THE Italian Government could face a catastrophic claim from its taxpayers if the European Court of Justice (ECJ) rules that an unpopular levy against Italian businesses is contrary to EU law.

The chances of a huge bill of up to €120 billion (£83 billion) to reimburse taxpayers have increased after an advocate- general of the court issued a legal opinion against Irap, an Italian tax on business turnover introduced in 1998, because it is too similar to VAT.

The court may not now rule for several months, but in 90 per cent of cases it follows the advocate-general’s opinion.

The Italian Prime Minister, Silvio Berlusconi, last week promised to scrap the unpopular tax, which funds regional government and is mainly paid by small and medium-sized Italian companies, but the financial repercussions could be huge.

In his legal opinion, the advocate-general, Francis Jacobs, noted the serious consequences for the Italian economy of reimbursing the €120 billion, the amount that could be claimed back under Italian law over 48 months.

Years of economic stagnation and poor fiscal discipline have left Italy with huge public debt and continuing problems in complying with the public deficit rules of the eurozone’s Stability and Growth Pact.

According to Eurostat, Italy’s public debt was €1,429 billion at the end of last year, equal to 106 per cent of the country’s GDP.

However, the statistical agency has problems with the figures collected by the Italian Government and will not confirm their validity.

Tax experts doubt that Italy could begin to repay such amounts if the Government were faced with immediate claims.

Kendra Hann, a tax partner in Deloitte, the accountant, said that the court would probably impose a time limit on claims to mitigate the Government’s potential liability. “The potential cost is billions of euros,” she said. “If the ECJ does rule it is illegal, from a fiscal perspective I cannot see the Italian Government having the cash to pay. They might have to give an IOU.”

So weak is the Italian Government’s fiscal position that it is already unable to settle VAT claims from taxpayers and effectively gives companies a promise to pay. As a result, a new business has emerged for Italian banks in securitising VAT credits for companies. This means, in effect, that the banks are factoring bills owed by the Government.

Other EU governments will be watching the European Court’s decision on the Irap tax closely, it could have consequences for other turnover taxes.

Germany, France, Hungary and Lithuania are thought to have similar taxes that may be threatened.

The difficulty with the Irap tax is its similarity to VAT, the tax paid by all EU member states. The advocate-general’s opinion found explicitly that the tax was prohibited under the EU’s sixth directive, which outlaws all turnover taxes that have the characteristics of value-added tax.

Finance ministers of member states are becoming apprehensive of the increasing intervention of the court in tax cases, almost all of which are decided in favour of the taxpayer.

Rulings from the Luxembourg court have played havoc with anti-avoidance rules and dividend taxes, striking down provisions that discriminate against taxpayers on grounds of location and place of establishment.

In the UK, a major plank of the tax system, group relief, is being challenged by Marks & Spencer, in a case expected to be decided by the European court next month.

The company is claiming the right to offset losses in France against its UK tax bill.

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