On 27 October 2019, Law-Decree no. 124 (26 October 2019),which sets forth the major changes made by Art. 39 with respect to how tax-evasion (of both income and value-added tax) crimes are charged and punished under Legislative Decree no. 74/2000, was published in Italy's Official Gazette. The rules will take effect once the final law (as initially promulgated by the law-decree) is published.
1. Increasing the Ranges of Punishment.
A first round of reforms involved higher fines and longer imprisonment for certain fact patterns:
Art. 2 (“Fraudulent tax return using invoices or other documents for illusory transactions”): the current range of punishment of “one year and six months to six years” has been replaced by the more severe “four years to eight years”; the former range of punishment will now only apply to situations where the fictitious expenses or losses claimed on the tax return, taken as a whole, total less than Euro 100,000 (that threshold – as we will see infra – was chosen by the Legislator not only with respect to the range of punishment, but also as the threshold for “expanded” civil forfeiture under Art. 240-bis of the Criminal Code);
Art. 3 (“Fraudulent tax return using other schemes”): the prior range of punishment of “one year and six months to six years” is increased to “three to eight years”;
Art. 4 (“Misleading tax return”): the range of punishment of “one to three years” is increased to “two to five years”;
Art. 5 (“Failure to file a return”, including with respect to alternative tax under paragraph 1-bis): the new range is “two to six years’” imprisonment (instead of the prior range of punishment of one year and six months to four years);
Art. 8 (“Issuance of invoices or other documents for illusory transactions”): in a manner entirely analogous to the fact pattern punishable under Art. 2, the range of punishment " one year and six months to six years” was maintained solely for situations wherein “the illusory amount set forth in an invoice or other document, for the tax period in question” was less than Euro 100,000; where higher, the new range of punishment (of four to eight years) will apply;
Art. 10 (“Concealing or destroying accounting documents”): the former range of punishment “one year and six months to six years” is increased to “three to seven years’” imprisonment;
On the other hand, the range of punishment for the crime of failure to make a tax payment under Art. 10-bis and 10-ter remained unchanged.
These increases to the ranges of punishment have triggered rather significant consequences both during investigations as well as at the sentence-execution stage. In terms of investigations: following these changes, wire-tapping may be authorised for the crimes of misleading return or failure to file a return. In terms of serving a sentence, the increase in the range of punishment will, as a practical matter, make it more challenging to secure an alternative punishment, such as probation supervised by social services.
2. Lowering of the Thresholds for Culpability.
A second round of legal reforms involved lowering the thresholds for culpability:
Art. 4 (“Misleading return”): the threshold for tax evasion was lowered to one hundred thousand Euro (from one hundred fifty thousand),whereas the threshold relating to positive deductible amounts was reduced to two million (from three); additionally, paragraph 1-ter (a safe-harbour provision for false assessments which, taken singly, fall within a 10% margin of error) was repealed;
Art. 10-bis (“Failure to remit any certified or payable withholding”): the threshold for punishment was lowered to one hundred thousand Euro in unpaid taxes (from one hundred fifty thousand);
Art. 10-ter (“Failure to pay VAT”): the threshold for punishment was lowered to one hundred fifty thousand Euro in unpaid taxes (from two hundred fifty thousand).
3. “Expanded” civil forfeiture.
The tax decree also introduced Art. 12-ter, which contemplates the application of “expanded” civil forfeiture pursuant to Art. 240-bis to all criminal fact patterns contemplated under Legislative Decree no. 74/2000 (with the exception of failing to make a payment) provided the following conditions are met:
a) the amount of the illusory expenses or losses exceeds one hundred thousand Euro for any crime contemplated under Article 2;
b) the tax evaded exceeds one hundred thousand Euro for any crime contemplated under Articles 3 and 5, paragraph 1;
c) the amount of unremitted withholdings exceeds Euro one hundred thousand for any crime contemplated under Article 5, paragraph 1-bis;
d) the misleading amount stated in the invoices or in the documents exceeds Euro one hundred thousand for any crime contemplated under article 8;
e) the undue off-set involves receivables which have not accrued or which are entirely illusory and which exceed Euro one hundred thousand for any crime contemplated under Article 10-quater;
f) the total amount of taxes, penalties, and interests exceeds Euro one hundred thousand for any crime punishable under article 11, paragraph 1;
g) the amount of revenue or gain which falls short of those actually earned or realised, or the amount of any illusory expenses or losses exceeds Euro one hundred thousand for any crime contemplated under Article 11, paragraph 2;
h) a conviction or finding of guilt has been entered for any crime contemplated under Article 4 (note that the threshold for culpability has been set at one hundred thousand Euro for evaded tax -Ed.) or 10 (which punishes the concealment or destruction of accounting documents -Ed.).
That type of civil forfeiture, originally introduced as a means of combating organised crime, is particularly insidious. In fact, although predicated on a conviction or “plea bargain” (unlike pre-trial seizure),not only does it “strike at” the ill-gotten gains or loot from the crime (as contemplated under Art. 12-bis),but it also keeps the tax evader from having access to those assets, monies, or other benefits “whose provenance the guilty party cannot explain, and in which, either directly or through a strawperson, natural or legal, such person holds any title, interest, or possession (constructive or actual),in a manner disproportionate to one's stated income”.
The Legislator therefore extended that form of forfeiture to instances of conviction or plea bargain for the better part of all tax crimes, setting a further condition of the one-hundred-thousand-Euro threshold, identified using a rather dubious criterion. In fact, although for the crimes punishable under Art. 2 and 8 the one-hundred-thousand-Euro threshold refers to those illusory expenses or losses claimed on the return, and to the false amount shown on the invoice (thresholds that are material for purposes of identifying the range of punishment, as well),for the other fact patterns the one hundred thousand Euro essentially refers to taxes owed, or even (for any instance of tax evasion under Art. 11),to the taxes, interests, and penalties owed to the tax authorities. Thus, there appears to be no consistency – other than a purely literal one - in setting that threshold.
4. Legislative Decree no. 231/2001. Fraudulent tax returns pursuant to Art. 2 - a new predicate crime.
We would finally note that the tax reform in question, pursuant to PFI Directive 2017/1371, which required Member States to establish criminal liability for entities for the commission of “serious crimes against the common VAT system”, introduced into Legislative Decree no. 231/2001 a new provision, to wit, Art. 25-quinquiesdecies.
That provision serves to make Art. 2 of Legislative Decree no. 74/2000 (“Fraudulent tax return using invoices or other documents for illusory transactions”) a predicate crime for entity criminal liability under Legislative Decree no. 231/2001. Where such a strict-liability crime is committed, the entity will be fined up to five hundred quotas.
Please note that the PFI Directive required the introduction of a type of organisational criminal liability solely for major VAT fraud, meaning trans-national fraud causing at least Euro 10 million in damage to the financial interests of the EU.
The Italian Legislator received and codified that Directive, but solely by establishing that violations of Art. 2 would be a predicate crime in terms of entity liability. While that fact pattern is certainly the most significant in terms of trans-national VAT fraud, it is by no means the only one.
By the same token, should the predicate crime under Art. 2 be committed, the entity would be sanctioned even where the fraud did not cross any border, and is relatively modest in size.