"NEWS of July 15, 2016-tax deduction and spending money: what the correct boundaries?"

Posted by on Jul 15, 2016

What are the conditions to exercise the right to deduct the VAT paid on purchases? Paragraph 1 of article 19 of DPR 633/1972 constrains the benefit to the fact that serious tax on fees relating to goods and services imported or purchased in the performance of the enterprise, art or profession.

In relation to this concept, often falls into confusion on two aspects which deserve attention:

  • the confusion between inherently concept for the purposes of direct taxation and VAT, believing the two spheres perfectly superposable;
  • the habit of domestic practice to define the taxable person as taxpayer, rather than debt collector (or tax collector) as more properly using do at Community level.

Trifles, nuances, you say; to us so it does not seem, since misunderstandings referred to above lead to bizarre pronouncements, like that found in Cassation 5195 of 3/16/2016.

A company had production of packages of clothing, which yielded, with a view to their marketing in Italy and abroad, with two other sister companies. The IRS challenged the deduction of VAT charged on invoices issued by the holding company for advertising services and use of the mark.

The complaint was based on the absence of business object, inherently disbursements directed solely to production and not the marketing of goods, carried out by sister companies.

According to the Supreme Court, the community case-law States that inherently evaluation parameter of the goods or services falling within the undertaking's economic activity operations differs depending on whether the use of a service or purchase capital goods. As regards the use of the service, "normally there must be a direct and immediate link between a particular input transaction and one or more output transactions conferring the right to deduct" (Justice Court October 29, 2009, C-29/08, SKF, paragraph 57).

Immediacy is understood in a functional way, with reference to the whole economic activity in order to propitiate/appease development (Justice Court October 22, 2015, case C-126/14, who admitted the deduction of VAT paid on the purchase or manufacture of capital goods in the context of the construction of a recreational trail intended for free use of the public, but by a company whose corporate purpose the welcome , catering, organization of conferences, exhibitions and leisure).

The direct and immediate link with the whole of the activity there is also specified the case-law relied on, even if the costs of services form part of the overheads of the taxable person. Then the sentence stating that these same principles have been recalled by internal law, particularly concerning the advertising costs inherent in General and sponsorship in particular (Supreme Court November 16, 2011, n. 24065; April 27, 2012, n. 6548 and May 27, 2015, n. 10914). Thus, in order to assess the cost of advertising supported inherently in favour of a third party, you must investigate the nature of the relationship between the company that supported the spending and the third, in order to assess the advantages and usefulness be reaped from advertising carried out in their favour, to whom is due the advertising message; does not detect the incongruity between spending and revenues earned in the tax year, as it is not necessary for there to be an immediate hit, but that this cost is projected for future utility.

After this reconstruction, in connection with the case and the judgment of appeal (conducive to revenue), detect the Supreme courts:

  • the appeal court undoubtedly incorrect in stating that "the costs of advertising does not appear to be related to the business activity exercised" by the manufacturer;
  • but, the relevance of that erroneous ruling is then neutralized when the Commission determined that, although the costs in question were born from the producing company, the taxpayer did not provide evidence that they "… were recovered downstream against the companies distributing ". Then, since there is no indication that the costs have been incorporated in the price charged for the sale of goods that other companies would have to deploy, it follows the severing of direct and immediate link between the use of the advertising service and the supply of goods to be distributed in the Valley.

In summary: taking moves from a reading of the judgments of the community case-law, you come to affirm a principle which appears to have been correctly applied by the courts of appeal.

But are we really sure that the judgment of the ECJ States precisely the principle evoked by the Supreme Court? We ask the question simply because you are given ample emphasis to the content of paragraph 57 (if you require – as a general rule-the direct and immediate link), and in our opinion is "guilty" overlooked the section 58, which States an important justification than the general criterion.

We list for maximum fidelity: "A right to deduct the taxable benefit is nevertheless allowed even if cannot be reconstructed a direct and immediate link between a particular input transaction and one or more output transactions conferring the right to deduct, when the costs of the services in question are part of the taxable person's overheads and as such are cost components of the products or services that it provides. Such costs have a direct and immediate link with the whole economic activity of the taxable person ".

We feel that the divergence is evident: to the ECJ the fact that certain charges are part of general expenses automatically determines the fact that they are cost components; for the Supreme Court, however, the lack of indicating that the costs have been included in the price determines the severing of direct and immediate link.

In short, the story is worth an additional reflection.

by Giampiero Guarnerio and John V