Italy
Alessandro Caridi
PricewaterhouseCoopers
Italy
Alessandro Caridi of PricewaterhouseCoopers analyses the government's tax strategy during the recession. It has focused on revenue raising and promoting tax incentives
The Italian economy was severely affected by the economic and financial crisis. Uncertainty remains high as market confidence has yet to stabilise. The Italian government has taken steps to counteract the crisis by encouraging private investment, accelerating public investment and injecting liquidity into the system, in addition to various other actions to protect household savings and boosting consumption. However, this public intervention is relatively modest when compared to the massive public funding of other developed economies, though it is worth noting that Italian budget constraints are generally more stringent than other countries given that public debt is already well in excess of its GDP.
The spiralling economy and the various measures taken to manage the crisis have already had an impact on the Italian tax system as the government will need to revisit some of the long-term tax policies it designed before September 2008. The 2010 to 2013 Economic and Financial Planning Document, adopted in July 2009, discusses some of the tax changes that will probably affect the business community over the next few years, which includes an international tax perspective. These changes include revenue raising provisions aimed at fighting tax avoidance and evasion, as well as tightening the rules on tax havens and international fiscal arbitrage through controlled foreign companies (CFCs). Other additional changes are intended to support businesses by introducing certain tax incentives associated with selected investments.
Crackdown on tax havens
In line with global trends, Italy continues its effort in cracking down on tax-haven jurisdictions by increasing potential penalties on offshore assets and allocating additional resources to the tax authorities to detect tax evasion. This impetus against tax havens is expected to continue in 2010 and beyond in coordination with other countries fighting for tax transparency and improved exchange of information procedures.
As indicated repeatedly by the tax authorities, there is a clear intention to continue the substantial tax audit activities against individuals diverting their assets into foreign undeclared accounts. The attitude and investigation methods are similar to those seen in other sophisticated jurisdictions such as the U.S. and Germany. Liechtenstein and Switzerland are common locations under scrutiny. However, the tax authorities' focus goes beyond these two jurisdictions.
Moreover, the recent law changes certainly do not favour the tax evaders which the campaign targets. In fact, any undeclared offshore assets will be presumed to have been derived through transactions structured primarily to evade Italian taxes. Furthermore, it will be up to the taxpayer to prove the contrary. Clearly, the introduction of this rebuttable presumption will significantly increase tax costs associated with tax audits.
Tightening of anti-deferral provisions
A critical change affecting international corporations is the tightening of the anti-deferral and anti-arbitrage provisions. The new changes are meant to extend the reach of these rules from a relatively clear country-based approach to a broader income-based approach. However, the wording of the new legislation is unclear and the business community is concerned over both its possible practical application and its unintended tax effects. The exceptions to these rules and their mechanics are similarly unclear. Furthermore, if the law is not reworded, the budgeted revenues for these changes may very well be more than the l government's initial estimates.
The anti-deferral rules were applicable only to blacklisted jurisdictions, or to a certain extent, specific beneficial tax regimes expressly listed. Outside this selection, the rules were simply not relevant. Under the revised regime, an immediate (that is, regardless of any actual income distribution) Italian tax charge would apply to the income realised by any foreign low-taxed entities earning primarily passive income. The definition of passive income is broad and it encompasses most financing or intangible property arrangements extending to intercompany services. The passive income test is met when the passive income is more than 50% of the gross income (revenues) of the company. These new rules state that a low-taxed entity is intended to be an entity paying less than 50% of the tax that it would have paid had it been an Italian tax resident entity.
In addition to the extension of the rules to non-blacklisted countries or entities, new limitations were introduced with reference to exceptions applicable to entities operating in blacklisted countries. This confirms some recent restrictive interpretations the tax authorities have taken on this issue.
Tax incentives on selected investments
The stimulus package introduces tax incentives for selected investments. Particularly, an entity acquiring certain eligible assets should benefit from a tax exemption on its income for an amount equal to 50% of the qualifying purchases. The qualifying assets/purchases were specifically listed by the Bill and mainly include industrial requirements such as turbines, pistons, boilers and other specific machinery. Certain recapture rules were inserted in case of resale of the qualifying assets in the short to medium term. The tax benefit will apply to eligible purchases made until June 30 2010.
Asset depreciation rates
The depreciation rates, initially introduced in the late 1980s, will be revisited. Investments in state-of-the-art or energy-saving technology will probably receive beneficial tax treatment under the new depreciation limitation rules.
Deductions on debt write-offs
To facilitate new lending activities, the deductibility limitations on loans were eased if certain conditions are met. Particularly, the deductibility cap on write-offs is now increased to 0.5% (compared to the ordinary 0.3%) for selected loans originated in the tax period after the enactment of the stimulus package that exceeds certain yearly lending averages. For qualifying loans, the portion of the write-off exceeding the 0.5% threshold would be deductible over a period of nine years (ordinarily 18 years).
Fiscal federalism
After a long legislative process, Fiscal Federalism was introduced into the Italian system in April 2009. However, this new law is one of the many steps that need to be taken to reorganise the allocation of public resources and expenses between the State and regions. It is estimated this reform will take about five more years to be completed. As pointed out in our article in World Tax 2009, the system is mainly intended to allocate some independent tax-raising powers to the local authorities and at decentralising the taxation system to align it with a geographically diverse economy.
Based on public sources, the intention is not to increase the overall fiscal burden; however, several aspects still need to be better defined. The success of the new system will depend largely on various elements, including municipalities' willingness to merge to exploit economies of scale, as well as local authorities' ability to manage their territories. Moreover, a risk may arise that economic differences among regions will become even more evident or that allocated resources will be misused.
Revenue raising – tax amnesty
To repatriate funds shielded in tax-haven jurisdictions, a tax amnesty has been introduced. Taxpayers will be allowed pay a 50% tax on interest earned on the offshore funds for a period of five years before the repatriation. For the purposes of the tax, the interest is presumed to have accrued at a 2% rate.
Although there are no official sources estimating how much the repatriation will amount to, it is very likely that the amnesty will imply the repatriation of billions of euro in the Italian system, significantly increasing the level of capital available to Italian businesses. This result would be in line with similar measures previously-enacted.
Alessandro Caridi (alessandro.caridi@it.pwc.com) ( TLS – Associazione Professionale di Avvocati e Commercialisti Member firm of PricewaterhouseCoopers