VAT Talks - Andrea Parolini


In this episode of VAT Talks we meet with Andrea Parolini, member of the VAT Expert Group. Andrea has an enormous experience in the VAT world, being a professor at the Catholic University of Milan and legal and economic adviser to the Italian government between 2014 and 2016, when the Italian Sistema di Interscambio (SDI) was conceived. Join us to discover how real-time reporting was developed in Italy and learn about its results so far. According to Andrea, real-time reporting made life easier for taxpayers although they were skeptical at the beginning. This is also why for him real-time reporting is the future of European VAT.

Could you tell us a bit more about yourself, for how long you have been working in VAT and how you ended up in this field of work?

“I started my profession around three decades ago and I developed a specific interest in tax litigation. In the 1990s, European (Tax) Law was the “new frontier” in VAT litigation since it was a sort of “lender of last resort”: when all remedies evaporated you still had the chance to invoke supranational law, but this was something in the hands of a small group of quite revolutionary professionals. I had the chance to improve my knowledge in European Tax Law during my postgraduate studies. Therefore, I was one of the first developing EU Tax law arguments in tax litigation. When I joined Maisto e Associati, back in 1998, the naming partner of the firm – Prof. Guglielmo Maisto – perceived that in Italy VAT was still treated as a “national” tax and that it was time to adopt a different and EU oriented approach in this field. Due to my interest in EU Law, he asked if I wanted to take care of this task and I accepted. I became VAT partner of Maisto e Associati in 2007 and I am still thanking Prof. Maisto for proposing to me to switch to VAT.

In 1999 I started to cooperate with the Catholic University and I was appointed to become a lecturer (professore a contratto) in 2005. In 2008 I was given the task to teach VAT to the students of the fifth (and last) year and I kept this position until 2019.

Due to my expertise in VAT, in 2014 I was appointed as a legal-economic adviser of the Italian Prime Minister for around three years in the period 2014-2016. My task was to propose new legislation in the VAT field or, eventually, to provide my comments to proposals developed by other persons, mainly experts of public finance. The goal was to increase tax revenues without increasing nominal rates. As far as VAT was concerned, in Italy such a goal could be reached by tackling the Italian VAT Gap. At that time, I had the privilege to work on some files such as the first implementation of the split payment method and the application of the reverse charge on supplies to mass market retailers (MMR), the first steps of electronic invoicing and I chaired the group that drafted the first document of the Italian government on taxation in the digital economy.”

You were part of the team that conceived the Italian SDI system, could you tell us more about this process and what were the challenges? Were there objections from businesses for example? What were the biggest surprises during implementation?

“The intuition to use IT technology in a widespread manner in order to tackle the Italian VAT gap was developed by the vice-minister of Economy at that time, Mr. Luigi Casero. This idea was then developed and led to a project to create an IT infrastructure for sending and receiving invoices. The problem to be solved was technical, since the amount of data to be handled would have been enormous, and legal, bearing in mind that Austria and Germany were unsuccessful in 2006 when they requested the Commission to apply a broad reverse charge for taxpayer willing to opt in a system that showed several similarities with what then became the Italian electronic invoicing system. From a legal point of view there was a general perception that, due to the Italian VAT gap, the new system would have been accepted by the Commission if Italy managed to minimise direct and indirect costs for businesses. The technological issue, on the contrary, generated a lot of concerns due to the enormous amount of data to be handled.

When the discussion on the new system became public, it was criticized both from businesses and from professionals. Taxpayers were perceiving the new system as a new and burdensome obligation placed on their shoulder and were also concerned about confidentiality. Professionals, mainly accountants, were worried since such a system could erode part of their activity. That said, my involvement was limited to the very beginning of this project that was then developed when I was not advising the government anymore. I must admit that I was somewhat skeptical too since I thought that implementing a widespread electronic invoicing system would have been too difficult from a technological point of view. I have to say that my concerns were ungrounded. Electronic invoicing is a striking success and I am proud that the project took off when I was advising the government.”

What are the main features of the SDI and what are its first results? We have seen the report concerning the results regarding VAT fraud in Italy in 2019, could you tell a bit more about the achievements of the SDI?

“The SDI is simply an electronic data interchange system run by the Italian Revenue Agency for the issuance and receipt of de-materialized invoices. In a recent speech at the Italian Parliament, the Head of the Italian Revenue Agency, Mr. Ruffini, declared that the adoption of electronic invoicing in 2020 (i.e. the first year of its adoption) increased VAT revenues of around € 3,5 billion. In short, electronic invoicing is an incredible achievement. Also accountants changed their mind. Recently, speaking with friends who work in VAT accounting services, I was told that electronic invoicing made their workflow faster and more efficient.”

Concerning the Italian B2C solutions, like the receipt lottery, what was its impact?

“The first discussion on implementing a lottery started when I was advising the government. The idea was inspired by the Portuguese experience, but I think that there is a basic misunderstanding on this initiative. The general understanding, in fact, is that the lottery is aimed to create a conflict of interest between suppliers and consumers to fight the shadow economy. This view is too narrow as the benefits of systems like the Portuguese “Lucky Invoice” are broader since it pushes consumers to make use of portals or apps. In this way consumers are dealing with tax on a daily basis, while the Portuguese Tax Authority is emphasising the playful aspect of winning a lottery.

However, when the system proved to work, the existence of an invoice on the portal became also the condition in order to invoke personal allowances on certain expenses for individual income tax purposes. This allowed the Portuguese Tax Authorities to perform real-time controls on tax allowances. At the same time, businesses were required to comply with a number of ancillary obligations (notably to adopt standardized invoicing and inventory software certified by the Tax Authorities and upload monthly their invoices in the Tax Authorities’ website (the so-called “real-time invoicing reporting”), as well as to adopt standardized electronic procedures to control and document the transport of goods and to have their accounting data available to the Tax Authorities under the international standard “SAF-T”). All in all the “Lucky Invoice” was a real succes. Not only because since its implementation the VAT gap is constantly decreasing, but also because it made Portuguese taxpayers (in the broadest sense) familiar with tax driven IT platforms.

This was the idea also when the Italian lottery was proposed. Notwithstanding this, in Italy something was lost in translation since the Italian lottery seems to be focused only on the conflict-of-interest side. The Italian implementation emphasized exclusively on prizes for the consumers thereby weakening the purpose of this measure.

You worked on the exemptions requested by Italy on Split Payments and Reverse Charge, could you tell how such a process works, and why was the Split Payment granted and Reverse Charge not?

“First of all, I have to say that the greatest privilege of my experience as an advisor to the government was discussing VAT issues with persons having a great passion for - and knowledge of - VAT, i.e. officers of the Italian Ministry of the Economy, the Italian Revenue Agency and people of the Commission. The level of knowledge is incredibly high, and you learn that proposing and drafting legislation is indeed more difficult than drafting an opinion since you must bear in mind the coherence of the system, respect the limits of EU law and consider the “butterfly effect” that every change in the legislation may generate. Moreover, being seated on the “other side of the pond” compels you to see the world from another angle from which the interest of the community and the consequences, both for taxpayers and tax authorities, must be considered.

Apart from this, I was directly involved in two requests of derogation filed by the Italian Republic following new legislation approved by the Italian Parliament, i.e. the application of the split payment system on supplies to public bodies and the application of the reverse charge to supplies made to MMR. The different outcome of the procedures was most likely due to the different magnitude and purpose of such proposals. The application of the Split Payment method, which is an alternative way to collect VAT, was discussed broadly at a theoretical level and there are several ways to apply it. The Italian proposal was limited to payment made by public bodies in which tax evasion is particularly annoying considering that the tax evaded materializes a dual misappropriation of State resources since unpaid VAT is financed with transfers from the State. The request was also time limited (three years) and the Italian Republic made itself available to share with the Commission the data obtained in the application of this measure. In my opinion, such circumstances were crucial to obtain the derogation. In terms of effectiveness to tackle tax evasion, the statistical office of the Ministry of Economy has estimated that in the first three years of application (in which the split payment was applied limitedly to payments made by public authorities) the split payment helped to recover around € 1 billion of VAT evasion (ie around € 350 million per year).

The derogation concerning the application of reverse charge to the MMR had a different background. Back in 2014 there was a widespread idea that a broad application of the reverse charge could help in tackling tax evasion. This idea, according to the greatest part of VAT specialists, is wrong since a broad application of reverse charge, apart from changing the very nature of European VAT from a tax collected fractionally to a retail tax, would simply postpone the risk of tax evasion at the last stage of the distribution chain. This idea was shared by the Commission that was very clear on this position. When I was involved in the file, I pointed out (and the idea was shared by my colleagues in the team) that chances to obtain the derogation would have been minimal since the Italian legislator, proposing the application of the reverse charge to MMR, acted outside the strict limits applied by the Commission in evaluating derogations based on reverse charge.

That said, when you have the honor to act for your country, you must do your best to achieve the goal you have been given. When the Commission informed us that the request was rejected, they told us informally that our request was sound and convincing but that they did not want to change their interpretative direction also with the aim of avoiding the proliferation of requests of derogation based on the reverse charge system. This was already an achievement considering the position of the Commission on the subject matter.”

What is the role of the VAT Expert Group (VEG) you are part of and what are your views concerning VAT in Europe?

“The VEG assists and advises the European Commission on VAT matters. I was appointed as a member of the VEG, in my capacity of academic, back in 2012 and our first task was to provide our view on the definitive regime. Throughout the years, the role of the VEG broadened and now the VEG issues position papers on various matters in order to provide the Commission with a different point of view. Participation in the VEG is always very stimulating since there is a lot of “food for thoughts” due to the inputs of the members and the Commission. Moreover, recently participation in the VEG has been opened also to interested parties and this makes the discussion livelier and more to the point.

As far as European VAT is concerned, I think that vetoes of Member States damaged the possibility to make it more modern and business friendly. There is a tendency to forget that taxable persons are acting as collectors of VAT. They have no benefits whatsoever and, to perform their tasks, they are endorsing substantial risks. It is time to give them something back mainly in two areas: legal certainty and compliance. In the last field the use of IT solutions is the new frontier.”

Do you think that a real time reporting solution should be implemented also on a European level concerning intra-community transactions?

“To me real time reporting is the future of European VAT.”

As you know we value confidentiality. What do you think the role of confidentiality is in the development of the solution to VAT fraud? Is it part of the debate? Also in your talks with the VEG?

“This is not my field of expertise and as far as I remember we didn’t discuss issues of confidentiality at the level of the VEG. That said, to me confidentiality is not an argument to be raised as a shield to protect people stealing public money. I understand that taxpayers acting in good faith are clearly not happy about the circulation of sensitive data so that my argument could prove to be weak vis-à-vis their reasons. There must be a dividing line but I think it is very difficult to draw it.”

You are advising the EC on a regular basis, but if you have to give them 1 piece of advice which they should implement immediately, what would it be?

“I think that it is time to be brave and reshape exemptions laid down in Article 132 to 135 of the VAT Directive with the aim to have a more “modern” VAT.”

Lastly, what would you say to people who are not really fond of VAT? How would you enthuse them for this form of taxation?

“VAT changed my life both from a professional and personal point of view. As I mentioned before, I was not meant to become a VAT specialist when I started my professional career. When I accepted the task proposed by my firm, I understood the magic of VAT. VAT is a very technical tax with deep roots in economic reality. When you face a VAT issue you must perform a multidisciplinary exercise. You must first “follow the money” in the sense that you must understand the economic background of the transaction (in VAT terms, the “supply”). The legal analysis is the second step and must be performed considering the application of private (commercial) law, domestic VAT law and international (EU) law.

As VAT specialists, we are compelled to adapt our beliefs following the pacing of the jurisprudence of the Court of Justice and this is indeed challenging if one considers that they are requested to interpret concepts and notions which have been developed more than 50 years ago: a good example is the jurisprudence of the Court of Justice on the exemption laid down in Art. 132 (1) (f) of the VAT Directive for an independent group of persons that a few years ago turned the VAT world upside-down when the Court concluded that it could not be applied to the insurance and financial sectors. VAT has its own jargon. We speak a different language, the VAT language, and I understand that somebody practicing a different tax every now and then may feel disoriented in a conversation where the terms have a precise and different meaning compared to those of the common language and in which everybody refers to precedents of the Court of Justice. It was the same feeling I had when I participated in the first meeting of the VAT Club, a group of VAT experts which is also a member of the VAT expert group, back in 1999.

Now speaking such language with people that I now can call “friends” is fun. Looking back, I must admit that I was extremely lucky when I agreed to focus on VAT. I definitely made the best choice and I would be happy to share this life experience with new and younger colleagues.”

We would like to thank Andrea again for his time and for giving his perspective on VAT. The opinions expressed in this article are personal. If you have any questions, suggestions or if you want to be our next interviewee, do not hesitate to contact us via