Partial Payment of VAT Debt in Case of Arrangement with Creditors
By Bernadette Accili & Martina Torresani
In case of arrangement with creditors under Article 160 of the Bankruptcy Law, Article 182-ter, introduced by Article 146 of D.Lgs. n. 5/2006, expressly states that taxpayers can propose a partial payment of income taxes, but not of VAT and withholding taxes, for which the payment can be only deferred.
Alongside such amendment in the Bankruptcy Law, the following case law of the Supreme Court (See No. 22931/2011, No. 22932/2011, No. 14447/2014, No. 9541/2014) and the official interpretation of the Revenue (Circular 40/2008, Resolution No. 3/2008) maintained that an arrangement which provides a partial payment of VAT cannot take place as contrary to Italy’s obligation towards the European Union to ensure the effective collection of the EU’s own resources. Thus, according to the Italian legislator, VAT may be non-negotiable on the assumption that VAT is an EU own resource.
Similarly, withholding taxes have been considered non-negotiable, on the basis of an alleged similarity between withholding taxes and VAT.
On 28 November 2014, the tribunal of Udine referred to the ECJ, a case on the compliance of such rule to European law.
The opinion of the Attorney General of the ECJ, Eleanor Sharpston, in case No. C-546/14, laid the foundation for a review of the prior interpretation on the matter.
Indeed, the Attorney General, in her opinion of 14 January 2016, explained that “neither Article 4(3) TEU nor Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax preclude national rules such as those in issue in the main proceedings, if those rules are to be interpreted as allowing an undertaking in financial difficulties to enter into an arrangement with creditors involving liquidation of its assets without offering full payment of the State’s claim in respect of VAT, on condition that an independent expert concludes that no greater payment of that claim would be obtained in the event of bankruptcy and that the arrangement is validated by a court.”
Thus, in the opinion of the Attorney General, under certain circumstances a Member State may reasonably consider it legitimate to waive full payment of VAT debts, provided that such circumstances are exceptional, specific, and limited, and that the Member State does not thereby create significant differences in the way in which taxpayers are treated as a whole and does not therefore infringe on the principle of fiscal neutrality.
The Member States should enjoy a degree of flexibility with respect to the collection of VAT debts when the taxpayer is in financial difficulties and its assets are insufficient to satisfy all creditors. As there are no harmonised rules in the EU concerning the ranking of VAT debts—continued the Attorney General—Member States must be free to consider that other debts deserve higher protection.
Furthermore, the Attorney General believes that a procedure such as the arrangement with creditors is consistent with the Member States’ obligation to ensure the effective collection of the EU’s own resources, as it contains safeguards to protect VAT debts.
While waiting for the decision of the ECJ, the lower court of Santa Maria Capua Vetere, following the statement of the opinion, approved an arrangement pursuant to Article 160 of the Bankruptcy Law, which provides for a partial payment for VAT liabilities and withholding taxes in its decision of 17 February 2016.
According to the aforementioned court, the arrangement may rule that a VAT debt may not be entirely fulfilled in case an independent expert attests that the Tax Authorities would not receive a better treatment in the event of bankruptcy.
The court argued against the constant prior case law that an arrangement that provides a partial payment for VAT liability would be not contrary to Italy’s obligations towards the European Union.
As to withholding taxes, the court reaffirmed that the preferential treatment lacks any justification, as it is not provided by supranational rules, but it arises instead from the sole choice of the Italian legislator. Thus, according to the court, an arrangement that does not provide the entire payment of withholding taxes is also possible.
Furthermore, the court of Santa Maria Capua Vetere noted that, in case of insufficient assets to reimburse senior creditors, an arrangement that provides that the entire payment of the VAT debt and of withholding taxes cannot be approved as made to the detriment of senior creditors.
Lastly, the court noted that should the Revenue not be satisfied by the proposal or should it be contrary to the arrangement, or in disagreement with the conclusions of the independent expert, it may vote against the arrangement, thus safeguarding the interest of the Revenue.
The recent interpretation of the lower court of Santa Maria Capua Vetere, in line with the opinion of the Attorney General in case No. C-546/14, clearly shows that the amendment allowing the settlement with the Tax Authority in 2006 was based on an erroneous interpretation of EU law and thus should not be retained.