The functioning of the tax justice system: microdata evidence from Italy

This study provides a concise overview of the legal framework governing tax litigation in Italy and documents some stylized facts concerning its functioning, using data on corporate tax disputes. The analyses show that the number of disputes has declined, relative to the early 2010s, partly due to the deflationary effect of the mandatory tax mediation introduced in 2011. On the other hand, the average duration of proceedings and the rate of reversal of decisions between first and second instance have remained broadly stable. By linking litigation data to the financial statements of the population of joint-stock companies, the study identifies factors associated with the incidence of disputes. The analysis reveals a higher concentration of litigation in the manufacturing and trade sectors, as well as in the South. Involvement in tax litigation is associated with a deterioration in corporate performance and with higher exit rates following disputes with negative outcomes, particularly for smaller and more highly indebted firms. The data show a reduction in activity for both successful and unsuccessful firms, suggesting that the uncertainty and costs associated with tax litigation play a significant as well as negative role.