Italian bad debt rules challenged by Advocate General
The EU Advocate General recently challenged the administrative requirements of Italian bad debt rules.
In Italy, where an invoice is unpaid but you have accounted for output VAT on this invoice as part of your VAT return, you need to wait until insolvency proceedings are concluded in order to get the money back. These proceedings take a long time, creating a significant disadvantage on the creditor who will not get interest added to this repayment.
The ECJ Advocate General recently gave his opinion about this regulation as part of Di Maura case (C-246/16). According to the AG, the requirement for the taxpayer to wait until the end of insolvency proceedings is disproportionate and contradicts the principle of neutrality. The AG confirmed that Member States are free to implement rules on bad debt requirements and related administrative obligations. Although requirements such as initiating legal proceedings or waiting for a given period of time (eg. six months) are considered proportional measures, the AG took the position that financial disadvantages of the current Italian bad debt regulations were contradictory to EU law.
Case Goldsmiths (C-330/95) already opened the door to EU challenges on excessive administrative burdens on bad debt recovery. The decision of the ECJ is likely to extend this approach and require Italian to change the existing bad debt rules.
In the European Union, countries are free to introduce requirements and administrative conditions to allow VAT deduction on unpaid issued invoices. This freedom creates a range of different regulations across Europe. The UK is one of the simplest systems as it only requires a six-month period and a debt to be written off in order to allow VAT deduction, which is made directly in the VAT return. The Netherlands recently announced that it will follow the UK bad debt rules. On the contrary, more formalistic countries like Portugal, Spain or Italy require applications, legal proceedings and several formalities that delay and increase costs in the process.