Narrowing the Dialogue: The Italian Constitutional Court and the Court of Justice on the Prosecution of VAT Frauds

–Diletta Tega, University of Bologna

Some recent cases on VAT frauds are the background of a strained dialogue between the Italian Constitutional Court (ICC) and the European Court of Justice (ECJ). Although the latter has the last word on the scope and meaning of State obligations under EU law, the former claims the final say on the extent to which international and supranational law may enter the national legal system. Notwithstanding some mutual roughness in the first stages of this conversation, both courts would do better by not trying to assert their own ultimate authority and instead using it most sparingly and prudently. Narrowing the scope of the controversy might be the best path towards a common ground.

Criminal offences for VAT evasion are often perpetrated through elaborate organizations and operations. Consequently, investigations require such a long time that the statute of limitations in the Italian Criminal Code may bar their prosecution.

In its 2015 Taricco judgment, the Grand Chamber of the ECJ held that, based upon the rather broad phrasing of Article 325 TFEU, national limitation periods should neither prevent effective and deterrent penalties “in a significant number of cases of serious fraud affecting EU financial interests”, nor provide for time limits for frauds affecting national financial interests longer than those affecting EU financial interests.

The ECJ also added – somewhat unexpectedly – that national courts should verify themselves if national limitation periods are incompatible with Article 325 TFEU and, if need be, disapply those national provisions. According to the ECJ, by doing so, national courts would not infringe Article 49 of the EU Charter of Fundamental Rights or Article 7 ECHR with regard to pending criminal proceedings. At the time when they were committed, the alleged crimes constituted the same offence and were punishable by the same penalties which would be applied. The extension of the limitation period and its immediate application (i.e.: the disapplication of a shorter period) are not prohibited, when the offences have never become subject to limitation.

In Italy, some courts did not hesitate to directly perform the Taricco tests, including the Court of Cassation (judgment no. 22100/2015). In some cases, this led to the court not applying the relevant provisions of national law.

In contrast, in other cases, the national judges, including the Court of Cassation (judgment no. 44584/2016), held that the conditions for the disapplication were not met.

Other courts, such as the Appellate Court of Milan and the Court of Cassation in another decision (order no. 28346/2016), perceived several constitutional problems with the Taricco judgment. These judges viewed the Taricco principles as prima facie applicable. Their cases concerned serious VAT frauds which would be time-barred under Italian law and the relevant limitation periods are shorter than those established for criminal offenses concerning national taxes (e.g. excise duties on cigarettes). Nevertheless, enforcing the Taricco principles would: a) extend ex post facto the temporal dimension of criminal liability, and b) do so in the absence of clear legal rules, as it is far from clear what frauds should be considered “serious”, or what numbers should be considered “significant”. Therefore, the Italian law, which transposes the Lisbon Treaty in the national system, was questioned, as the disapplication it requires does not appear compatible with several constitutional norms, most importantly the principle of strict legality in criminal matters, enshrined in Article 25(II) of the Italian Constitution.

Ruling on these issues, the ICC (order no. 24 of 2017) has made a request for a preliminary ruling to the ECJ interpreting this contested issue of EU law. The ICC is ready to put a halt on some of the Taricco principles but first it has asked whether these principles could be tempered taking into greater account national constitutional concerns.

The grounds of the preliminary reference can be summarized as follows.

First, according to the so-called controlimiti (counter-limits) doctrine established in 1973 and akin to the German Solange doctrine, EU law rightfully reduces national sovereignty, but there are limits (counter-limits) to sovereignty limitations acceptable by EU law. These limits are based on supreme principles and inalienable rights, such as those stemming from Article 25(II) of the Italian Constitution.

Second, the Taricco principles clash with Article 25(II), but only partially:

1. There is no question that VAT frauds require a stronger reaction by Italian authorities and an amendment of the statute of limitations and infringement procedures could be rightfully initiated against Italy. This is the main difference with the Melloni case. In Melloni, the national Constitution was invoked to set out additional conditions for EU arrest warrants, breaking the unity of EU law despite the issue requiring mutual trust in a uniform legal system;

2. The question concerns a narrower object: national courts should not be required to not apply the current national statute of limitations. In Italy, according to a well-established legal tradition (shared also with some other, albeit not all, Member States, and by itself entirely compatible with EU law), time limitations are part of the substantive regime of criminal liability. No offender could reasonably expect, before the Taricco judgment, that Article 325 TFEU would entail a longer statute of limitations. A court cannot clearly establish when VAT frauds are “serious”, or “significant” in number through legal interpretation.

Third, apparently, the Taricco judgment leaves some room for further refinement:

1. While the judgment considered the compatibility of its own statements with Article 49 of the EU Charter of fundamental rights, and Article 7 ECHR, it did not consider explicitly the national Constitution, whose interpretation is reserved to national authorities (in Italy, to the ICC). This issue should be seen in light of fundamental EU norms such as Article 4 TEU (respect for the constitutional identity of Member States, sincere cooperation, and full mutual respect), Article 6, para. 3, TEU (constitutional traditions), and Article 53 of the Charter of Nice (higher constitutional protection for EU fundamental rights);

2. Moreover, Taricco hinted at the fact that national courts must factor in the alleged offenders’ fundamental rights (in para. 53, “if the national court decides to disapply the national provisions at issue, it must also ensure that the fundamental rights of the persons concerned are respected”; and also in para. 55).

Based on these premises, the ICC frames its own constitutional concerns in EU legal categories and asks whether Article 325 TFEU requires the disapplication of the relevant national law on time limitations, even in the absence of a sufficiently clear legal basis. In addition, it asks, whether the answer changes when, under national law, time limitations are part of substantive criminal law, therefore subject to the principle of legality; and whether the disapplication is mandatory when it violates the supreme principles of the national legal order as well as inalienable rights recognized in the national Constitution.

The ICC hopes that Article 325 TFEU can be construed in a way compatible with Article 25 of the Italian Constitution. But it also warns the ECJ that the duties of cooperation, mutual respect, and assistance, under Article 4 TEU “entail that the parties are united in diversity”. There would be no respect if unity demanded to erase the very core of values underpinning the Member States. Nor if the defense of diversity exceeded that core, thereby threatening the construction of the peaceful future based on common values, mentioned in the Preamble to the Charter of Nice. The primacy of EU law is not a mere technical articulation of the system of national and supra-national sources of law. Rather, it mirrors the conviction that the goal of unity, within a legal system ensuring peace and justice amongst Nations, justifies limitations to sovereignty, even when they are defined in constitutional norms. At the same time, the legitimacy (Article 11 of the Italian Constitution) and the strength of unity within a pluralistic system (Article 2 TEU) are born from its capacity to include the minimum degree of diversity, which is nevertheless necessary to preserve the national identity, inherent in the fundamental structure of the Member State (Article 4, para. 2, TEU). Otherwise, the European Treaties would contradictorily undermine the very constitutional foundations on which they were established by the will of the Member States” (a translation of the full text of order no. 24 of 2017 should be available soon on the official ICC website).

While the variable outcomes of the Italian judicial decisions after the ECJ ruling might lend some force to the criticism of the Taricco principles for their lack of clarity, the grounds of the preliminary reference still leave some questions unanswered. Most notably, if time limitations are a substantive part of criminal liability, is it really correct to include them in legality as a supreme principle (i.e.: in the hard core of legality in criminal affairs), thereby concluding that the very constitutional identity of Italy covers the expectation of offenders to escape punishment after the period established at the time of the offences? However, this should not be a question for the ECJ, which should not challenge the ICC on the construction of its national constitutional law.

The ECJ is now in a difficult position, but it does not lack escape routes. If it confirms its first judgment, it could provoke the ICC into taking a bold and almost unprecedented stance. For the first time, it would emphatically deny the compatibility of EU primary law and ECJ rulings with basic constitutional principles and fundamental rights, thereby taking direct action to neutralize those rulings. Nevertheless, the ICC has tried to signal several ways to avoid such a conflict, by pointing at additional legal elements that were not considered in Taricco. For example, the reference to Article 53 of the EU Charter of Fundamental Rights might prove fruitful: the ECJ might narrow the scope of the Taricco judgment and concede that disapplication may be avoided when the national Constitution not only recognizes the values enshrined in Article 49 of the Charter, but affords them additional protection (a broader scope, including time limitations). Thus, the partial exception to Article 325 TFEU would find its ground (also) in a systemic reading of the Treaties, on which the ECJ has the last say. Should another Member State invoke its own constitution for the sake of entirely nationalistic values, the ECJ could simply point out that they are alien to the Charter and the shared constitutional heritage it embodies. A fearsome example is the Hungarian Constitutional Court decision no. 22/2016, commented masterfully by Gábor Halmai.

As noted at the outset, the way out of this institutional muddle might lie in emphasizing the narrowness of the question at stake, and in reconsidering – and somewhat tempering – the principles established in Taricco. This would greatly help to distinguish the Italian case from the Hungarian case, in which the authority of the EU was questioned in much broader terms.

Suggested Citation: Diletta Tega, Narrowing the Dialogue: The Italian Constitutional Court and the Court of Justice on the Prosecution of VAT Frauds, Int’l J. Const. L. Blog, Feb. 14, 2017, at:  http://www.iconnectblog.com/2017/02/narrowing-the-dialogue-the-italian-constitutional-court-and-the-court-of-justice-on-the-prosecution-of-vat-frauds