With the introduction of Art. 25-quinquiesdecies to Italian Legislative Decree n. 231 dated 8 June 2001 (also known as “Decree 231”) through Art. 39, section 2 of Italian Decree Law n. 124 dated 26 October 2019 (converted, with amendments, into Italian Law n. 157 dated 19 December 2019) – legislators added tax crimes to the list of offences which are predicate to the criminal liability of entities, taking the prosecutable offences directly from Italian Legislative Decree n. 74 dated 10 March 2000.
Scope of application of the Legislation
The scope of application of this legislation was increased by Art. 5, section 1, subsection c), subsubsection 1, of Italian Legislative Decree n. 75 dated 14 July 2020 to implement EU Directive n. 2017/1371 (known as the P.I.F. Directive) which lays down rules to counter fraud affecting the financial interests of the Union by means of criminal law.
In current legislation, the crimes taken into consideration include, in detail, the following offences: filing fraudulent tax returns based on non-existent invoices or other documents (Article 2, Italian Legislative Decree n. 74/2000), filing fraudulent returns using other contrivances (Art. 3), issuing invoices or other documents for non-existent transactions (Art. 8), concealing or destroying accounting documents (Art. 10), tax evasion (Art. 11), as well as filing untrue tax returns – when carried out as part of cross-border fraudulent systems and with the intention to evade VAT totalling €10 million or more (Art. 4), failure to file a tax return (Art. 5), and undue compensation of tax credits (Art. 10-quater).
The introduction of Art. 25-quinquiesdecies within the Decree 231 system brought about a significant change since investigation for one of these offences puts any company – regardless of their size and the industry in which they operate – at risk of punishment (which can be extremely severe in some cases).
Administrative liability of collective entities within the Decree 231 system
Decree 231 sets out and governs the scope of liability of entities with regards to a family of administrative offences which form part of a larger crime (known as “predicate offences”) when committed in the entity’s interest or to its advantage by people who hold high-ranking positions therein (i.e. members of senior management) or by people who answer directly to the latter (i.e. people managed or supervised thereby, a.k.a. “subordinates”).
Pecuniary penalties are, however, only applicable to the entity benefiting from the offence and therefore, theoretically, its shareholders or members cannot be held directly liable financially for such penalties, regardless of the legal form of the entity in question.*
*Art. 7 of Italian Decree Law n. 269 dated 30 September 2003, stipulates that «administrative penalties concerning tax payments due by a company or entity with juridical personality are payable solely by the juridical person in question». From a legal point of view, there is a structural differentiation between – on the one hand – companies and juridical persons (as the sole parties liable for administrative tax penalties) and – on the other – all other collective entities (such as, for example, partnerships), for which the mechanism for applying the penalty is based on the principle of personality and therefore if the offence(s) has (have) been committed in the interest of the said collective entity (i.e. an entity without juridical personality), liability for the amounts due as a penalty is nevertheless held jointly by the party who committed the offence and the entity.
Regarding tax crimes in particular, the penalty system established by Decree 2312 is applied additionally and does not replace the penalties applicable to the individual (natural person) liable for the criminal conduct, nor the administrative penalty envisaged by Italian Legislative Decree n. 471 dated 18 December 1997, which is applicable to the entity in its capacity as a taxpayer.*
*2 Art. 10 of Italian Legislative Decree 231 dated 2001 provides for the application of a pecuniary penalty, which uses a systems of ‘shares’ to calculate the amount due, wherein the lowest number of shares that can be applied is 100 and the highest is 1,000, and the monetary value payable per share ranges from €258 to a maximum of €1,549. In the case of tax crimes, the maximum number of shares applicable varies between 400 and 500 depending on the kind of offence committed.
As a result, an offence falling within those envisaged by the new Art. 25-quinquiesdecies is addressed in two separate yet contemporaneous ways as, on the one hand, the offence results in the liability of the individual who actually committed it (offence punishable under criminal law) and, at the same time, it results in the administrative liability (i.e. non-criminal liability punishable by the application of the pecuniary penalties provided for by Italian Legislative Decree n. 471/1997 and by Italian Legislative Decree n. 231/2001) of the entity with which the perpetrator had a relationship (whether as an employee thereof or through service provision) at the time the offence was committed.
However, the administrative penalty system does not contain any appreciable coordination between the provisions envisaged by Italian Legislative Decree n. 74 dated 2000 and those envisaged by Decree 231.*
*Following this reform, legal theorist have raised numerous doubts about the breach of the ne bis in idem principle (SANTORIELLO C., “La nuova responsabilità delle società per i reati tributari” – New corporate liability for tax crimes – published in Il Societario, 19.03.20 p. 6, GRASSO G., “Responsabilità da reato tributario dell’ente e ne bis in idem: tra binari doppi e multipli alla luce del d.l. n. 124 del 2019, conv. in l. n. 157 del 2019 – Tax liability of entities and the ne bis in idem principle: double or multiple application of penalties on the basis of Italian Decree Law 124 dated 2019, converted into Italian law n. 157 dated 2019 – published in Giurisprudenza penale, 2021/1-Bis, pages 2 et seq.).
Indeed, tax penalties already take a distinctly punitive approach, as they are calibrated according to the severity of the offence, and they are designed to act as a sufficient response to the offences in question without requiring any further measures. So, by quite simply adding the entire collection of provisions envisaged by Decree 231 – as if no punishment had yet been envisaged for the area concerned – has proved to be a somewhat unbalanced solution that is likely to lead to excessive punishment in the future.
What is more, the different perspective applied to the area of tax offences is based not only on punishment but also on recovering unpaid or evaded taxes (by introducing incentive tools that encourage compliance by the perpetrator).
Adoption of an organisation, management, and control model
Entities can obtain exoneration from liability or, at least, lower levels of disciplinary measures/penalties if they take certain action; this can include making compensatory payments for offences committed and demonstrating willingness to reorganise the operating structure by adopting an organisation, management, and control model, or updating its existing model, in such a way as to prevent the conduct constituting eligible offences according to the aforesaid Art. 25-quinquiesdecies being committed by people within their organisational or operational structure.
To achieve this, entities are required to apply a special part of the said model which stipulates the adoption of an appropriate self-assessment method in order to identify and describe the areas at risk of the aforesaid criminal offences.
The corporate departments that must be assessed first and foremost are those responsible for the entries in the accounting records and the financial statements (concerning customers, suppliers, banking institutions, treasury) and for filing returns (income tax return, VAT returns, etc.) and those which handle relations with tax revenue offices.
Within this area then, the business procedures that govern the procurement of goods and services, the marketing of goods and services produced, the management of sales activities, the management of corporate operations (e.g. sales of real and personal property outside the core business, and exceptional business) must all be carefully examined.
Therefore, it will be necessary to introduce precise rules of conduct which must be applied early on concerning the careful selection of customers, suppliers, and workers/partners in general and likewise rules prohibiting, for example: the issue and/or entry in accounts records of documents that do not correspond to the underlying legal/financial reality of the transaction to which they refer; the falsification or concealment of company documents to hinder controls by the competent authorities; specious or unjustified application of tax provisions or misapplication of provisions (disregarding the interpretations offered by case law, legal theory, and the practices of the Italian tax authority).
Therefore, a specific application protocol must be established for each sensitive activity, which involves identifying the tasks, duties, and responsibilities within the governing bodies and among the senior members, and also, where applicable, the firm (or person) appointed to carry out audits and the board of auditors.
Control measures could take the following forms:
- the creation of a full, up-to-date customer and supplier database;
- planning and carrying out checks on suppliers’ legal form and operations and on their effective legal basis and financial capacity;
- establishing pricing procedures, checking the effectiveness of the services received and the congruity of the amounts stated on the invoice in relation to the current value of the goods/service involved in the transaction and that the figures tally with the amounts stated on the underlying contractual documents (order confirmations, letters of appointment, authorisations, etc.);
- checking corporate transactions carried out to ensure the parties and the supporting documents involved are real and truthful;
- overseeing the accounts in terms of compliance of the entries with requirements and regular audits on the way in which accounting records are kept;
- checking the work of external consultants and setting up periodic rotation mechanisms for the professionals appointed to file tax returns.
Lastly, the supervisory body and the code of ethics will be given a key role in order to ensure the model is adequate, compliant, and up to date and to verify compliance with existing operating procedures in sensitive areas with a view to preventing possible criminal conduct, including tax crimes.
Liability of corporations for tax crimes in Italy: Closing remarks
The extension to include tax crimes with a wider social impact introduced with the inclusion of Art. 25-quinquiesdecies within the regulatory framework of Italian Legislative Decree n. 231 dated 2000 can lead, as noted above, to extremely serious penalties for the company, partnership, or association if it is found administratively liable based on the charge criteria established therein4.
The organisation, management, and control model is therefore an essential means of preventing the risk of tax offences being committed. Furthermore, if a tax offence is committed, the fact that the entity had adopted and implemented the model before the crime was committed can – where deemed appropriate by the criminal judge – prevent the serious administrative penalties envisaged in Italian Legislative Decree 231 being applied to the entity. It should be remembered that even adopting Decree 231 model after the crime was committed (referred to as “Posthumous OMM”) is extremely important as it can stop disqualification penalties being applied to the entity and can limit the pecuniary penalties too