EU Urges Italy to Close Tax-Evasion Loophole

(CN) - A loophole in Italy's criminal code that routinely allows tax evaders to dodge prosecution may run afoul of EU law when the scofflaws' conduct hurts the EU budget, Europe's highest court ruled Tuesday.

The case in question involves a group of individuals who Italian prosecutors believe ran a value-added tax evasion scheme between 2005 and 2009 involving bottles of champagne. The Italian government says that because the group dodged the VAT tax, they got the bottles at below-market cost and distorted the market accordingly.

But because of Italy's statute of limitations - and the often complex nature of tax-evasion investigations - the group will likely dodge prosecution by the time the case finally comes to trial.

The district court in Cuneo asked the European Court of Justice to weigh in on whether - by effectively granting de facto impunity to individuals suspected of evading millions of euros in VAT taxes - Italian law actually creates a new VAT exemption that goes against EU law.

In an 8-page opinion, the Luxembourg-based high court noted that member states' tax authorities are obligated to counter tax fraud that affects the European Union's financial interests with the same vigor as they would protect their own - particularly since the EU budget is financed in large part by VAT taxes.

If the Italian court determines that Italy's statute of limitations allows a considerable number of tax-fraud cases to go unprosecuted, it would violate the EU constitution, the high court said.

This is especially the case if the Italian court finds the nation has longer limitation periods to protect its own financial interests, according to the ruling.

"As the European Commission observed at the hearing before the court, and subject to verification by the national court, Italian law does not lay down any absolute limitation period in respect of the offence of conspiracy to commit crimes in relation to import duties on tobacco products," the court wrote.

"In the event that the national court concludes that the national provisions at issue do not satisfy the requirement of EU law that measures to counter VAT evasion be effective and dissuasive, that court would have to ensure that EU law is given full effect, if need be by disapplying those provisions and thereby neutralizing the consequence without having to request or await the prior repeal of those articles by way of legislation or any other constitutional procedure," the court wrote - but also noted the need to "ensure that the fundamental rights of the persons concerned are respected."

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