Changes in value of the “provision for outstanding claims” of insurance companies must be posted in the financial statements, also for the purposes of their deductibility, according to the statutory standard of prudence.
Art. 33 of Legislative Decree no. 173/1997, to be interpreted in coordination with art. 111 of TUIR for tax purposes, provides that insurance companies must provide a fund for claims at the end of each fiscal year, allocating the amounts necessary to pay outstanding claims occurred during the year or in previous years, therefore recognizing the same classification of this cost item also for tax purposes.
The Italian Court of cassation issued a judgment concerning the alleged undue deduction (according to the Italian Revenue Office) of part of the amount allocated as “provision for outstanding claims”, deemed as excessive and therefore non-deductible from the IRES and IRAP taxable income.
This is an issue of great relevance, involving many technical aspects (financial statements, evaluation, insurance, statistic-actuarial and even tax issues) that were briefly grouped together in the abovementioned order. But all these aspects need to be further analysed.
The Revenue Office based its thesis assuming that the provision for outstanding claims was determined by incorrectly applying the standard of prudence, and not in compliance with the standards regulating its evaluation according to Legislative Decree no. 173/1997, but rather it exceeded the maximum established limit by law referred to in art. 111 of T.U.I.R.
The bone of contention also concerned the interpretation of art. 111 of T.U.I.R. and, particularly, whether the mentioned maximum established limit of the provision for outstanding claims should be referred to the specific law of the sector or to art. 109 of T.U.I.R.
The judgement on the merits admitted the objections raised by the insurance company and the Tax Authorities appealed to the Court of cassation. The parties discussed on whether the Tax Authorities could adjust the amount of the provision for outstanding claims, considered as excessive, thus denying the tax deductibility of the FY allocation.
