Italy to extend anti-fraud reverse charge to retail to fund tax cuts

Italy is set to introduce the domestic reverse charge to the retail sector to help reduce Value Added Tax fraud and fund corporate tax rate reductions.  Italy earlier this month proposed implementing the reverse charge on the construction sector.

The proposal was announced this week by the reformist Prime Minister, Metteo Renzi. It is part of a range of measures aimed at reducing the estimated €40 billion lost to VAT frauds, and is crucial to improving the government’s finances. Currently, Italy has one of the world’s largest sovereign stock of debt – over 120% of GDP.

The introduction of the domestic reverse charge, to be included in the 2015 Stability (Budget) Law, will effectively take VAT payments out of the affected transactions and therefore eliminate the opportunity for VAT frauds. Instead of the seller of goods in Italy to a buyer in Italy charging and collecting VAT, the buyer becomes responsible for reporting the transaction in their Italian VAT return. There is therefore no need for a VAT cash payment.

Italy will have to seek European Union consent to introduce the measure. The EU sets the rules for the harmonised VAT regime. It set up a 30-day approval for the anti-fraud measure in 2013 in its Rapid Response Mechanism.