IRAP Compatible With European Law, ECJ Rules

by Ulrika Lomas, for LawAndTax-News.com, Brussels

04 October 2006

Going against the opinion of one of its own advocates general, the European Court of Justice (ECJ) on Tuesday ruled that the Italian government's regional production tax, known as IRAP, is compatible with European law.

The Banca Popolare di Cremona brought an action before the Commissione tributaria provinciale di Cremona against the decision of Agenzia Entrate Ufficio Cremona refusing to reimburse the IRAP paid in 1998 and 1999.

The Commissione tributaria then asked the Court of Justice for a ruling on the compatibility of IRAP with the Sixth VAT Directive, and in particular with the prohibition on the introduction or maintenance by Member States of taxes which are in the nature of turnover taxes.

Delivering its verdict, the ECJ announced that:

"IRAP differs from VAT in that it is not proportional to the price of goods and services and it is not intended to be passed on to the final consumer in a way characteristic of VAT."

"IRAP differs from VAT in such a way that it cannot be characterised as a turnover tax within the meaning of the Sixth Directive. It follows that a tax with the characteristics of IRAP is compatible with the Sixth Directive."

The ECJ decision has been welcomed by the Italian government, which is already struggling under a Stability and Growth pact-busting budget deficit of 4.8% of GDP for this year.

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