Key Points
- For IRAP purposes, VAT that becomes non-deductible under the pro-rata mechanism, recorded under other operating expenses (item B.14 of the profit and loss account, in accordance with OIC 12), is a cost recognised on an accruals basis: it contributes to the value of production for the financial year in which it is recognised in the accounts.
- The cash basis under art. 99 of the Italian Income Tax Code (TUIR) does not apply: it applies only to taxes deductible from business income and is not incorporated by reference into the IRAP rules.
- Extending art. 99 TUIR to IRAP by analogy breaches the principle of legality in taxation.
- The precedent in Italian Supreme Court (Corte di Cassazione) judgment no. 20435/2021 concerns income taxes and the capitalisation of VAT on an asset: it neither lays down rules for IRAP nor requires a current expense to be deferred.
- For income tax purposes, non-deductible VAT on documented business-related costs is deductible; the burden of proving that the costs are not business-related rests with the Tax Office.
- Source: Ravenna First-instance Tax Court (Corte di Giustizia Tributaria), Division II, no. 227 of 19 June 2026.
The Italian Revenue Agency (Agenzia delle Entrate) argued for the latter approach, applying the cash basis under art. 99 TUIR to IRAP and relying on a 2021 precedent from the Italian Supreme Court (Corte di Cassazione). The Ravenna First-instance Tax Court (Corte di Giustizia Tributaria), in judgment no. 227 of 19 June 2026, reached the opposite conclusion and gave clear reasons for doing so. The reasoning and its practical implications are set out below.
What the pro-rata mechanism is and why it generates a cost
The pro-rata deduction mechanism is a flat-rate mechanism that applies to those who carry out exempt transactions on a non-occasional basis. Under art. 19, paragraph 5, of d.P.R. n. 633/1972, where a taxpayer carries out both activities giving rise to a right of deduction and activities generating exempt transactions, input VAT is not fully deductible: the deduction percentage under art. 19-bis applies, corresponding to the ratio of transactions giving rise to a right of deduction to total output transactions. The prerequisite is therefore the simultaneous performance of taxable and exempt transactions.
In accounting terms, the non-deductible portion is an expense affecting the result for the financial year. OIC 12 provides for it to be recorded under other operating expenses, in item B.14 of the profit and loss account, unless it constitutes an incidental cost of purchasing goods or services.
IRAP derives from the accounts, not from the TUIR
To understand the decision, the starting point is art. 5 of D.Lgs. n. 446/1997: for companies limited by shares or quotas and commercial entities, the IRAP tax base corresponds to the operating result in the accounts — items A) and B) of the profit and loss account — unless a provision of the same decree makes an item non-deductible or requires its recognition in a different period. This is the principle of direct reliance on (or direct derivation from) the accounts, distinct from the “enhanced derivation” principle for income taxes (art. 83, paragraph 1, TUIR): for IRAP purposes, anything correctly recognised in the profit and loss account is relevant for tax purposes, unless an express exception applies.
This approach was consolidated by legge n. 244/2007 (art. 1, paragraph 50), which repealed art. 11-bis of D.Lgs. n. 446/1997 — the provision that previously provided for partial alignment with the TUIR. With that alignment removed, the legislature established a clear separation between the two sets of rules, reinforcing the autonomy of IRAP. It follows that the limits and criteria of the TUIR do not automatically extend to the regional tax unless D.Lgs. n. 446/1997 expressly incorporates them by reference.
Why the cash basis under art. 99 TUIR does not apply to IRAP
For business income purposes, art. 99, paragraph 1, TUIR makes income taxes and taxes recoverable from another party non-deductible, while allowing “other taxes” to be deducted in the financial year of payment, namely on a cash basis.
The point is that this rule belongs to the income tax framework and is not incorporated by reference into the IRAP rules. For the regional tax, there is no provision requiring a cash basis for taxes recoverable from another party: the accruals basis under civil law applies, meaning that a cost recorded under item B.14 contributes to the value of production for the financial year in which it is recognised in the accounts. Imposing a cash basis on IRAP contradicts direct reliance on the accounts (art. 5) and the legislature's own intention to anchor the IRAP tax base to the accounting result under civil law, subject to expressly specified exceptions.
The Neuromed precedent must be read within its scope
The Tax Office had relied on Italian Supreme Court (Corte di Cassazione) judgment no. 20435/2021 (the Neuromed case). However, that judgment decided an income tax issue concerning the capitalisation of non-deductible VAT relating to a depreciable asset: the Court had classified the expense as a “general operating cost”, allowing its deduction on a cash basis in the year of payment as an alternative to — and to prevent deferral through — the depreciation over several years sought by the Tax Office, and therefore to the taxpayer's advantage.
Read for what it actually says, that principle contains no IRAP rule and does not require a current expense to be shifted “on a cash basis” from the financial year to which it relates to the year of payment.
The Ravenna judgment does not contradict the 2021 precedent: it correctly defines its scope. For IRAP purposes, the conclusion in any event follows independently from art. 5 of D.Lgs. n. 446/1997.
A methodological error: pro-rata VAT cannot be split invoice by invoice
A second aspect undermines the tax claim. The adjustment had been constructed “invoice by invoice”, based on the payment dates of individual documents recorded in 2019 and settled in 2020. Yet — as both Ministry of Finance Resolution no. 9/869 of 1980 and Italian Supreme Court (Corte di Cassazione) judgment no. 20435/2021 acknowledge — non-deductible pro-rata VAT is an “aggregate amount”, determined at year-end by reference to the ratio of exempt transactions to turnover, relating to the activities as a whole rather than to individual purchase transactions.
It is an amount that crystallises only at the end of the financial year: it has no “payment date” specific to each invoice and cannot be broken down document by document.
The only recognition consistent with its nature is recognition in the financial year to which it relates (2019).
Splitting it on a cash basis contradicts the very classification of the expense emerging from the sources on which the Tax Office claims to rely.
Penalties: objective uncertainty before 2021 precludes liability
The company also escapes penalties. It had acted in good faith and transparently, in line with OIC 12, professional practice (A.D.C. Standard of Conduct no. 152 of 2003) and ministerial practice (Resolution no. 9/869 of 1980), all of which supported deduction on an accruals basis. In the absence of any tax avoidance or fraudulent intent, and without any alteration of the accounting data, any error is excusable on grounds of objective uncertainty, under art. 6, paragraph 2, of D.Lgs. n. 472/1997 and art. 10 of legge n. 212/2000.
Indeed, the very existence of a “turning-point” judgment in 2021 demonstrates, conversely, that the matter had previously been contentious. The uncertainty is not subjective but objective, rooted in the state of the interpretative debate at the time of the events. The indicators identified in Italian Supreme Court (Corte di Cassazione) judgment no. 15452/2018 point in the same direction: conflict between administrative practice (the 1980 Resolution refers to “accruals”) and case law (the 2021 Italian Supreme Court (Corte di Cassazione) judgment refers to “cash”), the absence of established administrative practice, and the lack of precedents before 2021.
A proportionality consideration must also be added: in the IRAP case, the adjustment generated no additional tax — IRAP payable was zero, given a credit balance — so the entire claim amounted to a fixed penalty of EUR 250 for a mere error in the period of recognition, “without loss to the Treasury”. The same reasoning applies to income taxes: at most, there was a timing mismatch without detriment, since the cost remained deductible in the financial year of payment, with a risk of double taxation if the adjustment was not accompanied by recognition of the expense in 2020.
Deductibility for income tax purposes and the burden of proof
On the third issue — deductibility for direct tax purposes — the Court confirms that non-deductible VAT is deductible if it relates to business-related and properly documented costs, in line with administrative practice (Italian Revenue Agency (Agenzia delle Entrate) Circulars no. 42/E of 2009 and no. 1/E of 2013). The company had produced adequate documentation of the nature and business relevance of the costs, whereas the Tax Office had not demonstrated, with concrete evidence, that the transactions were unrelated to the business or fictitious.
The principle is clear: once the taxpayer has documented the costs, the burden of proving that they are not business-related rests with the Tax Administration, which cannot base an adjustment on a mere assertion.
The decision of the Ravenna Tax Court (Corte di Giustizia Tributaria) (no. 227/2026)
The dispute arose from two tax assessment notices for the 2019 tax year, served on an Italian limited liability company operating in the lottery and betting sector. For IRAP purposes, the Tax Office challenged the deduction of non-deductible pro-rata VAT on an accruals basis (adopting the cash basis by analogy with art. 99 TUIR and Italian Supreme Court (Corte di Cassazione) judgment no. 20435/2021) and, for income tax purposes, raised the same issue concerning recognition of the cost in a different period. After attempts to reach agreement under the tax settlement procedure (accertamento con adesione) failed, the company challenged the notices through separate appeals, which were subsequently joined because they were connected.
The Court ruled on three points:
- IRAP: the cash basis does not apply. Applying art. 99 TUIR by analogy, without an express reference in the IRAP rules, breaches the principle of legality in taxation.
- Penalties: objective legislative uncertainty at the time of the events was sufficient to excuse any error.
- Income taxes: non-deductible VAT relating to documented business-related costs is deductible, since the Tax Office had not proved that the transactions were unrelated to the business or fictitious.
Lessons from the judgment
Although a first-instance decision, the judgment is consistent with the established approach of the Italian Supreme Court (Corte di Cassazione) to the autonomy of the IRAP tax base. Its merit lies in bringing the regional tax back within its own rules, removing it from analogy with art. 99 TUIR: the IRAP tax base is anchored to the result in the profit and loss account (art. 5 of D.Lgs. n. 446/1997), not to the rules governing the timing of recognition of business income.
On closer examination, even the stark choice between “cash or accruals” is misleading. For IRAP purposes, the accruals basis follows directly from the link to the profit and loss account; nor, even for income tax purposes, does the 2021 precedent require the cash basis to be used to defer a current expense, since it used that criterion — in a capitalisation case — in the taxpayer's favour.
Two practical points remain. First: rigorous accounting classification of items, particularly non-deductible pro-rata VAT under item B.14 in accordance with OIC 12, and orderly documentation of the business relevance of costs, on which correct recognition for IRAP purposes and deductibility for income tax purposes respectively depend. Second: where the taxpayer's conduct, before a change of approach, complied with the practice and accounting standards prevailing at the time, objective uncertainty is an argument that may be raised against penalties.
