Fundamental Elements of Taxation
Content
Elements of taxation • • • Definition of “taxes”: Taxes are financial means to grant public expenditure They consist of legal obligations of payment, which arise in connection with the demand of public services, or just because the taxpayer has the “ability to pay”, id est a taxable capability in terms of “economic strength” (income, property, consume, etc.) Characteristics of tax: Enforced contribution. Its payment is not voluntary, and the imposition isn’t dependent upon the will of the person taxed It is generally payable in cash Proportionate to the income or wealth of the taxpayer It is levied on person or property, on acts, rights, privileges It is levied by the State which has jurisdiction over the persone or property It is based on statute laws. Assessment and collection are possible only if a prior law is enacted by the law making body of the State Taxes vs. other kind of payment: Tax distinguished from toll, price, etc.: tax is an expression of sovereignty, while toll or price are paid for the use of other’s property A tax is enforced only by public authority (i.e. the State), while a toll may be imposed by a private individual or legal entity Tax shall be distinguished by penalties: a tax is intended to raise revenue given a certain taxable capacity, while a penalty is thought to regulate conduct In It. Tax system taxes are not defined, but several statutes, even of constitutional level, refer to this concept According to art. 75 Cost., abrogative referendum is not admissible in the case of tax Under art. 81 Cost., “it is not possible to introduce new taxes and new expenditures in the law approving the budget” Jurisdiction on taxes is performed by a special judge
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The civil code grants privileges on credits for taxes Taxes as a constitutional duty: Art. 53.1: “Each person shall contribute to public expenditure, in relation with his taxable capacity” 53.2: “The taxation system shall be based on progression criteria” What does “taxable capacity mean”? Who is the rule thought for? The historical reasons of the aforesaid expression: Other constitutions, as the German one, don’t refer to tax at all, because the power to levy taxes is implied in the idea of sovereignty During the works of the IT Constituent Assembly, at the beginning no mention to tax issues was proposed Afterwards, it was decided to insert a reference to tax matter in the Constitution The safeguard of the elementary needs of the individual: Some proposed to insert an expression as the one contained in the old Statuto Albertino, which made reference to the properties of individuals (“averi”, that means broadly “property”). But others were worried of granting no taxation under a minimum threshold calculated according to the elementary needs of the individual That is why the formula “capacity to contribute” was chosen (not every economic capacity is a capacity to contribute) There is a limit in the percentage of taxation? There’s an issue concerning superior limit in imposing taxes, so that the taxpayer is granted certain amount of income after the taxation Some argue that such a limit exists. For instance according to German Cons.t. Court, tax should refrain from collecting more than 50 per cent of the income of the individual Some argue that such a limit can be founded on the right to freely perform an economic activity (art. 41 Cost.) and on right of property (art. 42 Cost.) The underlying idea is that taxation can’t “expropriate” the income or properties of taxpayers
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Expression of solidarity principle: Art. 53 is an aspect of solidarity duties, and it is considered a projection of art. 2 (“The Republic expects the fundamental duties of political, economic and social solidarity to be fulfilled”) Art. 53, according to the Constitutional Court, covers only taxes levied upon a taxable capacity, no matter on how many services are requested by the taxpayer Taxable capacity and equality principle: The rule stated in art. 53 is not only a duty for taxpayers, it is also a limit to the power of the legislator, which cannot impose taxes when taxable capacity is absent In this respect, a tax not founded on t.c. would be unconstitutional On the other hand, even a tax law issued without taking into account the equality principle would be unconstitutional “Ability to pay” as ground for taxation: Taxable capacity, or “ability to pay”, is the theoretical amount of tax which each individual taxpayer is able to contribute to his government and is based on the principle that individuals with higher income or greater wealth should pay more tax than those with lower income or lesser wealth The higher the wealth, the lower the sacrifice requested to the taxpayer in paying taxes Taxable capacity as a matter of equality: Taxable capacity thus relates to the economic capacity of each taxpayer as compared to the economic capacity of individuals in different circumstances Taxable capacity is more a matter of equitable distribution of tax burden among taxpayers than a tool to determine the actual amount than can be paid by each individual taxpayer Some issues on t.c. : Constitutional Court has settled some principles regarding art. 53 The taxable capacity shall be actual and current, so tax statutes introducing financial obligations of payment based on past facts could be unconstitutional, if axable capacity is likely to be absent when the law is enforced The effectiveness means that taxable capacity cannot be only alleged or presumed Taxable capacity and jurisdiction to tax:
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Art. 53 refers not only to citizens or residents individuals, but to “everyone” It means that even foreign (not residents) individuals and legal entities can be legally obliged to pay taxes to italian State or Regions, depending on a reasonable link with the italian territory (in terms of source of income) Some case law : Constitutional Court has sometimes judged unconstitutional statutes tax law in which equality principle was violated In a judgment concerning a tax on income stemming from “capital” (“Ilor”), it was considered inconsistent (and unconstitutional) that, given the aim to tax income arising from “capital”, professional services income were taxed “Irap” (regional tax on businesses): Irap was conceived to tax profits arising from organized activities Constitutional Court held as unconstitutional the taxation of any activity (businesses or professional services) not performed through an organization of means and personnel The so-called “Robin Hood Tax” as a case of excessive profit tax: A statute law raised the corporation tax rate for selected activities (oil and gas, electric power producers), on the assumption of a greater taxable capability due to extra-profits made in the past This is quite odd, since IT Corporation tax is a flat rate tax: raising tax rate only for certain activities could infringe equality principle Regional Financial Autonomy: According to art. 119 Cost. (reformed in 2001), financial autonomy to tax and spend is granted to Regions and other local authorities (provinces and municipalities). These local level of government are entitled to have independent financial means Having independent financial means is of course a strict condition to manage the new powers assigned by the Constitution Types of revenues: Regional financing is based on the following types of revenue: A) revenues arising from Region’s property (“demanio”)
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B) taxes which Regions can impose, in harmony with the Constitution and abiding by the principles of coordination of public finance and the State taxation system C) share of State’s tax levies, related to the Region’s territory D) revenues from an equalization fund provided by the State, to the benefit territories with reduced fiscal capacity per inhabitant The aforesaid kinds of revenues are intended to cover all the expenses due to the public functions attributed to them Source of tax law: Under art. 23 Const., “no obligations of a personal or a financial nature may be imposed except by law” Among financial obligations, we have social security contributions, and tax So, the source of any tax is necessarily a statute law Constit. Statutory law and democracy: In the ancient medieval States, the reason of the rule was to give protection against the sovereign, who otherwise could have imposed taxes without limits Then the rule has become consistent with the view of taxes as a limitation of property rights. In a liberal State, limits to citizen’s freedom can be established only by the law “no taxation without representation” is a matter of democracy. The Houses are a more democratic and representative power than the government The risk of abuses of the tax administration: The constitutional statutory limit is aimed to limit the discretionarily of the tax administration Statutory limit is a guarantee for the taxpayers, against an abuse of powers by the tax authorities, which are bound to the law The chance for a Constitutional review: Another advantage of the constitutional statutory limits is the possibility of a judiciary control on the respect of the Constitution According to art. 134 C., “the Constitutional Court shall decide on disputes concerning the constitutional legitimacy of laws and acts having the force of law, adopted by the States and the Regions”
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Secondary sources of law, such as governments regulations, are outside the control of the Const. Court Which statutes fullfill art. 23? By the term “law” art. 23 refers to primary source, id est ordinary State law (the aim is to encourage the partecipation of minority parties) and others acts having “force of law”, as Law Decrees enacted by the government Art. 23 lay a statutory limits that is “relative”, not “absolute” Law Decree: The use of Law Decree is admitted only in the case of necessity and urgency, but the Decree shall be submitted immediately to the Parliament to be confirmed (Art. 77) New taxes cannot be introduced by a Law Decree (art 4. L. 212/2000, Bill of taxpayer’s rights) Delegated Law Decree: Under art. 76 Const., legislative function may be delegated (with a Law of Delegation) by Houses to Parliament, but only for limited time and specified purposes Delegated Law Decrees are commonly used to enact tax law. The subject can be better managed by the government, given the high specialization needed Secondary sources: Primary statutes law shall rule the fundamentals of any tax, such as the taxpayers, the object of taxation, the taxable base and the rate Further details can be provided for by secondary sources of law, such as Regulations issued by the gov. or the ministry of finance In particular, secondary sources of law can regulate tax compliance (tax returns, tax assessments, refunds, etc.) The statute of rights of taxpayers: The statute law n 212/2000 has stated some general principles about taxation, in order to implement artt. 3, 23, 53, 97 Const. These rules are “general principles of tax legal order”, and can be modified or repealed only esplicitly and never by special statutes
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Unfortunately, the statute has been approved by an ordinary law, not a constitutional one, and for this reason could be repealed by following statutes Rules referred to the legislation:
(1) Retroactive laws: • • Tax rules can’t be retroactive. This principle, as any other contained in the Statute, may however be overruled by subsequent ordinary law Anyway art. 53 is a substantial limit to retroactive taxation. A taxation based on facts which took place prior to the enforcement of the law could be unconstitutional if one can presume that the taxable capacity is no longer present at the moment of payment The rule of irretroactivity doesn’t apply to interpretative laws, id est laws enacted to clarify the meanings, among others, of previous laws (2) Transparency – (3)Law decrees: • • • • • Laws and other acts having the force of law must be clear and transparent According to art. 4, law decrees cannot be used for introducing new taxes or extend an existing tax to further classes of taxpayers Principles referred to the acts and activity performed by tax administration: Principles stated in the Statuto are quite common in administrative law Tax authorities shall put the taxpayers in the condition to accomplish their duties, granting a complete and easy access to every legal and administrative rule, as well as interpretative acts (circolari, risoluzioni, etc.) (art. 5) Acknowledgment of acts (art. 6): Any act referred to the taxpayer shall be delivered in a way to ensure his acknowledgment (notificazione) The tax authorities shall, before issuing a tax notice and proceed in tax collection, invite the taxpayer to give the due explanations and deliver the relevant documents Justification of acts (art. 7): Every act issued by the tax administration shall be justified, with the indications of the relevant facts and juridical rules that have been applied. If, for the justification, reference is made to another act, the latter must be delivered
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Any act (of assessment and of any other kind) must make reference to the tax authority to which address a review, and the rules of proceedings to file a jurisdictional claim against the act (in order to avoid it) Safeguard of good faith and reliance (art. 10): The relationships between tax adm. and taxpayers have to be inspired to good faith and reliance According to this principle, if the authority give a certain interpretation and then change opinion, no penalty can be applied to the taxpayer who relied on the previous opinion In any case, no penalties are applied if the violation is due to an objective uncertainty on the significance of the rule assumed to be violated Advance ruling (art. 11): The taxpayer can file a request of advance ruling, asking the tax adm. to give the correct interpretation of a rule, when there are objective reasons of uncertainty The request shall be referred to a concrete and not hypothetical case, and all the relevant facts must be clearly set forth Once the tax adm. has delivered his interpretation, no assessment based on different basis can be issued In case of silence after 120 days, a deemed affirmative answer is considered to be issued Rights e guarantees of the taxpayer in the course of a field audit (art. 12): The taxpayer, in case of an outdoor audit, has the following rights: To be informed on the reasons of the audit, that can’t last longer than 30 working days To be assisted by a professional To verbalize comments into the audit report To put in claims before the “Guarantee of taxpayers’ rights” To file comments and request within 60 days from the end of the audit Tax inspection in the domicile: art. 14 of Const. states some important elements of safeguard of domicile Statutory law and jurisdictional limits
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Search and seizure for fiscal reason are permitted only if foreseen by the law, and if a jurisdictional warrant is issued If the inspection has to be performed in a private domicile, is also needed a serious evidence of violations Which are the parameters of the constitutional review? Talking about tax laws, the parameters are art. 53 (taxable capacity) often in connection with art. 3 (equality principle) The focus is sometime on art. 24 (right to defence) The incidental proceedings: To file a constitutional review, one have to file a claim against an ordinary court judge, during the course of the concrete controversy The party who allege the unconstitutionality of a law, shall indicate the provisions of the Constitution which are assumed to have been violated If the judge considers the question relevant and not clearly unfounded, he shall to suspend the lawsuit and refer the question to the Const.Court Effects of the judgment: The Const.Court could deliver a negative judgment when it considers the law not to be in violation of Constitution, or a “positive” judgment when it decides that the law is unconstitutional. In the latter case, the law judged unconstitutional ceases his validity, in the principaliter proceedings and also in any other pending lawsuit, with the limit of the defined questions, such as questions on which a final judgment has already been delivered
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The civil code grants privileges on credits for taxes Taxes as a constitutional duty: Art. 53.1: “Each person shall contribute to public expenditure, in relation with his taxable capacity” 53.2: “The taxation system shall be based on progression criteria” What does “taxable capacity mean”? Who is the rule thought for? The historical reasons of the aforesaid expression: Other constitutions, as the German one, don’t refer to tax at all, because the power to levy taxes is implied in the idea of sovereignty During the works of the IT Constituent Assembly, at the beginning no mention to tax issues was proposed Afterwards, it was decided to insert a reference to tax matter in the Constitution The safeguard of the elementary needs of the individual: Some proposed to insert an expression as the one contained in the old Statuto Albertino, which made reference to the properties of individuals (“averi”, that means broadly “property”). But others were worried of granting no taxation under a minimum threshold calculated according to the elementary needs of the individual That is why the formula “capacity to contribute” was chosen (not every economic capacity is a capacity to contribute) There is a limit in the percentage of taxation? There’s an issue concerning superior limit in imposing taxes, so that the taxpayer is granted certain amount of income after the taxation Some argue that such a limit exists. For instance according to German Cons.t. Court, tax should refrain from collecting more than 50 per cent of the income of the individual Some argue that such a limit can be founded on the right to freely perform an economic activity (art. 41 Cost.) and on right of property (art. 42 Cost.) The underlying idea is that taxation can’t “expropriate” the income or properties of taxpayers
• •
Expression of solidarity principle: Art. 53 is an aspect of solidarity duties, and it is considered a projection of art. 2 (“The Republic expects the fundamental duties of political, economic and social solidarity to be fulfilled”) Art. 53, according to the Constitutional Court, covers only taxes levied upon a taxable capacity, no matter on how many services are requested by the taxpayer Taxable capacity and equality principle: The rule stated in art. 53 is not only a duty for taxpayers, it is also a limit to the power of the legislator, which cannot impose taxes when taxable capacity is absent In this respect, a tax not founded on t.c. would be unconstitutional On the other hand, even a tax law issued without taking into account the equality principle would be unconstitutional “Ability to pay” as ground for taxation: Taxable capacity, or “ability to pay”, is the theoretical amount of tax which each individual taxpayer is able to contribute to his government and is based on the principle that individuals with higher income or greater wealth should pay more tax than those with lower income or lesser wealth The higher the wealth, the lower the sacrifice requested to the taxpayer in paying taxes Taxable capacity as a matter of equality: Taxable capacity thus relates to the economic capacity of each taxpayer as compared to the economic capacity of individuals in different circumstances Taxable capacity is more a matter of equitable distribution of tax burden among taxpayers than a tool to determine the actual amount than can be paid by each individual taxpayer Some issues on t.c. : Constitutional Court has settled some principles regarding art. 53 The taxable capacity shall be actual and current, so tax statutes introducing financial obligations of payment based on past facts could be unconstitutional, if axable capacity is likely to be absent when the law is enforced The effectiveness means that taxable capacity cannot be only alleged or presumed Taxable capacity and jurisdiction to tax:
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Art. 53 refers not only to citizens or residents individuals, but to “everyone” It means that even foreign (not residents) individuals and legal entities can be legally obliged to pay taxes to italian State or Regions, depending on a reasonable link with the italian territory (in terms of source of income) Some case law : Constitutional Court has sometimes judged unconstitutional statutes tax law in which equality principle was violated In a judgment concerning a tax on income stemming from “capital” (“Ilor”), it was considered inconsistent (and unconstitutional) that, given the aim to tax income arising from “capital”, professional services income were taxed “Irap” (regional tax on businesses): Irap was conceived to tax profits arising from organized activities Constitutional Court held as unconstitutional the taxation of any activity (businesses or professional services) not performed through an organization of means and personnel The so-called “Robin Hood Tax” as a case of excessive profit tax: A statute law raised the corporation tax rate for selected activities (oil and gas, electric power producers), on the assumption of a greater taxable capability due to extra-profits made in the past This is quite odd, since IT Corporation tax is a flat rate tax: raising tax rate only for certain activities could infringe equality principle Regional Financial Autonomy: According to art. 119 Cost. (reformed in 2001), financial autonomy to tax and spend is granted to Regions and other local authorities (provinces and municipalities). These local level of government are entitled to have independent financial means Having independent financial means is of course a strict condition to manage the new powers assigned by the Constitution Types of revenues: Regional financing is based on the following types of revenue: A) revenues arising from Region’s property (“demanio”)
• • •
• • • • •
• • •
• • • •
• • • • • • • • • • • • • • • • • •
B) taxes which Regions can impose, in harmony with the Constitution and abiding by the principles of coordination of public finance and the State taxation system C) share of State’s tax levies, related to the Region’s territory D) revenues from an equalization fund provided by the State, to the benefit territories with reduced fiscal capacity per inhabitant The aforesaid kinds of revenues are intended to cover all the expenses due to the public functions attributed to them Source of tax law: Under art. 23 Const., “no obligations of a personal or a financial nature may be imposed except by law” Among financial obligations, we have social security contributions, and tax So, the source of any tax is necessarily a statute law Constit. Statutory law and democracy: In the ancient medieval States, the reason of the rule was to give protection against the sovereign, who otherwise could have imposed taxes without limits Then the rule has become consistent with the view of taxes as a limitation of property rights. In a liberal State, limits to citizen’s freedom can be established only by the law “no taxation without representation” is a matter of democracy. The Houses are a more democratic and representative power than the government The risk of abuses of the tax administration: The constitutional statutory limit is aimed to limit the discretionarily of the tax administration Statutory limit is a guarantee for the taxpayers, against an abuse of powers by the tax authorities, which are bound to the law The chance for a Constitutional review: Another advantage of the constitutional statutory limits is the possibility of a judiciary control on the respect of the Constitution According to art. 134 C., “the Constitutional Court shall decide on disputes concerning the constitutional legitimacy of laws and acts having the force of law, adopted by the States and the Regions”
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Secondary sources of law, such as governments regulations, are outside the control of the Const. Court Which statutes fullfill art. 23? By the term “law” art. 23 refers to primary source, id est ordinary State law (the aim is to encourage the partecipation of minority parties) and others acts having “force of law”, as Law Decrees enacted by the government Art. 23 lay a statutory limits that is “relative”, not “absolute” Law Decree: The use of Law Decree is admitted only in the case of necessity and urgency, but the Decree shall be submitted immediately to the Parliament to be confirmed (Art. 77) New taxes cannot be introduced by a Law Decree (art 4. L. 212/2000, Bill of taxpayer’s rights) Delegated Law Decree: Under art. 76 Const., legislative function may be delegated (with a Law of Delegation) by Houses to Parliament, but only for limited time and specified purposes Delegated Law Decrees are commonly used to enact tax law. The subject can be better managed by the government, given the high specialization needed Secondary sources: Primary statutes law shall rule the fundamentals of any tax, such as the taxpayers, the object of taxation, the taxable base and the rate Further details can be provided for by secondary sources of law, such as Regulations issued by the gov. or the ministry of finance In particular, secondary sources of law can regulate tax compliance (tax returns, tax assessments, refunds, etc.) The statute of rights of taxpayers: The statute law n 212/2000 has stated some general principles about taxation, in order to implement artt. 3, 23, 53, 97 Const. These rules are “general principles of tax legal order”, and can be modified or repealed only esplicitly and never by special statutes
• • • • • • • • • • • • • •
• •
Unfortunately, the statute has been approved by an ordinary law, not a constitutional one, and for this reason could be repealed by following statutes Rules referred to the legislation:
(1) Retroactive laws: • • Tax rules can’t be retroactive. This principle, as any other contained in the Statute, may however be overruled by subsequent ordinary law Anyway art. 53 is a substantial limit to retroactive taxation. A taxation based on facts which took place prior to the enforcement of the law could be unconstitutional if one can presume that the taxable capacity is no longer present at the moment of payment The rule of irretroactivity doesn’t apply to interpretative laws, id est laws enacted to clarify the meanings, among others, of previous laws (2) Transparency – (3)Law decrees: • • • • • Laws and other acts having the force of law must be clear and transparent According to art. 4, law decrees cannot be used for introducing new taxes or extend an existing tax to further classes of taxpayers Principles referred to the acts and activity performed by tax administration: Principles stated in the Statuto are quite common in administrative law Tax authorities shall put the taxpayers in the condition to accomplish their duties, granting a complete and easy access to every legal and administrative rule, as well as interpretative acts (circolari, risoluzioni, etc.) (art. 5) Acknowledgment of acts (art. 6): Any act referred to the taxpayer shall be delivered in a way to ensure his acknowledgment (notificazione) The tax authorities shall, before issuing a tax notice and proceed in tax collection, invite the taxpayer to give the due explanations and deliver the relevant documents Justification of acts (art. 7): Every act issued by the tax administration shall be justified, with the indications of the relevant facts and juridical rules that have been applied. If, for the justification, reference is made to another act, the latter must be delivered
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Any act (of assessment and of any other kind) must make reference to the tax authority to which address a review, and the rules of proceedings to file a jurisdictional claim against the act (in order to avoid it) Safeguard of good faith and reliance (art. 10): The relationships between tax adm. and taxpayers have to be inspired to good faith and reliance According to this principle, if the authority give a certain interpretation and then change opinion, no penalty can be applied to the taxpayer who relied on the previous opinion In any case, no penalties are applied if the violation is due to an objective uncertainty on the significance of the rule assumed to be violated Advance ruling (art. 11): The taxpayer can file a request of advance ruling, asking the tax adm. to give the correct interpretation of a rule, when there are objective reasons of uncertainty The request shall be referred to a concrete and not hypothetical case, and all the relevant facts must be clearly set forth Once the tax adm. has delivered his interpretation, no assessment based on different basis can be issued In case of silence after 120 days, a deemed affirmative answer is considered to be issued Rights e guarantees of the taxpayer in the course of a field audit (art. 12): The taxpayer, in case of an outdoor audit, has the following rights: To be informed on the reasons of the audit, that can’t last longer than 30 working days To be assisted by a professional To verbalize comments into the audit report To put in claims before the “Guarantee of taxpayers’ rights” To file comments and request within 60 days from the end of the audit Tax inspection in the domicile: art. 14 of Const. states some important elements of safeguard of domicile Statutory law and jurisdictional limits
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• • • • • • • • • • •
Search and seizure for fiscal reason are permitted only if foreseen by the law, and if a jurisdictional warrant is issued If the inspection has to be performed in a private domicile, is also needed a serious evidence of violations Which are the parameters of the constitutional review? Talking about tax laws, the parameters are art. 53 (taxable capacity) often in connection with art. 3 (equality principle) The focus is sometime on art. 24 (right to defence) The incidental proceedings: To file a constitutional review, one have to file a claim against an ordinary court judge, during the course of the concrete controversy The party who allege the unconstitutionality of a law, shall indicate the provisions of the Constitution which are assumed to have been violated If the judge considers the question relevant and not clearly unfounded, he shall to suspend the lawsuit and refer the question to the Const.Court Effects of the judgment: The Const.Court could deliver a negative judgment when it considers the law not to be in violation of Constitution, or a “positive” judgment when it decides that the law is unconstitutional. In the latter case, the law judged unconstitutional ceases his validity, in the principaliter proceedings and also in any other pending lawsuit, with the limit of the defined questions, such as questions on which a final judgment has already been delivered
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