Incorrect reverse-charge: VAT recoverability in Italy under pro-rata regime

The Italian Tax Authority, with Ruling no. 20/2024 analysed the possible implications that could impact a VAT taxable person subject to VAT recoverability limits due to the application of the “pro-rata” regime in case of: (i) irregular application of VAT under reverse-charge to transactions that should have been subject to the ordinary regime (see Italian Tax Authority, Circular Letter no. 17/2016); and (ii) charging of the VAT (or the higher VAT) due by the supplier under the ordinary regime in the context of the tax assessment.

Indeed, in the present case, the transferee requested the Italian Tax Authority how to recover the Italian VAT already assessed by virtue of the reverse-charge mechanism and also almost entirely paid to the State due to the application of the “pro-rata” VAT recoverability regime.

In this context, the Italian Tax Authority clarified that: (i) in relation to the VAT charged by the supplier, as a result of the tax assessment, the transferee may deduct the VAT in the annual VAT return “under the conditions existing at the time the original transactions were carried out”, i.e. by applying to the VAT charged the non-deductibility pro-rata relating to the tax period subject to the assessment; (ii) in relation to the additional VAT paid by the transferee under the reverse-charge arrangement (i.e. the portion of VAT that is non-deductible due to the “pro-rata” VAT regime) that amount can only be claimed by means of a specific refund request within two years "from the day on which the prerequisite for the refund occurred"; i.e., from the settlement of the tax assessment notices by the supplier with payment of the VAT.

Key takeaway

In a case of incorrect application of the reverse-charge mechanism, whether VAT has been assessed by a taxable person subject to the VAT “pro-rata” regime, the portion of non-deductible VAT paid to the State can only be recovered by means of a refund request and not in the VAT annual return.

Reference: Italian Tax Authority, Ruling No. 20 of 26 January