ECJ Advocate General Decides Italian Business Tax Is Illegal

by Ulrika Lomas, Tax-News.com, Brussels

17 March 2006

An opinion by an Advocate General to the European Court of Justice has argued that a local business tax in Italy is illegal, but has recommended that the government be allowed to protect itself from the billions of euros in potential refund claims if the ECJ rules against the levy.

The issue concerns a tax used to fund regional governments, known as Irap, which is levied on the revenues of mainly small and medium-sized businesses. However, Banca Popolare di Cremona, the company that first brought the case, argues that the levy is too similar to value added tax.

Under European law, value-added tax is the only tax that can be levied on corporate revenues, and according to Advocate General Christine Stix-Hackl, IRAP should be deemed illegal because it carries the "essential characteristics of a revenue tax."

The Italian government says that it has collected a total of EUR120 billion in revenues from the tax since its introduction in 1997 and is expecting a flood of refund claims should the ECJ follow the AG's non-binding opinion - which it tends to do in the overwhelming majority of cases.

However, Stix-Hackl concurred with the Italian government's concerns that the extent of these refund claims could destabilise the finances of the country's local governments, and recommended that any decision to rule the tax illegal not become effective until the end of the 2006 fiscal year thus giving the government time to legislate to reject refund claims - an unusual move which could lead to national governments being protected against retrospective claims in future tax cases.

Recommended