The tax shield: restricting illicit financial activities?

Measures to revive the state budget have been hugely encouraged, among them the tax shield. The financing of the recovery plan, the transfer of private debt to the public budget, and the decline in tax revenues caused by declining economic activity have put a strain on the state's accounts and significantly increased its debt. Methods to make up the deficits are now at the centre of the debate.

The tax shield has been one of the emblematic measures to try to curb rampant tax evasion and help financial agents better detect fraudulent taxpayers.

But let us see in more detail what it is and how it affects income tax.

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What is the tax shield?

The tax shield is a kind of tax amnesty that allows one to obtain protection from tax and contribution assessment actions and the resulting criminal consequences. This does not mean that one is immune from the aforementioned tax and criminal offences, but through the tax shield one is granted a mitigated regularisation of the aforementioned tax and criminal offences.

Illegal conduct involving the use of the tax shield consists of the foreign capital of Italian taxpayers who have not declared this income to the tax office.

Origin

During the fourth Berlusconi government, the tax shield legislation was drafted and passed. The bill was voted on 24 July 2009 and approved in an amendment on 15 July 2009.

The law, once in force, allowed tax evaders to put their accounts in order by paying, by 31 December 2009, the amount equivalent to 5% of the capital deposited abroad, plus interest and penalties.

Obviously, the approval of this law caused much discussion, especially among the ranks of the opposition, which saw the tax shield as an incentive to tax evasion. In reality, in the long run, the state was able to benefit from this legislation, as we will see later in the article.

The laws regulating the tax shield

The tax shield has been regulated over the years by various laws in order to establish as precise a regulatory framework as possible; the main articles underlying this instrument include

• Article 13-bis of Decree-Law No. 78/2009 (the third anti-crisis decree) created the concept of the tax shield
• Decree-Law no. 103/2009 (converted, with amendments, by Law no. 141/2009) and Decree-Law no. 194/2009, the so-called 'milleproroghe' (converted, with amendments, by Law no. 25/2010) made further amendments to the basic text
• Decree-Law no. 201/2011 and Decree-Law no. 16/2012 added changes to the tax shield process, especially in the area of taxation

Also worth mentioning is Decree-Law No. 350/2001 in which the intention was to curb tax violations of assets held abroad and registered outside the Italian territory. However, it had a temporary impact and duration.

Who can benefit from the tax shield?

According to Law Decree No. 78/2009, the categories that could enjoy the benefits of the tax shield are all taxpayers who can prove tax residence in the Italian national territory, specifically

• natural persons
• self-employed professionals
• business owners or partners of a company
• non-commercial entities (including trusts)
• simple companies
• associations treated as such
• natural persons with assets in common

In addition, the law has established that the heirs of the taxpayer who has benefited from the tax shield may also benefit from this 'tax amnesty'.

The usefulness of the tax shield

The tax shield was a measure introduced to encourage taxpayers who had deposited their financial capital in so-called tax havens to come out of illegality. In fact, through the payment of a minimum one-off tax, the fraudulent taxpayer can clear his illegal situation with the Italian tax office.

Among the countries adopting this legal measure are not only Italy, but also France, England and the United States. As much as it may seem like a decree to incentivise evasion, it has actually proved very useful in two respects:

• rapid and effective recognition of tax evaders
• study of the evasion methods used by evaders to hide their capital abroad

Moreover, in this way, an attempt is made to collect at least a small part of the assets held in countries identified as tax havens that would otherwise be irrecoverable. Thus, the tax shield is shown to be effective in helping the state to restore the tax agency's coffers.

However, the tax shield only applies to capital deposited in tax havens. If they are deposited elsewhere, the tax shield regulation does not apply and therefore those capital are irrecoverable for the time being.

The tax shield protects against what offences?

A person who decides to adopt the tax shield procedure is automatically legally protected and cannot be charged with any civil, administrative or tax offence, either independently or additionally.

According to what was decided by Judgment No. 33833/2018 of the Court of Cassation, those who avail themselves of the tax shield cannot be prosecuted for the following offences:

• omitted and false tax returns,
• fraudulent declaration,
• false accounting and false accounting,
• concealment or destruction of documents.

The protection also extends to companies that have their registered office abroad and are often the repository of this illegal capital. Obviously, if a criminal charge is already pending on the foreign company in question before the activation of the tax shield, the protection condition does not apply.

Additional protection: anonymity

Another of the great advantages of the tax shield lies in complete anonymity once the emersion operation has been implemented. This is a peculiarity of the Italian tax shield, as in Great Britain and the United States, legislation stipulates that, in order to avail of the cancellation of criminal penalties and a reduction by the tax authorities, the identity of the tax evader must be public knowledge:

• the identity of the evader
• the amount of illegally deposited capital
• the actual payment of all back taxes, plus interest.

However, in Italy, this level of secrecy is only maintained if the repaid money is reinvested in shares. If the person decides to reuse it for entrepreneurial activities, then he or she waives the right to anonymity.

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Voluntary disclosure

A new law has established the introduction of a new tax shield that allows tax evaders to make a self-declaration to the tax office for failure to declare undeclared capital deposited in foreign accounts. This is why the name voluntary disclosure, or voluntary cooperation, was chosen.

Voluntary disclosure came into force on 30 January 2015, allowing all non-compliant taxpayers to legalise their situation, eliminating all legal pending as a result of their illicit financial and asset activities.

Article 7 of Decree-Law No. 193/2016 has again given the possibility to take advantage of voluntary disclosure for the year 2016. This law is therefore called 'Voluntary bis'.

Both laws are based on the main points of the tax shield established in 2009, guaranteeing the same means for the compensation of illicit capital, namely:

• the payment of the tax due
• a reduction of the penalties foreseen
• the cancellation of tax offences.

The first voluntary disclosure allows for self-disclosure by 30 September 2014. The voluntary bis, which came into force on 7 February 2017, allows one to self-declare guilty to the tax authorities by 2 October 2017.

The Inland Revenue has repeatedly stressed the usefulness of this measure, encouraging tax evaders to come forward and declare the amount of capital deposited abroad in order to have their sentence remitted.

The Agenzia delle Entrate has, in fact, stated in Circular 19/E of 12 June 2017 that voluntary disclosure is a way to:

"allow taxpayers to repair past declaratory infidelities and lay the foundations for a relationship with the tax authorities based on mutual trust, according to the guidelines set out by the Organisation for Economic Cooperation and Development (OECD)."

The mini - voluntary disclosure

Another decree-law was enacted in 2018 to give the possibility to still dispose of the tax shield. Decree-Law 148/2017 (Fiscal Attachment to the 2018 Budget Law), called "mini-voluntary disclosure", is aimed at taxpayers who reflect these two criteria:

• hold a cross-border job or are former residents abroad (AIRE members).
• they have a current account or savings account abroad

The time window in which it is possible to take advantage of this mini voluntary disclosure has been set at 31 July 2018, with payment of the taxes due by 30 September 2018. In this case, the sums repatriated or regularised to the state are equal to 3% of the capital deposited abroad, including taxes, penalties and interest.

The payment can be made in one lump sum or in a lump sum divided into 3 monthly instalments.

But this procedure has raised a lot of controversy. Is the cap on individual payments that this instrument provides for incompatible with the necessary increase in public revenue? Doesn't this self-limitation of taxation impose too great a burden on our economy, which faces a still fragile recovery, faltering job creation and capital markets under pressure? Has the tax shield succeeded in its aim of assisting the state in identifying tax evaders, trying to close the loopholes in the Italian tax system through accurate tax monitoring?

Let us know what you think by leaving feedback in the comments.