The Italian Tax Mores Case

Case study for Nov. 3: The Italian Tax Mores case

Name: Xiaoyue Li

Italian tax authorities assume that all Italian corporations would submit a tax return, which understates actual profit by 30 to 70 percent. After six months of annual deadline for filing tax returns, the tax authorities will invite corporation to discuss the tax return. Tax authorities will show a position which is several times higher than the corporation tax return for the current year. Tax authorities develop the position based on both prior year tax actually paid and the current year tax return. The Italian corporation will have a commercialista to negotiate corporate tax payments with Italian tax authorities. Addition, the Italian corporation has no clue about the negotiation other than the final settlement. Bustarella is a cash payment to Italian tax authorities’ agent. The more bustarella, the lesser the corporation should pay in addition to tax authorities. Commercialista will charge a lump-sum fee including bustarella. Corporation will never know how much represent bustarella. Moreover, corporation could recognize full amount of fee as a tax deduction for the following year tax return.

An American bank opened in Italy. The bank filed the tax return by not taking the advice that understated its profits despite tax authorities will consider the bank did. The general manger of the bank has the following reasons:

1. He considered it dishonest
2. He considered it inconsistent with the practices of his parent company in U.S

The general manger of the bank also ignored the advice to hire a commercialista to negotiate with tax authorities when he receive an “invitation to discuss” from tax authorities. Instead, he wrote a letter stating the return was correctly filed and requested tax authorities inform him any questions about the tax return. Later the bank received a formal tax assessment calling for tax almost three times higher than the bank original return. The tax authorities simply assumed the bank original return had been understated. The general manager of the bank refused to hire a commercialista again because he consider commercialista paying bustarella is unacceptable. Instead, he sent a check to tax authorities for the original return amount even though it’s past due. After he did that, he bank received a notice from tax authorities saying that the interest expense is a disallowed deduction on the return, so tax authorities should charge an even larger amount than the second tax assessment amount. The general manger of the bank was so upset and met with the tax authorities’ agent. From that time they start negotiate and the bank force to pay the initial tax assessment amount.