Italy – Tax authorities may assess under-declared VAT by extrapolation

The Advocate General (AG) has opined that the principles of EU law do not preclude national legislation from assessing a taxpayer, who is presumed to have under-declared VAT, for unpaid VAT by means of estimating that taxpayer’s likely revenues based on studies of comparable taxpayers within the same economic sector. However, the national courts must ensure that principles of law, such as the right to challenge the basis of assessment, are respected (Fontana (C-649/16)).


In 2014, the Italian tax authorities subjected the Taxpayer – whom they suspected of under-declaring VAT – to an adjustment procedure with respect to the tax year 2010. The Italian authorities were not persuaded by the Taxpayer’s submissions and so, in December 2014, she was assessed for unpaid VAT.

Italian national legislation allows the Italian tax authorities to assess such unpaid VAT by means of extrapolation. The Italian Ministry of Finance – following consultation with relevant trade and professional bodies – conducts detailed statistical studies of representative taxpayers in specific economic sectors. Then, when a member of such an economic sector is suspected of under-declaring VAT, an assessment can be raised based on that taxpayer’s likely revenues, as determined by the studies of that sector.

Taxpayers are categorized by sector according to their predominant economic activity. In the case of the Taxpayer in this case, the assessment was determined with reference to the sectoral study of public accountants and tax advisers.

The Taxpayer appealed against this assessment. She contended not only that the wrong sectoral study had been applied (she submitted that the study of HR management advisors was more relevant), but also that her assessment was based only on estimates derived from the sectoral study and not on her actual economic activities.

The court to which the Taxpayer appealed was unsure as to the application of EU law to these proceedings. It therefore stayed and referred the following question for a preliminary ruling:

“Do Articles 113 and 114 TFEU and the VAT Directive preclude the Italian domestic legislation in Articles 62sexies(3) and 62 bis of Legislative Decree No 331/93 [converted into law by] Law No 427 of 29 October 1993, which allows the application of VAT to the overall turnover established by extrapolation, in the light of the principle of deduction and the obligation to recover the tax and, more generally, the principle of the neutrality and the passing-on of the tax?’


Despite a lack of detailed guidance from the referring court, the AG proceeded to consider the compatibility of the Italian legislation concerning sectoral studies and extrapolation with EU law, in particular with the principles of proportionality and fiscal neutrality.

Dealing first with the issue of proportionality, the AG reasoned that tax authorities may and probably should ignore incorrect VAT returns submitted by a taxpayer who is suspected of fraud. Consequently, with the objective of calculating the correct amount of tax due from the taxpayer, and without accurate invoices from which to calculate that amount, the AG could see no reason why tax authorities should not in theory use inductive reasoning and statistical data to calculate realistic amounts of VAT that should be due from a taxpayer. Such a course of action falls within the powers derogated to Member States in order that tax evasion should be detected and that the correct amount of VAT should be collected efficiently.

The AG warned, however, that such methods of calculation – and specifically the sectoral studies at issue here – should also reflect the reality of the taxpayer’s economic activities. The obvious corollary of this point is that national authorities cannot assess a taxpayer for more VAT than the taxpayer actually received from its customers. Any legislation which failed to give a truthful picture of the taxpayer’s economic reality would therefore probably be in breach of EU law.

That, however, was not the case with the Italian legislation in question. Firstly, it was clear that the Italian application of sectoral studies to cases of suspected tax fraud did not automatically lead to adverse decisions being taken by the tax authorities. These studies only highlighted anomalies that would be addressed through formal procedures in order to determine the taxpayer’s economic reality. Secondly, the Italian application of a sectoral study – and its illumination of potential tax fraud – does not shift the burden of proof onto the taxpayer: it remains the burden of the Italian tax authorities to prove in legal proceedings that tax fraud actually took place.

Nonetheless, the application of a sectoral study must be compliant with the Charter of Fundamental Rights of the European Union. Specifically, this means that the taxpayer must be allowed to challenge both the accuracy of that study and the relevance of its application to its situation. If those conditions are met, then the relevant legislation will be proportionate and therefore compatible with EU law.

With respect to the principle of fiscal neutrality, the AG opined that the Italian legislation was not in breach of that principle. Firstly, the application of a sectoral study to the assessment of a taxpayer would not prevent a taxpayer from deducting whatever input tax to which it is entitled, and it would not enable the tax authorities to assess more output tax than what is actually due. Secondly, the AG reasoned that the principle of fiscal neutrality cannot be invoked legitimately by a taxpayer who has intentionally committed tax fraud and who thereby has jeopardised the operation of the VAT system.

The AG therefore proposed, in an opinion which may be accessed on the Curia website, that the ECJ should answer the referred question as follows:

“The principles of proportionality and of fiscal neutrality underpinning Council Directive 2006/112/EC … do not preclude national legislation that allows the authorities to assess the tax due by a taxpayer presumed to have under-declared value added tax through an inductive method based on sectoral studies which estimate the likely revenues of certain categories of taxpayer, provided that such legislation is applied in conformity with Articles 47 and 48 of the Charter of Fundamental Rights of the European Union.

The AG concluded by stating that it was for the national courts to determine whether the legislation in question infringed upon those principles in the context of specific cases.


If followed in judgment by the ECJ, this opinion may strengthen, in principle, the autonomy of Member States in dealing with suspected cases of VAT fraud, subject to conformity of national legislation with the Charter of Fundamental Rights of the European Union.

The AG commented on the lack of information regarding the Appellant’s factual circumstances, and in that context any wider implications of this opinion remain obscure.


If you wish to discuss this further, please contact Luca Lavazza Partner PwC Italy on +39 02 91605701 or


Bildquelle: Katharina Wieland Müller  /


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