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Italian Government Open To Discussion On Tax Package

by Ulrika Lomas, Tax-News.com, Brussels

23 October 2012


With a package of tax measures within its new ‘stability law’ now before parliament for approval, Minister of the Economy Vittorio Grilli has responded to criticism by stating that the government is ‘open to discussion’ on all of those measures.

Designed to be revenue-neutral, given the government’s requirement to keep intact its overriding priority of balancing Italy’s budget by the end of next year, the new decree contains a much-wanted reduction in individual income tax rates, but at the cost of disputed tax increases in other areas.

From January 1, 2013, individual income tax rates will be reduced by 1% for the two lowest bands. The rate on taxable income up to EUR15,000 (USD19,600) is to be reduced from 23% to 22%, and on income of over EUR15,000 and up to EUR28,000 reduced from 27% to 26%.

To fund that tax cut, the government has had to maintain a hike in the rate of value-added tax (VAT) from July 1, 2013 – of 1% on the current rates of 10% and 21%. That is half of the previously-approved 2% increases in VAT rates from July next year, but the December 31, 2013 expiry date on those increases has been cancelled, as has the 1% reduction expected on January 1, 2014.

At the same time, an amount of EUR250 will be subtracted from any expense allowed for a credit or deduction in the individual income tax code, such as mortgage interest, insurance premiums and education fees, and a EUR3,000 maximum overall deduction will be introduced, for taxpayers on annual incomes above EUR15,000. Controversially, that measure is to be retroactive, in that the subtraction and the overall limit are to be effective against 2012 earnings.

The latter has caused more than a little discontent, as individuals have obviously been unable, during this year, to arrange their tax affairs to take account of the changes, while those with mortgages (almost all of whom earn over EUR15,000 per year) are becoming aware that a claim to deduct their mortagage interest payments will probably take up all of their EUR3,000 limit, and knock out all of their other expected tax credits for 2012.

On the other hand, the remaining VAT rate increase has also been much discussed, largely because those on the lowest incomes can be expected to gain little from the reduction in income tax rates, while the rise in VAT will have a significant effect on families, especially those with more children. In addition, there is concern as to whether it will further depress domestic consumption that is already falling sharply.

In reply, Grilli has confirmed that the government is available to discuss the whole package in parliament. However, he noted that, whatever is eventually passed, its revenue-neutral basis must be maintained.

On being asked whether the government would remove the retroactivity of the income tax credits, he replied that the Cabinet has had no change of mind, and that, if it was removed, there would be a shortfall of around EUR1bn in tax payments in 2013.

As that shortfall would need to be covered elsewhere in the package, probably by delaying the 1% cut to 26% in the second rate of income tax until 2014, the government preferred to go ahead as proposed.

Grilli, when asked if the government has put aside its previous intention to avoid all increases to VAT in the future, also replied that, for now, the reduction of the rise to 1% was all they could do at present. Nevertheless, he left the door open for some action before July next year to cancel that rate increase as well.

Finally, further details are now available on the proposed financial transactions tax, also to be effective from January 1 next year. Confirming that it would not apply to transactions in government bonds, the decree stipulates that all transactions in shares, bonds and other financial instruments, including derivatives, will be subject to a tax of 0.05% on their value. The tax will be paid when at least one of the counterparties to a transaction is an Italian resident, even if it is completed outside of Italy.

TAGS: individuals | tax | value added tax (VAT) | law | financial services | capital markets | budget | tobin tax | tax credits | legislation | tax rates | Italy | tax breaks | individual income tax | services

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