Italian Government Dithers On Business Tax Cuts

by Ulrika Lomas, Tax-News.com, Brussels

30 September 2005

Reports in the Italian press have suggested that the government remains uncertain about how to proceed with plans to cut business taxes, with the national budget continuing to come under funding pressures.

According to a report in the Italian daily La Stampa, Finance Minister Giulio Tremonti revealed in a meeting with trade union leaders that a decision on how and when to phase out a regional business tax known as IRAP is still to be made.

In an opinion released in March, Francis Jacobs, an advocate general to the European Court of Justice, argued that IRAP is too similar to the existing value added tax system, in contravention of the EU’s sixth directive. In June, Prime Minister Silvio Berlusconi, no doubt aware that the ECJ follows the opinions of advocates general in about 80% of cases, duly pledged to eliminate the tax in three stages beginning in 2006 and continuing through to 2008. However, a further report by the daily Il Corriere della Sera has suggested that the government will instead seek to bring about EUR2 billion in other tax cuts whilst maintaining IRAP.

Either way, Italy's room for manoeuvre on the fiscal front is severely constrained by its need to reduce its budget deficit to below the level deemed acceptable by the European Union. Currently the government is planning to save EUR11.5 billion through spending cuts and revenue raising measures in an attempt to reduce the deficit to 3.8% of GDP - still above the 3% ceiling permitted by the eurozone Stability Pact.

La Stampa reported that the government is planning a number of measures to help meet the budget target, including a crackdown on tax evasion to raise EUR3.4 billion, extra taxes on gambling to raise EUR1 billion, the sale of property assets to raise EUR3.2 billion and a possible tax amnesty, to bring in an estimated EUR4 billion.

Further reports in the Italian media have stated that the government is also mulling new taxes on the energy and telecommunications sectors to boost revenues by up to EUR800 million.

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