Italian Tax Authorities Question UK Non-Domicile Tax Rules

by Ulrika Lomas, Tax-News.com, Brussels

13 August 2007

Italy's deputy economy minister, Vincenzo Visco has reportedly made inquiries to determine whether motorcycle racing's answer to Michael Schumacher, Valentino Rossi, was allowed to use the United Kingdom's non-domicile tax status to create a "fictitious" residency there and avoid tens of millions of euros in taxes in Italy.

Italian news agency ANSA quoted Visco as observing last week that Britain's 'resident but not domiciled' rules "go beyond the norms of competition between states" in the European Union, and he reportedly hinted that the Italian authorities may urge the European Commission to challenge the British law.

"A more or less fictitious residence in London allows you not to pay taxes in your own country" Visco, the Italian government's tax chief, was quoted as arguing.

Reports began to emerge last Wednesday that twenty-nine year old Rossi, who won the top class 500cc and MotoGP world championship every year from 2001 to 2005 and is an Italian sporting idol, was being investigated by the Italian tax authorities for possible undeclared earnings of EUR60 million (US$82.8 million) from 2000 to 2004.

Rossi has been a British resident since 2000, and it is alleged that he did not declare earnings from Yamaha, the team for which he races, or from sponsorship, to either British or Italian authorities during that period.

Rossi confirmed to ANSA that he had indeed been residing in the UK since 2000, but had spent about seven months of the year racing, holidaying or visiting family and friends. "For seven months of the year I travel the world for my job. The tax agency is rightly doing its job ... My consultants are already examining the issue," he announced in a statement.

Under UK tax rules, individuals not born in the UK but who have resided there on a long term basis are permitted to apply for non-domicile tax status. This allows them to pay tax only on their UK income and not on their foreign income, provided those foreign earnings are not brought into the UK. The law is frequently criticised by taxpayer groups for allowing a handful of very wealthy foreign individuals to pay relatively small amounts of tax in the UK. The Treasury has been reviewing the rules since 2003, but is reluctant to scrap the system because, the department has argued, it gives the City of London a competitive edge over other financial centres in attracting investors.

In the eyes of Italian tax investigators however, Rossi effectively maintained his Italian residency during the period in question, but they say he declared only modest earnings in Italy from property investments, and none from the far more lucrative Yamaha and sponsorship contracts.

The tax agency has reported Rossi to the public prosecutor's office, and if convicted of evading tax, he could face a fine of up to four times the amount evaded. He also risks a prison term of up to three years.

The case also highlights the problem of tax evasion in Italy, the stamping out of which Prime Minister Romano Prodi has made a top priority. In a letter to news daily Corriere della Sera last week, Prodi suggested that tax evasion is "the main reason why we have both overly high taxes for honest people and a heavy deficit in the state's balance".

According to the Italian government, the so-called 'black economy' is equal to about 27% of Italy's gross domestic product, although it claims to have made great strides in tackling evasion, claiming a EUR12 billion haul in unpaid taxes last year.

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