislative Decree 173 changed approval mechanism for key agency decisions and reduced term of Agency directors from five years to three years. - 2004: Presidential Decree 272 establishes rules for recruitment of directors in fiscal agencies. - 2006: Legislative Decree 262 introduced the spoils system linking directors’ tenure to the political cycle. - 2008: Law 112 introduces detailed rules for HR management, procurement, energy consumption and cuts to head-counts. - 2009: Legislative Decree 150 introduced four areas of collective bargaining across public sector, removing independent collective bargaining power of AdeD and AdeE and imposing complex rules covering personnel evaluation, compensation incentives, training, and promotion. - 2015: - Adverse Constitutional Court ruling prohibits Agencies from making provisional management appointments pending outcomes of general competitions. - Law 157 (implementing enabling Law 24 of 2014) redefines the mission of fiscal agencies to improve taxpayer relations and reduce agencies’ management headcounts by 10 percent. - A draft law for 2016 proposes horizontal cuts to information technology expenditures in the fiscal agencies. - A proposal for civil service reforms raises concerns that supervision of the fiscal agencies will be vested within the Presidential administration. ### Modernization, reorganization, and service delivery - Office network and restructuring: - Between 1997 and 2002, 384 local offices were established with sub-provincial competence. - AdeE consolidated local offices into 108 provincial centers between 2009 and 2011. - AdeE office network now consists of 323 territorial offices, in addition to the 108 provincial directorates. - Three “operative centers” provide national automated processing facilities and seven multi-channel assistance centers exist. - Office mergers of the Land Registry with AdeE took place in 2012; 100 land offices were added to AdeE network. - Provincial directorates (PDs) provide full support across core functions; PDs divided into control and legal offices and territorial (satellite) offices; regional directorates supervise PDs. - Taxpayer segmentation: - Large business taxpayer segment: turnover greater than €100 million; reorganized and attached to regional directorates from 2009. - Medium taxpayers: turnover between €5 Million and €100 million. - Small business and professional sector segment. - Individual taxpayers and not-for-profit sector. - Cooperative compliance program for the largest businesses to be phased in from 2016. - Multi-channel initiatives and digital services: - AdeE adopted a charter of service in 2004 committing to confidence, cooperation and transparency and performance within service standards; customer satisfaction surveys and annual reporting are conducted. - Seven multi-channel assistance centers provide in-bound call center services, professional support, and electronic advisory services (Web mail, email, short message service). - Extensive internet-based services: file declarations, register deeds, access cadastral data, confirm VAT and taxpayer registry information, make payments, receive statements of account. - Italy requires 100 percent of tax declarations to be filed electronically for PIT, CIT, VAT, and pay-as-you-earn withholding. - Prefilled personal income tax returns introduced from 2015 incorporating information on 20 million individuals; around 70 percent of taxpayers used the prefilled information in its first year; data for prefilling is to be expanded next year. ### Performance issues, risks, and need for major reform - Despite high tax revenue levels, performance in main taxes is mixed; VAT performance is low relative to EU peers. - VAT evasion remains high and similar compliance behavior occurs in other domestic segments. - Taxpayers operating in the global economy present challenges for AdeE to secure taxation. - Tax arrears have reached a worrying level and administration systems contribute to an unmanageable accumulation. - Past responses such as recurrent amnesties have undermined voluntary compliance culture and hampered tax administration effectiveness. ### Recommended major reform priorities (mission-identified) - Restore the autonomy of fiscal agencies and solve the appointment of managers. - Strengthen management of compliance risks. - Improve tax revenue performance of key segments. - Redesign VAT compliance management. - Take concrete actions to address the root causes of the accumulation of tax debts. - Increase the effectiveness of the audit and tax fraud investigation functions. - Simplify taxpayer obligations. *Source: Prepared by the mission based on IMF data (content unit: _cr16241 - 1. Tax revenues in percentage of GDP are high and have been increasing in the past).* ### 25. Major initiatives should form an integral part of a medium-term vision of the ### _cr16241 - 25. Major initiatives should form an integral part of a medium-term vision of the ### Strategic planning and medium-term vision - Major initiatives should form an integral part of a medium-term vision of the future tax administration, and should be implemented as a package. - The planning process has become more tactical and the agencies plans in the conventions have become annual operational plans. - The need to empower the agencies in building their five-year institutional visions is crucial. - The AdeE needs to develop its medium-term strategic plan. - Reforms in Sections II and III should be incorporated into such a strategic plan and undertaken as a coherent package; they will: - take time to deliver noticeable changes in tax administration, - need to be supported by a sustained implementation effort, - demand changes in legal frameworks, therefore early identification of legal requirements is advisable to ensure timely adjustments and political support for passage of necessary legislation. - The AdeE faces a major challenge from adverse court decisions on managerial appointments which have "weakened severely the AdeE management" and requires urgent attention (as advised in Section II). ### Governance reform trends (Section II.A) - Governance structures have become increasingly important over the last 20 years; focus areas include responsibility, authority, accountability, and transparency. - Governance is assessed by features including independence and autonomy, reporting relationships, oversight mechanisms, levels of transparency, and frameworks for integrity and risk management. - Italy moved to adopt new governance standards for its tax and customs agencies from 2001; modifications to the governance framework followed the 2001 reform. - Autonomy is described across legal form and status, funding and budget, management of financial and human resources, and administrative practices. - Typical international practice: - A single body is usually accountable for administration and enforcement of broad national taxes such as income taxes and VAT; a separate body for customs is more usual. - Optimal arrangement is a single body with “end-to-end” responsibilities for assistance, assessment, audit, and collection enforcement; Italy is unusual due to spread of tax administration responsibility across separate bodies. ### Heads of agencies, accountability, and balance - Fiscal agencies often headed by an apolitical appointee with CEO-like responsibility; appointments often for a fixed period unrelated to the political cycle to provide independence, impartiality and consistency. - Heads maintain a direct relationship with government and are accountable to the MOF for effective administration of revenue laws and managing within governing rules; political level normally does not intervene in specific cases or day-to-day management. - Increased autonomy generally accompanied by increased accountability via reporting, oversight and transparency: regular reporting of plans and results to government and parliament, provisions for internal and external audit, and budget allocation control. ### Institutional models for fiscal agencies (Section II.A, Box 4 summary) - Common arrangements: - a) Multiple Directorates in the MOF. - b) Unified semi-autonomous body. - c) Unified semi-autonomous body with board (Revenue Authority model). - Distribution (Box 4, In Percent): - Single or multiple directorates in the MOF: OECD 30, EU 37. - Unified semi-autonomous body: OECD 44, EU 48. - Unified semi-autonomous body with board: OECD 12, EU 11. - Examples listed in Box 4 (preserved as in source) for each model. - Note: As at mid-2014, 13 countries in the OECD had aligned tax and customs operations within a single organization (OECD: Tax Administration 2015). - Italy is not reported within any Box 4 category but characteristics broadly align to semi-autonomous bodies. ### Delegated authority and practice (Table 2 highlights) - When reported as a semi-autonomous body, over 80 percent of OECD survey respondents report authority to: - design internal structures, - fix levels and mix of staff, - reallocate budget, - influence staff recruitment criteria, - hire and dismiss staff. - Across institutional categories, powers least frequently delegated relate to ability to negotiate pay levels and to determine levels and mix of staff. - Selected entries from Table 2 (Number and % of Total by Institutional Category): - To make tax rulings: Single or Multiple Directorate(s) 20 (100%), Semi-Autonomous Body 31 (100%), Other Bodies 5 (83%). - To remit penalties/interest: 18 (90%), 28 (90%), 5 (83%). - To design internal structure: 15 (75%), 25 (81%), 6 (100%). - To reallocate budget as deemed appropriate: 13 (65%), 27 (87%), 4 (67%). - To fix levels and mix of staff: 11 (55%), 26 (84%), 3 (50%). - To set service standards: 20 (100%), 31 (100%), 6 (100%). - To influence staff recruitment criteria: 17 (85%), 30 (97%), 6 (100%). - To hire and dismiss staff: 13 (65%), 30 (97%), 6 (100%). - To negotiate pay levels: 6 (30%), 20 (67%), 2 (33%). - Source of Table 2: Organization of Economic Cooperation and Development. ### Evidence on autonomy and performance - Evidence on impact of autonomy on tax revenue performance is not conclusive, but positive inferences for operational performance are reasonable. - Prevalence of semi-autonomous administrations in countries with strong performance (Australia, Canada, Demark, Norway, United Kingdom) reflects consensus that a certain level of autonomy positively impacts performance. ### Minimum conditions for autonomy (Section II.B) - A proposed set of minimum requirements (detailed at Appendix 2) summarized as criteria fiscal agencies should meet: - Separate and dedicated administrative bodies: an organization contains all functions related to the respective administration; a Director controls all aspects and reports to the Minister of Finance. - Headed by a nonpolitical appointee as Director appointed for a fixed term unrelated to the time horizon of a government. - Empowered to administer and enforce the revenue laws, with all necessary and clearly defined powers and accountabilities; powers assigned to the Director in legislation (or indirectly via the Minister); Director able to delegate powers to operational officers. - Able to exercise strategic management and control of operations: performance measures developed by the administration; full authority to produce and publish strategic planning documents; organization develops and submits an annual report to the Minister for publication; Director can make organizational changes. - Provided with sufficient autonomy to manage resources—including human resources—based on delegated authority, accountability and transparency: Director may move funds between budget categories within defined limits; Director approves appointments and promotions on merit; tax administration has competitive position and grading structure; compensation levels competitive with private sector for professional staff; sufficient HR authority to promote integrity, investigate corruption, take disciplinary actions including dismissal and prosecution, and authority for training and development. ### Assessment of autonomy in Italy (Section II.C, Box 5) - Assessment uses a four level scale—fully, mostly, partially, or not adopted. - Box 5: Assessment of Progress on Autonomy — Conditions Adopted 1. Fiscal body is a separate and dedicated body with all functions — Partially 2. Director is empowered to administer the revenue laws — Fully 3. Director is a fixed-term appointment, not related to the political cycle — Partially 4. Authority to exercise strategic management — Partially 5. Authority for organizational change — Mostly 6. Budget flexibility — Partially 7. Recruitment and promotion authority — No 8. Determine grading, influence compensation — No 9. Integrity, discipline (including dismissal), and training — Mostly - The autonomy of fiscal agencies is well established in some key areas: - High level of autonomy in powers in the revenue laws for Directors to administer and enforce the revenue laws. - Budget flexibility available to Directors is generally appropriate (with caveats discussed in Section II.D). - Authority to make changes to internal structures generally lies within agencies and their management committees. - Several gaps threaten collection performance, most immediate being absence of authorities for recruitment and promotion (conditions 7 and 8). ### Enabling measures for securing autonomy (Section II.D, selected points) - Condition 1: A separate and dedicated body including all functions — Not met. - Critical gap: duplication of audit and investigations between fiscal agencies and GF. - Tax collection enforcement functions managed by Equitalia remain subject to control of the tax administration. - Information technology functions supporting both fiscal agencies are delivered by SOGEI; mission has not observed service delivery gaps but the recent expansion of SOGEI’s mandate could impact IT service quality. - Government needs to ensure SOGEI will continue to provide high quality IT support; achievement of minimum autonomy condition would require overlap in tax audit functions to be addressed (see Section III.E). - Condition 3: Fixed-term appointment for the Director unrelated to the political cycle — Partially met. - Current term is a fixed three-year term. - Originally term was five years; enabling Law 300/1999 provided adequate prescription on circumstances leading to removal. - Term for directors and management committee members and boards of auditors reduced to three years in 2003. - Director positions were made subject to the “spoils system” in 2006: Directors’ positions are vacated within 90 days of a new government formation; in absence of new appointee, occupant remains in place. - Agencies note operational decisions are limited during possible reappointment period to avoid binding incoming administration. - Achievement of the autonomy condition requires Directors’ tenure not automatically subordinated to the political cycle and vote of confidence of the incoming government. - It is desirable to restore term of appointment for Directors to five years as an optimal period for strategic management and medium-term institution building. - Condition 4: Authority to exercise strategic management — (discussion continues beyond provided excerpt). *Italic: Extracted from IMF staff report content provided in the source content unit.* ### 46. The authority within the fiscal agencies to determine business strategies and ### 46. The authority within the fiscal agencies to determine business strategies and exercise strategic management ### Supervision and authority over strategic management - Agencies are subject to the “close supervision” of the MEF (article 60 of Law 300/1999). - The most important decisions of the management committee of the agencies that relate to the statutes, regulations and documents of a “general nature” required the approval of the Minister. - Law 173/2003 curtailed management committee authority; it mandated an approval by MEF of the major decisions of the agency management committees and extended the timeline for ministerial approval of them—either explicitly or tacitly—to 45 days. - Under enabling Law 300/1999 management committee resolutions had immediate effect unless a ministerial request for suspension was made within 10 days. ### MEF supervision mechanics and performance conventions - Article 59 of Law 300/1999 provides for supervision through a rolling three-year agreement (the convention), with annual adaptation. - The convention provides for performance indicators (Appendix 3) to be measured as a means of verifying management results and to inform eligibility for the incentive scheme determining access to the bonus funding pool of each agency. - Performance indicators are agreed between the MEF and the agencies; negotiation is required to ensure indicators are sufficiently challenging yet realistic. - A “level playing field” between MEF and the fiscal agencies is important to keep the convention credible and balanced. ### Nature of performance indicators and push for strategic/outcome focus - Current indicators are operationally focused, reflecting business plans supplied by the agencies and incorporating many measures of volume and outputs (e.g., number of checks, customs controls and tax audits, processing times for cadastral updates, response times for enquiries, wait times for rulings). - Both fiscal agencies and the MEF express a need to shift indicators to a more strategic and outcome based focus emphasizing delivery of key reform initiatives and agency effectiveness. - Box 6 summarizes the movement from operational measures TO strategic/outcome measures. Examples included: - Customs: FROM "Number of customs and Excise Duty Controls" TO strategic outcomes including “Single window” for agencies involved in customs clearance; Percentage of Positive controls for: VAT and Excise; Under-invoicing from at –risk countries; Revenues from anti-fraud activities; Improvements in digitization of clearance processes; Improved quality of controls and lower rates of disputation. - Tax: FROM "Number of tax audits" and "Number of cadastral updates" and "Number of rulings responded in time" TO strategic outcomes including Number of large companies under tutorship; Industry sector based compliance survey results; Large taxpayer contribution to tax revenues; Medium term tax gap improvement; Annual Budget revenue target, Delivery of channel strategies and electronic initiatives, Attitudes to tax compliance in annual agency surveys. ### Autonomy condition for strategic planning and budget flexibility - Achievement of the minimum autonomy condition for strategic planning entails a progressive reset of roles within planning and monitoring processes. - Fulfillment of autonomy allows a less “hands-on” approach to supervision and management of the fiscal agencies as they mature. - There is some flexibility in use and transfer of funds between spending categories within an approved budget cap. - Both fiscal agencies have framework financing formulae, established in 2005, which produce some initial predictability in notional allocations from the State budget. - For AdeD, the formula is 0.1668 percent of the average amount of collection recorded over three years on specific tax revenue chapters. - For AdeE the figure is 0.8793 percent of revenues collected by AdeE, which includes amounts provided following the merger of the Land Agency. - Recently, cuts were made specifically to earmarked items (e.g., amounts to be spent on consultants, numbers of management positions, motor vehicles, and training costs) which encroach on an agency’s choice to determine how to find necessary savings. - Recommendation: revamp the framework financing formulae to incorporate the government’s recent initiatives on cost control while leaving decisions on items for cost savings to the fiscal agencies. ### Recruitment, promotion authority and managerial appointments (Condition 7) - The absence of recruitment and promotion authority represents the most serious gap in the autonomy framework of the fiscal agencies. - Various rulings of administrative judges and a ruling of the Constitutional Court in March 2015 rendered ineffective provisions concerning the agencies’ ability to establish their own rules for progression to management positions. - Decisions for temporary appointment to management positions were annulled leading to vacating of over 900 managerial positions and large-scale disruptions. - The Constitutional Court prohibits Agencies from attributing managerial roles to functionaries on a provisional basis without competitive examinations. - The law (Law 300/1999 and subsequent legislation) requires fiscal agencies to ensure all management appointments are accessed only through competitive examination, precluding promotion on merit based on relative skills, expertise, and suitability. - The mission’s view: the current situation is clearly unviable. - The government should restore autonomy power with respect to promotion and recruitment rules; precedents within the Italian public administration (e.g., authorities granted to the State Property Agency) should be investigated with necessary amendments to Law 300/1999. ### Grading, compensation and specialist classification (Condition 8) - The ability to provide a grading or job classification system specific to revenue administration was removed. - Fiscal agency specific collective agreements that defined professional categories for staff were frozen and replaced by national labor contracts in 2009; staff are now classified generically. - Concern: the professional classification system is too rigid and dated compared to systems adopted by European customs and tax agencies. - Remuneration levels cannot be readily influenced for highly specialized staff; there is some accommodation under the incentivizing quota scheme but supplementation amounts are modest. - Example: in AdeD, the pool of funds for incentivizing purposes was approximately €170 million for 2015. - A specialist classification scheme for the fiscal agencies is optimal to better manage staff retention and reflect role complexity and market pressures for roles such as large business and international tax compliance management; management of high wealth individuals; fraud detection and post-clearance audit; intelligence and risk analysis; tax law interpretation; and senior management positions. - The mission was informed that staff separation rates escalated in 2015 following the adverse constitutional court decision. ### Recommendations (as listed in the source) - Restore, through amendments to Law 300/1999, the autonomy of the fiscal agencies with respect to recruitment and promotion authority and the ability to provide a specific grading structure. - Revamp the financing formulae applicable to the allocation of the State Budget to AdeE and AdeD. - Adopt a fixed-term appointment for the director of AdeE and AdeD that is unrelated to the political cycle. - Revise the three year agreements between MEF and the fiscal agencies and the approach to ministry supervision; incorporate monitoring against strategic goals and apply higher level indicators appropriate to measurement of organizational outcomes. ### Strengthening management of compliance risks — need for strategic approach - AdeE has achieved significant operational reforms including: 100 percent coverage for e-filing of for all core taxes; delivery of service and assistance initiatives across multiple channels; prefilling of tax returns for individual taxpayers; large scale automated data matching; development of more than 200 industry sector benchmarks to identify taxpayers with turnover below €5 million who declare inconsistent revenue levels. - Many initiatives to date have been developed in a piece-meal, one-dimensional fashion as stand-alone service or enforcement initiatives. - The current approach to compliance improvement planning lacks a strategic focus and reflects a strong input/output bias. - Each of the two main directorates of the AdeE (Assessment and Taxpayer Services) separately develops operational plans to meet objectives set out in the three year convention with the MEF. - Example: the informal economy consistently features as the biggest compliance risk but there is no overarching strategy to address it; different directorates and the GF undertake independent responses without sufficient attention to cost-effectiveness or a single point of accountability for outcomes. - A more integrated, holistic approach to compliance risk management is needed: - Avoid developing service, compliance cost reduction, and verification initiatives independently within functional departments. - Address underlying causes of noncompliance rather than treating symptoms; tailor responses (education, assistance, law clarification, simplified procedures, audit, prosecution, publicity) to causal factors. - Note: audits are not the best response to noncompliance caused by lack of understanding; education and service are not the best response to deliberate evasion; strong penalties may be inappropriate where administrative design impedes voluntary compliance. - Effective tax administrations develop integrated strategies across taxpayer segments using market segmentation to prioritize compliance risks and ensure the major drivers of the tax gap are addressed. - Structural integration facilitates integrated planning for segments with relatively small numbers that account for a significant share of the tax base (e.g., large business taxpayers and very wealthy individuals); for broader populations, integrated strategies require close cooperation across functional departments. ### Checklist for developing and implementing effective integrated strategies (Box 7) - Identify and analyze the compliance risk: - What exactly is the risk and who is affected by it? - What are the underlying causes of the noncompliant behavior? - To what extent are the current law and/or administrative systems a causal factor in the noncompliance? - What judgment has been made about how the compliance attitudes of the risk population have been formed? - Has this judgment been validated through engagement with taxpayers and their advisors? - Plan and implement the strategy: - Has the desired outcome been clearly articulated and have success criteria been identified? - Is the tax agency’s interpretation of the law understood and accepted? Does the revenue agency need to clarify and/or communicate its position? - Can the tax agency improve the ease and/or cost of compliance by providing educational material or self-help tools such as industry benchmarks or online calculators? - How can the tax agency identify and assist those taxpayers within the target risk population who are trying to comply? Can the tax agency provide them with the time they need to get their affairs in order? - Are internal risk and intelligence capabilities adequate for case selection? - Does tax agency staff have skills and support tools to conduct effective audit and enforcement activities where necessary? - Are there underlying causes of noncompliance not addressed by the strategy? - Are there unintended consequences likely to arise from the strategy? - Evaluate the effectiveness of the strategy: - What do the effectiveness indicators show about the impact the strategy has had? - What has been learned from implementation and how will it influence future planning? *IMF staff report content* ### 65. The current penalties regime does not promote taxpayer confidence in the fairness ### 65. The current penalties regime does not promote taxpayer confidence in the fairness ### Penalties regime: findings and analysis - The assessment penalties in Italy are described as relatively high and are applied in a coercive manner. - It appears to be standard practice to apply a penalty of around 90 percent in the first instance with the penalty automatically reduced to 30 percent if the taxpayer accepts the assessment. - If the taxpayer disputes the assessment, the full penalty is maintained. - The approach "represents an inappropriate use of statutory penalty powers" and is "unlikely to contribute to a better relationship between taxpayers and the tax administration." - Penalties are currently used as a negotiating tool to put pressure on taxpayers to accept assessments. - Penalties should be proportionate to the issue and differentiated based on each taxpayer’s individual circumstances. ### Penalties regime: recommended design features - Allow for remission of all or part of the penalty in the first instance based on objective and transparent criteria such as: - (a) the compliance history of the taxpayer; - (b) whether the underpayment resulted from a genuine error or misunderstanding of the law; - (c) whether the taxpayer has taken reasonable care in maintaining records and completing tax returns; and - (d) whether the taxpayer has cooperated throughout the audit. - Apply the penalty regime uniformly across all taxes. - Explain the level of penalty applied in each case to the taxpayer. - Provide the taxpayer with the right to appeal against the level of penalty. ### Rationalizing investment in risk analysis and case selection: structure and capacity - Audit case selection is largely decentralized. - The AdeE has a total of 516 staff allocated to compliance risk analysis and strategy development nationally, 292 of whom are spread across 108 provincial offices. - The central assessment directorate has invested in modern computer based risk analytics and produces priority audit case lists for distribution to regional and provincial offices. - Regions and provinces also have access to risk assessment tools and are relatively free to assign resources based on local knowledge. - Guidelines require that the most productive cases be selected, but selection at provincial level is largely a matter of judgement. ### International trends and rationale for consolidation - International trends show a strong move to centralized audit case selection. - Centralized risk modelling should drive national audit case selection; creating sophisticated central models is of limited value unless used nationally. - Risk assessment and case selection require high level expertise and advanced analytics to deliver better audit case selection and higher tax revenue yields. - Expertise cannot be developed or maintained across many small distributed units; centralization reduces the risk of inappropriate case selections. ### Proposed consolidation and expected benefits - Consolidate the audit case selection function to at least the regional level as a first step. - Benefits of consolidating at regional office level: - Increase the critical mass of units. - Allow for greater specialization and more targeted training and development. - Simplify the line of command and improve communication with the central directorate. - Tighten control over audit case selection. - Staffing implications: - A total of 447 staff would be available for distribution across only 21 regional offices. - Overall number of staff allocated to the function could be rationalized as a result of consolidation. - Consider consolidation at central level after evaluating regional consolidation results. ### Key recommendations (explicit) - Adopt a more strategic approach to managing key compliance risks. - Move to a more differentiated penalties regime. - Consolidate the risk management and case selection functions of the AdeE at the regional office level; over time consider further consolidation at the central level. ### Improving the Tax Revenue Performance of Key Segments: overview - Three key segments where tax revenue performance could be improved: - large business taxpayers; - high wealth individuals; - the informal economy. ### Managing large business taxpayers (LBT): organization and thresholds - The AdeE has established a dedicated LBT department. - Since 2009, LBTs are managed by a central department with dedicated operational units located within the 21 regional offices. - LBT department manages taxpayers with an annual turnover of at least €100 million and banks and other insurance and financial institutions subject to thresholds based on interest income and premiums. - There are on average around 3,200 LBTs across the country. ### Distribution of Large Business Taxpayers for Fiscal Year 2013 (Table 3) - Lombardia: Number of Taxpayers 1,238; Total Turnover (In € million) 487,247.7 - Lazio: Number of Taxpayers 377; Total Turnover (In € million) 472,836.1 - Emilia Romagna: Number of Taxpayers 342; Total Turnover (In € million) 100,783.2 - Veneto: Number of Taxpayers 294; Total Turnover (In € million) 87,551.6 - Piedmont: Number of Taxpayers 252; Total Turnover (In € million) 95,917.6 - Toscana: Number of Taxpayers 156; Total Turnover (In € million) 57,725.8 - Campania: Number of Taxpayers 80; Total Turnover (In € million) 15,439.4 - Other: Number of Taxpayers 477; Total Turnover (In € million) 186,194.8 - Total: Number of Taxpayers 3,216; Total Turnover (In € million) 1,503,696.2 - Source: Agenzia delle Entrate. ### LBT operational practices and pilots - The LBT capability is maturing and uses advanced risk profiling methodologies. - Since entering into settlements with taxpayers, the LBT reports success in resolving complex issues without litigation. - Governance framework of checks and balances is necessary to prevent diversion of settlement arrangements for corrupt purposes. - Officers negotiating settlements should be protected under law against charges of corruption or maladministration if they comply with official guidelines. Box: Criteria for Settling Complex Issues with Large Business Taxpayers - Settlements are subject to a cost-benefit analysis. - A fundamental principle is that (identified) taxes are not negotiable. - Uncertain transactions may be waived (e.g., where insufficient factual evidence is available). - Penalties may be reduced within set limits. - Recognition is given to taxes actually paid. - The cost and time involved in bringing the case to court is weighed against the chance of success in litigation (i.e., taking into account uncertainties under the law and the risk of the case failing due to formal procedural errors). ### LBT population stability and recommended treatment - The LBT population is unstable due to annual application of qualifying criteria, producing significant entries and exits. - Table 4 demonstrates a turnover of 25 percent in the LBT population for the Lombardia region during the 2013 year. - Recommended approach: retain taxpayers in the LBT population for a period of at least three years before allowing exit (i.e., once a taxpayer meets the entry criteria for treatment as an LBT, it is retained in the LBT population unless it falls below the entry threshold for three consecutive years). Turnover in Large Business Taxpayer Taxpayers for the Lombardi Region, 2011–13 (Table 4) - 2011 / 2012 / 2013 - Total taxpayers: 1,239 / 1,235 / 1,235 - New entries: 98 / 123 / 154 - Exits: 117 / 127 / 154 - Source: Agenzia delle Entrate. ### Cooperative compliance: pilot and cautions - LBT department is piloting a cooperative compliance approach with a small number of the largest business taxpayers. - The pilot is supported, but should be restricted to a very few taxpayers until AdeE refines its approach and gauges cost-benefits. - Interventions by the GF could adversely affect cooperative compliance arrangements; in 2014 the GF conducted 241 field audits that include issues such as permanent establishments and transfer pricing. - The LBT department must ensure GF awareness and support for cooperative compliance principles. Box: Features of a Cooperative Compliance Arrangement - Taxpayers commit to demonstrating: - good governance of their tax affairs, including an appropriate level of validation and review of their accounting systems; and - a willingness to operate in an open and transparent manner and make full disclosure of their tax risks as they occur (i.e., in real time). - Tax administration commits to providing enhanced service to the taxpayer through, for example: - dedicated points of contact—including the use of client relationship management approaches; - speedier resolution of technical and administrative issues; - assignment of a reduced risk rating to the taxpayer for audit purposes; and - remission of penalties where unintended errors occur. ### Establishing a stronger focus on the wealthiest taxpayers (HWIs and HIIs) - AdeE plans to establish a dedicated high wealth unit next year; the initiative is strongly supported. - Historically, HWIs and HIIs have had their tax affairs assigned by principal address and managed by officials without special skills or training. - HWIs characteristics and risks: - a relatively small number of individuals control very significant wealth; - internationally mobile with substantial assets tied up in complex off-shore arrangements; - examples cited of assets held in Switzerland, Luxemburg and Liechtenstein; - challenges include complexity of affairs, amounts of revenue at stake, less transparency of privately owned entities, access to expert advisors, opportunity for aggressive tax planning, political influence, and impact on overall integrity of the tax system. - HIIs face risks from complex remuneration packages, share options, deferral arrangements, trusts, split contracts to allocate taxation across jurisdictions, and complex pension arrangements. ### Organizational design and strategy for HWIs/HIIs - Dedicated organizational units for HWIs/HIIs have proven successful internationally in preventing structured tax avoidance. - Units require skilled staff and access to sophisticated analytics and advanced software mapping programs. - Verification activities must be measured and professional; good communication with taxpayers’ accountants and advisors is paramount. - A balanced strategy of assistance and verification is required, including ex-ante services, timely clarification and information, and ex-post enforcement. - Strategy should be made public to demonstrate value. - Individuals managed in dedicated high wealth units typically receive a personalized taxpayer service and a relationship manager; relationship managers typically move every two–three years. ### Implementation approach for high wealth units - Start small and gradually build capability. - Initial size and scope should be restricted; selection criteria (thresholds of income and wealth) should be set at the higher end of the scale. - Staffing should be weighted to reflect complexity, revenue risk, and sensitivities. - Staff competencies should include audit, law, accounting and analytics. ### Reducing informality: short-term actions - More specific action is required in the short term to promote compliance. - Actions could include undertaking industry based projects and making broader use of industry sector benchmarks. ### Industry-based compliance improvement projects: approach - Industry-based projects are effective in lifting compliance, especially in industries with significant informality. - Projects require cooperative planning across functional directorates and strong coordination during implementation. - A senior officer should be appointed as project manager (or “risk owner”) to: - develop the plan; - secure resources; - establish appropriate coordination and communication arrangements; - oversee implementation. - Key steps in a typical industry-based compliance improvement plan are set out in Box 10 (box contents not reproduced here). *Source: Agenzia delle Entrate.* ### 83. Better leverage can be gained from use of industry sector benchmarks. The industry ### _cr16241 - 83. Better leverage can be gained from use of industry sector benchmarks. The industry ### Industry sector benchmarks and small business compliance (paragraphs 83) - Industry sector benchmarks developed by AdeE were originally used as both self-help tools for taxpayers and for issue of automated assessments. - After adverse court rulings, the AdeE now uses the tool as a risk indicator for audit case selection. - Audits are resource intensive and can only cover a small fraction of cases in the small business segment. - Proposed outreach and enforcement sequence: - Issue letters to taxpayers identified as outliers indicating that an under-declaration has been made and inviting them to review tax returns and file amended returns. - Send a second letter to taxpayers who fail to respond, indicating possible audit action. - Select at least a proportion of those who fail to respond a second time for audit. - Rationale: This approach will gain a much greater coverage of small businesses and better compliance leverage. ### Box 10 — Key Steps in a typical industry-based compliance improvement plan - Engage with relevant industry or business associations to explain why an industry is seen as high-risk and to ensure an accurate understanding of how the industry operates. - Publicize the tax agency’s intention to conduct a verification program of the industry and seek the support of associations in informing members. - Identify tax practitioners with significant client bases in the targeted industry, alert them to the issues, and request they inform their clients of the verification program. - Conduct a sample audit program to confirm the most serious areas of noncompliance and quantify the amount of tax at risk across the industry. - Engage with associations and tax practitioners to prepare advice to industry participants on noncompliance areas identified through the sample audit program. - Communicate directly with taxpayers in the industry and/or indirectly through associations and tax practitioners advising them of specific areas of noncompliance and requesting review of tax returns and self-corrections; highlight that voluntary disclosures will attract reduced penalties and that further audits are planned under which taxpayers who have not self-corrected will be subject to full penalties. - Offer free seminars and advisory visits to taxpayers who are unsure of their obligations (seminars ideally conducted jointly with the industry association). - Ensure enquiry staff is aware of the compliance improvement program and has scripted answers for enquiries, including how to make a voluntary disclosure, attend a seminar or request an advisory visit. - Ensure collection enforcement staff is aware of the program and applies reduced penalties and more flexible payment arrangements to taxpayers who voluntarily self-correct. - Conduct a follow-up audit program targeting taxpayers who failed to self-correct and are assessed as high risk; prosecute the worst offenders. - Publicize results of audits and prosecutions highlighting how data matching and other new approaches facilitated detection of high risk taxpayers, using representative case studies. - Measure effectiveness of the compliance improvement project, e.g., by tracking number of voluntary disclosures and the overall change in tax paid by taxpayers in the target industry, and surveying the industry and practitioners to test for observed changes in compliance behavior. ### General recommendations (from related section) - Stabilize the LBT population by retaining taxpayers for a minimum of three years. - Carefully assess the capability of the LBT department to effectively manage cooperative compliance arrangements before offering them more broadly. - Ensure appropriate checks and balances are in place for settlement procedures. - Establish a dedicated HWI/HII unit as soon as possible—starting with a relatively small target taxpayer population and building over time. - Establish a joint task force to take stock of current initiatives to reduce informality and, in time, develop a more coherent strategy. - Undertake industry-based compliance improvement projects in high risk sectors. ### Revamping Value-Added Tax (VAT) management — background (paragraphs 84–85) - This subsection examines critical issues in VAT administration, including approaches to improve payment and filing compliance and tackle VAT fraud. - VAT is a major revenue source for Italy. VAT is collected at the State level by the AdeE, the AdeD and Equitalia. - In 2014 total VAT collections amounted to 115 billion Euros and account for 40 percent of indirect taxes. ### VAT filing and payment compliance — key findings (paragraphs 86–91) - Italy is the only EU member state that has no monthly or quarterly VAT reporting obligations; the VAT annual filing deadline is September year n+1. - Most countries have monthly and quarterly returns with filing deadlines between one and three months after the end of the tax period. - Advance payments: - Taxable persons in Italy in a VAT payable position are required to make monthly or quarterly advance payments, depending on turnover. - Payments are due on the 16th day of the month following the end of the tax period. - Quarterly payments are subject to interest. - An additional advance payment is required on December 27 against liabilities arising in the final tax period of the calendar year. - Final payment after reconciliation is due on March 16 of the following year. - Problems reported achieving timely reconciliation of monthly, quarterly and December advance payments with liabilities. - Processing delays: - Processing of returns and payments may be delayed by up to one and a half year after the taxable period. - Because of multiple advance payment arrangements, absence of periodical reporting, late annual return submission deadline, and time needed to process over 5 million complex annual VAT returns, officials reported the tax administration only has a full picture of taxpayer payment compliance in year n+2. - Implications: Filing and payment arrangements impede effective compliance management and debt collection and early detection of VAT fraud. Administration is in a weak position to: - monitor current compliance; - detect fraud and evasion at an early stage; - launch timely corrective actions; and - recover arrears in a timely manner. - Annual VAT return burdens: - The annual VAT return contains more than 500 information boxes and has a user guide of 100 pages. - Total compliance cost to businesses for preparing and filing VAT returns is estimated at EUR 8.8 billion. - Observations: - Extensive information is required on advance payments of VAT and interest and on off-sets of credits against debits which would be unnecessary with monthly and quarterly returns. - Much of the data required is not directly relevant to VAT liability calculation or overall risk analysis and should only be requested where an audit or investigation is being conducted. - Detailed data requirements for special regimes add complexity and may need reconsideration. - Recommendations: - Introduce monthly and quarterly VAT returns. - Review and reduce significantly the amount of information required in these periodic VAT returns. - Abolish the yearly VAT return. ### VAT fraud — key findings and recommendations (paragraphs 92–100) - Tax gap and VAT shortfall: - A government report (October 2014) estimated an average total tax gap of €91 billion (5.6 percent of GDP) over 2007–12, of which around €40 billion represented unpaid VAT (2.5 percent of GDP). - Italy’s VAT compliance gap was estimated to be among the highest in the EU (31 percent) in 2013. - VAT arrears were around 35 percent of the stock of arrears held by Equitalia in 2014, amounting to €188 billion. - Missing trader intra-community VAT fraud (MTIC) concerns: - Missing traders are bogus companies with a post box or agent address, no commercial activity, no assets and no facilities; they may file no returns, nil returns, or file regularly but not pay VAT. - Fraud often involves intra-community acquisitions or supplies within the EU and may use interposed companies. - Detection and intelligence needs: - Need to develop or acquire specific intelligence and risk assessment for MTIC fraud. - Modern detection uses multiple analytical techniques combining social network analysis, business rules, predictive modeling and anomaly detection. - This requires input from VIES, preferably monthly VAT returns, and Eurofisc data. Italy’s annual returns impede early detection; analysis would have to use periodical payment data instead. - Deregistration procedures: - Deregistration procedures are too slow to stop VAT fraud early and do not succeed in quickly deregistering missing traders from VIES. - Currently, deregistration requires a decision by the Director of the provincial tax office of the AdeE based on an audit report and an on-the-spot check; requests by the AdeD and the GF must be addressed to the AdeE. Completion of this procedure takes too long to be effective. - Coordination and central unit: - VAT audit, assessments and collection is fragmented across multiple agencies and, within the AdeE, across local and regional offices. - Coordination of preventative and enforcement measures is insufficient; a central unit should coordinate risk analysis and take action nationally. - Characteristics of effective central VAT anti-fraud units: - able to carry out, or coordinate, registration control or visiting programs for potential buffers and brokers; - run detection software and have access to VIES, VAT returns, payments, and Eurofisc data; - have competence to cancel directly the VAT registration numbers; - be the competent authority for exchange of information with EU member states; - coordinate investigations and referrals for prosecutions. - Ideally, such a unit should be in the AdeE. - Registration and register cleanliness: - Registration process is crucial; when fraudulent intention is suspected, many countries require monthly returns or securities as precondition for registration. - Risk assessment can be two-step: quick assessment based on minimum data, and in-depth assessment for a minor group of risky applications. - Deregistration lag: Takes more than three years for physical persons and more than five years for companies that have ceased activities to be de-registered. - No systematic clean-up of the register, resulting in around 618,000 nil returns. - Monthly returns facilitate early detection of VAT fraud. - Recommendations: - Develop or acquire specific risk assessment tools for missing trader VAT fraud using multiple analytical techniques, combining network analysis, predictive modeling and anomaly detection. - Introduce a short and rapid procedure to de-register or to cancel the VAT number in VIES in cases of suspected VAT fraud. - Create one central unit to coordinate the risk analysis, preventive and repressive actions nationally for all the agencies, and locate this unit in the AdeE. ### Accumulation of tax debts and collection enforcement — Equitalia arrears (paragraphs 101 and Table 5) - Total arrears were at €728 billion and tax arrears at €568 billion in June 30, 2015. - Total arrears data and breakdown (Table 5: Equitalia—State of Arrears June 30, 2015; (€ Billions)): - Arrears to be collected by Equitalia since 2000: 805.8 total; 602.6 tax; 203.2 other - Collected: 77.9 total; 34,7 tax; 43,2 other - Collected in percentage of total arrears: 10% total; 6% tax; 21% other - Stock of arrears: 727.9 total; 567.9 tax; 160 other - Stock of arrears in percentage of yearly revenue1: 93% total; 116% tax; 54% other - Suspended arrears (e.g., in dispute): 4% total; 3% tax; 7% other - Bankrupt, deceased, out of business: 28% total; 31% tax; 19% other - Insolvent debtors: 10% total; 11% tax; 7% other - Under instalments: 3% total; 2% tax; 5% other - Enforced but not collected: 36% total; 36% tax; 36% other - Under provisions protecting taxpayer's assets: 8% total; 7% tax; 12% other - Net residual stock of arrears: 83.4 total; 59.5 tax; 23.9 other - Net residual stock of arrears in percentage of total: 11% total; 10% tax; 15% other - Sources: Equitalia; and IMF staff calculations. - Footnote 1: Projections 2015—General Government (GDF 2001 Format), 2013–20. - Trends: - Total arrears are growing rapidly—rose by €79 billion in 2014 compared to €55 billion in 2009. - Total arrears are at 93 percent of total tax revenue and tax arrears at 116 percent of tax revenue. - The collection rate for tax arrears (6 percent) is lower than the overall collection rate (10 percent). - Figure referenced: Equitalia: Net Increase of Stock of Arrears by Calendar Year (€ millions). Sources: Equitalia; and IMF staff calculations. *Italic: Content derived from _cr16241 (PDF chapter/section) provided.* ### 102. A significant amount of arrears is not collectable. As shown in Table 5, 10 percent of ### _cr16241 - 102. A significant amount of arrears is not collectable. As shown in Table 5, 10 percent of ### Extent and composition of uncollectable arrears - 10 percent of tax arears relate to insolvent debtors. - 31 percent relate to debtors which are bankrupt, deceased or out of business. - 36 percent relate to cases in which enforcement actions have been taken but did not result in actual collection. - 77 percent of the stock of arrears relates to insolvent, bankrupt, deceased or out of business debtors or to arrears for which enforcement actions have been taken but did not result in collection. - Between 2000 and 2015, only 21 percent of total arears and 23 percent of tax arrears has been written off. ### Factors contributing to low collectability - Economic recession increased insolvent debtors and uncollectable arrears. - Tax policy and institutional arrangements contributed: - Penalties up to 30 percent for declared but not paid tax liabilities. - Penalties up to 200 percent for nondeclared liabilities. - Significant amounts in the stock of arrears relate to penalties for noncompliance; international experience confirms collection rates for these penalties are very low. - Recent proposal to reduce penalties from 200 to 180 percent is likely to have only a minor impact. - A significant amount of debt originates in audits or investigations conducted by the GF on cases for which there is little hope of collection, given GF is de facto the core field audit function in Italy. ### Weaknesses in write-off arrangements - No effective legislative authority to write-off debts unless all possible recovery actions are taken. - AdeE may classify tax arears as uncollectible following an audit of Equitalia's activity during the following three years of the request to write-off; AdeE may suggest additional enforcement measures or deny write-off when the debt has not been recovered due to perceived shortcomings or irregularities on the part of Equitalia. - Write-off is an accounting action, not forgiveness; good practice is ongoing case-by-case write-off once all reasonable steps to collect have been taken. - The mission was informed that AdeE will examine write-offs on a yearly basis, but this new procedure is unlikely to accommodate the scale associated with the huge stock of uncollectible tax debts. - Box 12 summarizes key characteristics and practices for writing-off uncollectible tax arrears, including typical situations for write-off and system features (legal authority, documentation, audit, case-by-case consideration, internal accounting treatment, potential reraising of debts if debtor’s financial position improves). ### Recoverable arrears and enforcement impediments - Around a €100 billion of tax arrears is deemed to be recoverable. (Note: footnote clarifies €60 billion net stock of arrears and €39 billion under protection of taxpayer's assets.) - Collection enforcement starts too late: - Filing and payment arrangements entail late reconciliation of payments and liabilities, e.g., for VAT, more than one and a half year after the taxable period. - AdeE must notify a request for payment and only after 90 days can AdeE send a request for enforcement to Equitalia. - Equitalia must notify the taxpayer again and executory measures cannot commence for a further 180 days. - Consequently, collections work can only start after one and a half years and enforced payment after more than two years. - International experience suggests successful collection should be done within three to six months, after which collection rates deteriorate exponentially. - Equitalia must enforce all debts and cannot prioritize collection work or apply nonsequential collection processes; legalistic requirement to exhaust all means for enforced recovery for all debts impedes modernization and efficient resource prioritization. - Legal constraints to effective seizure of income and assets impede recovery of an estimated €39 billion of tax arrears and should be reconsidered: - Restrictions were enhanced by Law Decree no. 69/2013 and led to a significant drop in collections. - Restrictions include protection of balances on current accounts, impediments for executive procedure for nonprime residence real estate for debts under €120.000, or in general for mortgages for debts under €20.000. - Restriction reportedly reduced yearly mortgages from around 135.000 to 13.000 (per Equitalia staff). - There are restrictions for seizures of capital goods, including passenger cars, plus extensive notification requirements and ‘no-action’ periods for executory action. - Some categories of income (wages and pensions) are overly protected: - Most recent salary cannot be seized on current bank accounts; third party seizure limited to 5 to 10 percent depending on salary level. - Box 13 presents international examples and features of seizure of protected income (e.g., Belgium: between EUR 1,069 and EUR 1,386; Germany: EUR 930 increased by EUR 350 per dependent person; France: nonseizable credit balance on bank account (EUR 500); Portugal: 100 percent of the minimum wage (EUR 485); Slovenia: 70 percent of the minimum wage; Denmark: single person: DKK 5,850 Married/cohabiting couples DKK 9,920). ### Access to information and instalment schemes - Equitalia does not have access to balances and transactions on bank accounts; AdeE has full access for audit purposes but Equitalia can only confirm existence of a bank account. Granting access could enable targeted automated e-garnishments. - Instalment schemes are too lax and excessive use is not in line with international best practice: - All arrears under €75,000 are payable over two-to-five years regardless of capacity to pay. - In 2014 only 1.6 percent of requests for installment plans were denied by the administration, a trend that is decreasing (Table 6). - Under certain circumstances installments can be granted for 10 years. - No requirement for full and timely payment of all new tax obligations; until recently, new installment plans could be granted while previous plans were not complied with. - Equitalia estimates the drop-out rate at around 30 percent; anecdotal evidence suggests taxpayers often pay only the first installment. - Installments account for an increasing share of collection by Equitalia (close to 50 percent), undermining general payment compliance. - Table 6. Trends in Instalments (figures in € millions and percentages): - Total amounts collected: 2010 8,876; 2011 8,623; 2012 7,531; 2013 7,134; 2014 7,411. - Collected by instalments: 2010 3,213; 2011 3,409; 2012 3,066; 2013 3,334; 2014 3,405. - Percentage on total: 2010 36%; 2011 40%; 2012 41%; 2013 47%; 2014 46%. - Number of request for instalments: 2010 571,694; 2011 553,933; 2012 621,484; 2013 732,326; 2014 979,.082. - Percentage of requests denied: 2010 4.7%; 2011 4.2%; 2012 2.7%; 2013 2.0%; 2014 1.6%. - Box 14 outlines features of an installment payment system and eligibility and approval conditions, including maximum durations (natural persons generally not exceeding 12 months; for any taxpayer the installment plan should not exceed three years duration), requirements for payment of penalties and interest, provision of security if required, and cancellation on default. ### Recommendations (from the source) - Put effective write-off arrangements in place. - Redesign filing and payment arrangements with a view to early collection of taxes. - Review legal constraints to effective seizure of income and assets. - Bring instalment arrangements in line with international trends. ### Audit and investigations: fragmentation and proposed transition - Responsibility for tax audits and investigations is fragmented across two agencies—the AdeE and the GF; coordination is limited to case management level. - Consequences of fragmentation: - No single organizational unit has a complete picture of the tax risk environment or is accountable for compliance outcomes. - No assurance resources are directed to highest risks. - In absence of overarching strategy, compliance activities reflect a strong bias towards enforcement. - Taxpayers may be treated inconsistently and confused about agency powers. - Recommendation: Full responsibility for the tax audit function should be vested in the AdeE; police assistance may be requested but tax agency should lead except where non-tax criminal activity is the main focus. - Staged transition indicative timeframe: - Short term (within one–two years): - Maintain arrangement where all tax assessments are approved and issued by the AdeE. - Mobilize resources for AdeE to boost field audit capability (permanent/temporary transfer of trained staff from GF, targeted recruitment, internal reallocation). - Develop and deliver an up-skilling program for existing and new AdeE audit staff. - Narrow GF mandate to focus only on most serious fraud and evasion; develop an MOU specifying risk-based case selection and case referral guidelines and intelligence sharing. - Medium term (within four years): - When AdeE field audit capability is fully competent, further narrow GF mandate so AdeE has full responsibility for managing all aspects of compliance with domestic tax obligations, including investigation of serious evasion and tax fraud; GF will no longer have responsibility over tax audits and fraud investigations. *Italic: IMF staff report content as provided in the source text.* ### 118. Planning for a staged transition to the new tax administration model should ### _cr16241 - 118. Planning for a staged transition to the new tax administration model should ### Staged transition to new tax administration model - Planning for a staged transition to the new tax administration model should commence now to set a clear reform agenda. - The project should represent one of the key reforms included in a three–five year agency level strategic plan for the AdeE. - The heads of the AdeE and the GF should be made jointly accountable for implementing the reform and should be required to provide regular progress reports to the MEF. - Recommendation: - Implement a staged approach to moving full responsibility for the tax audit and investigation functions to the AdeE. - Include this initiative as a major reform objective in a three–five year agency-level strategic plan for the AdeE. ### Filing and payment of Social Security Contributions (SSC) — background and scale - SSC are a very important source of government revenues. - At 13 percent of GDP, or €216.4 billion (Table 1), they are the single largest category of collections and accounted for 28 percent of government revenues in 2014. - SSC payers consist of: - approximately 1.7 million employers (who pay 23.8 percent of employee earnings); - amounts withheld from 20.2 million employees (paying 9.1 percent of earnings); - around 3.9 million self-employed persons (who must pay under a separate social security regime and the rate varies from 25 to 29 percent of earnings). - Amounts are collected monthly from employers and quarterly from self-employed persons. ### SSC and Personal Income Tax (PIT) harmonization and administrative synergies - The bases for calculation of amounts payable for SSC and PIT are well harmonized; both are based upon common definitions and any differences in the base are considered exceptional (mission could not confirm the extent of deviations). - Further harmonization of registration, filing, and payment by payers of SSC and PIT provides distinct advantages for efficiency of administration and costs of compliance: - Payers would register once only and a unified register of payers can be established. - A single payment and single declaration can be filed that provides the information necessary for calculation and validation of both amounts. - Only minimal information is required by the tax administration to confirm correct calculation of payments. - Pension funds require substantially different and complex information for validating and updating SSC entitlement data; this may be done together or separately with the payment declaration. - The unification of SSC and PIT registration, filing and payment has been completed in a number of European administrations. - The OECD observes that the marginal cost of expanding systems used for tax administration to include SSC appears low because core processes are largely the same (identifying and registering employers and the self-employed, payment through the banking system, follow-up of nonfilers, verification using a risk based audit method). - Integration does not always extend to institutional location of an “integrated” administration; “one filing for two entities” can remain an option in the short term. ### Compliance weaknesses and operational frictions - INPS concerns: - extent of unregistered labor, - “brown envelope” payments, - SSC payment compliance among self-employed persons. - Cash payments to evade SSC obligations are endemic. - Current year filing and payment compliance is estimated at about 70 percent of those self-employed who are expected to be regularly filing and paying their SSC obligations. - There are missed synergies and frictions: - INPS focuses on unregistered labor but minimal focus on detection of cash payments. - No joint inspections at business premises between INPS and AdeE staff. - Information exchanges between INPS and AdeE are in place, but cycle times for providing information from tax administration to INPS are extended, delaying finalization of SSC obligations for self-employed. ### Integration sequencing, scope, and risks - Recommended sequencing of integration: - Step 1: Unify the register of payers across PIT and SSC and provide a single registration process for payers. - Step 2: Finalize a common filing and payment platform (a single payment is already available to cover PIT and SSC amounts but filing procedures differ). - Step 3: Unify compliance approaches — joint payroll audits and single audits for self-employed — for detection of undeclared amounts for both obligations. - Collection enforcement for both obligations is conducted by Equitalia. - Because of the dominance of SSC and PIT in the government’s revenue base, the risks attached to an integration must be carefully managed. - Based on case studies where this reform is pursued, an integration of the core processes for registration, filing and payment of PIT and SSC within 24 months is envisaged. - Reform to institutional arrangements that centralizes resources in the AdeE for administration of registration, filing, payment, and compliance management of PIT and SSC could be put in place concurrently or scheduled for a later time. - Recommendation: - Adopt a common registration, filing, and payment platform between SSC and PIT and common approaches to compliance management. ### Appendix highlights — institutional autonomy and agency requirements (selected findings) - Autonomy Condition 1 — separate and dedicated administrative body: - a) The tax and customs agencies are separate. - b) Not met. Directors of the agencies have ultimate control for some but not all aspects of administration. Information technology services are provided through SOGEI. AdeD works in close liaison with EU bodies. AdeD receives debt collection services from Equitalia but has limited control of debt enforcement within Equitalia. AdeE does not control the tax audit and tax investigation functions under the GF. - c) Not met. Tax audit functions are duplicated between the GF and AdeE. - d) Met in full. - e) Met in part. Management committees are not involved in decision-making on day-to-day tax and customs obligations and operational matters; they review and monitor results and check compliance, consistency and legality of administrative operations. The MEF has extensive supervisory powers over the agencies; the Minister must approve Statutes, Regulations, the budget and its revisions, financial statements, the investment plan (including IT), and other general measures concerning operation of the Agency. - Autonomy Condition 2 — empowered to administer and enforce revenue laws: - a) Met in full. No powers bypass the Director. - b) Met in full. Powers are not exercised outside the administration or Minister. - Autonomy Condition 3 — headed by a nonpolitical appointee for a fixed term: - a) Not met. A three year term is in place for the Directors of AdeD and AdeE, but the term of office is linked to the duration of government regardless of contract. Directors are removed ninety days after the vote of confidence for the new government. Directors can be reappointed by a new contract signed by an incumbent government. Deputy directors and all other directors are appointed by the Director following the advice of the Management Committee. - b) Met in part. Removal mechanisms are governed by law; early dismissal can occur in the event of nonachievement of targets (targets subject to MEF approval). - c) Met in full. Early termination of the Director’s employment contract results in appointment of a special commissioner pursuant to paragraph 1 of Article 69 of Legislative Decree no. 300/1999. - Autonomy Condition 4 — sufficient autonomy for strategic management and control: - i. Performance measures: - a) Met in part. Approval processes are subject to final approval in the MEF; MEF involvement in development of indicators is possible. - b) Not met. Key measures are a mix of operational inputs and outputs. - c) Met in full. Measures are published in annual reports of the agencies. - ii. Strategic planning: - Not met. MEF reviews strategic plans and business strategies prior to publication and may request changes or additions. The strategic plan for the AdeE is only for the period 2010 to 12. Plans accompanying annual agreements are more operational in nature. - iii. Reporting: - Met in part. Plans submitted to the Management Committee are approved by the Director of the Department of Finance of the MEF; MEF has a role in drawing the annual report. - iv. Authority to make organizational changes: - a) Met in part. Director can approve organization structures subject to review by the Management Committee and MEF. - b) Met in full. MEF will be consulted. - Autonomy Condition 5 — sufficient autonomy to manage resources including human resources: - i. Budget flexibility and financing authority: - a) Met in full. Financing formula is set for each agency as a fixed rate of collections on specific tax categories; the gross financing under the formula is adjusted for savings measures in accordance with government spending priorities. - b) Met in part. There are limits on spending categories which are subject to caps. - c) Not met. Limitations on specific categories of spending do apply. - d) Met in full. Government procurement rules apply. - ii. Authority to recruit, make appointments and promotions: - a) Not met. Court rulings rendered ineffective provisions concerning ability of fiscal agencies to establish their own rules for progression to management positions; annulment of temporary appointments vacated over 900 managerial positions causing large-scale disruptions. - b) Not met. - c) Met in full. - iii. Authority to classify positions: - Not met. Authority is not available to the agencies. Fiscal agency specific collective agreements were replaced by national labor contracts in 2009, causing staff to be classified generically. - iv. Remuneration of officials: - a) Met in part. Remuneration levels are competitive for entry and lower level positions. - b) Met in part. Some accommodation under the incentivizing quota scheme but salary supplementation amounts are modest. - v. HR—integrity, performance evaluation, discipline, and separation: - Met in part. Agencies have autonomy in integrity, anti-corruption and disciplinary measures. Recent legal changes deprived collective bargaining of exclusive competence over types of infringement and penalties; law introduced new types of offences and penalties including disciplinary dismissal. - vi. HR—training and career development: - a) Met in full. All training needs are determined by the administration. - b) Met in full. Measures to address training and development needs are developed and executed by the administration. *Italic: IMF staff report content as provided in the source document.* ### Appendix 3. Periodicity of Value-Added Tax Return Filing in EU Member States ### Appendix 3. Periodicity of Value-Added Tax Return Filing in EU Member States ### Periodicity of VAT Return - Table of periodicity markers (columns: Monthly / Bi-Monthly / Quarterly / Yearly / Summarizing Yearly Return) - Austria: X X X - Belgium: X X - Bulgaria: X - Cyprus: X X - Czech Rep: X X - Estonia: X - Finland: X X X - France: X X X - Germany: X X X X - Greece: X X - Hungary: X X X - Ireland: X X X - Italy: X - Latvia: X X - Lithuania: X - Luxembourg: X X X X - Malta: X X - Netherlands: X X X - Poland: X X - Portugal: X X X - Romania: X X - Slovak Rep: X X - Slovenia: X X - Spain: X X X - Sweden: X X X - United Kingdom: X X ### Return Filing and Payment Schedules (Appendix 4) - Table 7. Schedule of Tax Return Filing and Annual Payments — Tax Return for Fiscal Year 2014 - Presentation Period / Annual Payment / From / To - Income—corporation tax: 2015-05-01 2015-09-30 2015-06-16 - IRAP: 2015-05-01 2015-09-30 2015-06-16 - VAT: 2015-02-01 2015-09-30 2015-03-16 - Substitute tax: 2015-07-31 - Table 8. Schedule — Periodic Payments — Tax Return for Fiscal Year 2015 - Advance Payment 1 / Advance Payment 2 / Single Advance Payment - Income—corporation tax: 2015-06-16 2015-11-30 - IRAP: 2015-06-16 2015-11-30 - VAT: 2015-12-27 - VAT monthly payment: Day 16 of the next month - VAT quarterly payment: Day 16 of the second month following the quarter - Held on wages and salaries: Day 16 of the next month - Note: The terms which expire on Saturday or Sunday are extended to Monday. The terms which expire from 1 to 20 august are deferred to august 20. *Appendix 3 and related appendix tables as presented in the source PDF.* ### Organization of Audit and Tax Investigation Functions (Appendix 5) - Institutional responsibilities - Two agencies under the authority of the MEF: the AdeE and the GF. - AdeE: responsible for tax administration; around 12,000 staff allocated to desk and field audit activities nationally, with a further 216 staff dedicated to tax fraud investigations. - Risk analysis and case selection units: total of around 516 staff. - Majority of AdeE audit activities involve desk audits and automated assessments from extensive data matching programs; relatively few field audits are conducted by the AdeE. - Mix of audit types conducted by the AdeE, 2012–14 (Table 9) - 2012 - Field audits: 8,365 — 1.5 percent of Total - Desk audits: 212,368 — 38.5 percent of Total - Electronic audits: 330,492 — 60.0 percent of Total - Total: 551,225 — 100.0 - 2013 - Field audits: 8,749 — 1.6 percent of Total - Desk audits: 205,950 — 38.2 percent of Total - Electronic audits: 324,970 — 60.2 percent of Total - Total: 539,669 — 100.0 - 2014 - Field audits: 8,676 — 1.8 percent of Total - Desk audits: 193,230 — 39.9 percent of Total - Electronic audits: 283,102 — 58.3 percent of Total - Total: 485,008 — 100.0 - Source: Agenzia delle Entrate. - Guardia di Finanza (GF) role and capacity - GF established in 1774; paramilitary police organization with presence in 20 regional commands and 102 provincial commands. - Around 60,000 staff, largely uniformed and armed. - Estimated around 21,000 staff involved directly, or indirectly, in tax enforcement activities. - GF mandate includes (listed activities as stated in source): - Fighting tax fraud and the underground economy. - Anti-smuggling operations. - Attacking the financial and economic interests of organized crime. - Anti-money laundering operations. - Overseeing public spending. - Anti-corruption activities. - Investigating corporate, bankruptcy, bank, and financial crimes. - Protecting property rights (trademarks, branding etc.) and consumer rights. - Countering illegal trafficking in drugs, waste, arms, and people. - Intercepting unlawful cross-border movements of currency. - Economic control of the territory and public utility line services. - Cooperating with other Italian police forces in maintaining public order and safety. - Field audits conducted during 2012–14 (Table 10) - 2012 - GF: 34,118 — 77.2 percent of Total - AdeE: 8,365 — 18.9 percent of Total - AdeD: 1,687 — 3.8 percent of Total - Total: 44,170 — 100.0 - 2013 - GF: 34,294 — 77.2 percent of Total - AdeE: 8,749 — 19.7 percent of Total - AdeD: 1,365 — 3.1 percent of Total - Total: 44,408 — 100.0 - 2014 - GF: 33,229 — 76.7 percent of Total - AdeE: 8,676 — 20.0 percent of Total - AdeD: 1,425 — 3.3 percent of Total - Total: 43,330 — 100.0 - Source: Agenzia delle Entrate. - Coordination and case handling - Each agency conducts its own intelligence gathering, risk assessment, and case selection; shared databases and several common analytical tools facilitate access to data across agencies. - The great majority of tax related field audits and investigations are conducted by the GF; GF reports findings to the AdeE for evaluation. - AdeE is the only agency with authority to issue a tax assessment; in practice, few GF findings are rejected or adjusted by the AdeE prior to assessment action. - Mission advised that much additional tax, penalties, and interest resulting from GF audits/investigations is ultimately uncollectible and contributes to an already bloated stock of uncollectible tax arrears. - Where criminal evidence is obtained, GF forwards findings to the public prosecutor for decisions on criminal charges. - Coordination mechanisms: - Provincial level for individuals and small and medium sized entities; regional level for large business taxpayers; national level for the most serious cases. - Online access to lists of open cases; a “first-in” approach generally applied to avoid multiple simultaneous audits of the same taxpayer. - Regular liaison meetings. - National “control room” where representatives from the GF, the AdeE, and the AdeD meet regularly to compare case pools and decide which agency should conduct investigation where overlap exists. *Source: _cr16241 - Appendix 3. Periodicity of Value-Added Tax Return Filing in EU Member States (PDF).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16241.pdf_