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Italy Agrees Businesses Are Over-Taxed

by Ulrika Lomas, Tax-News.com, Brussels

12 December 2014


Italy's Economy Minister, Pier Carlo Padoan, has confirmed that he recognizes that Italian businesses remain over-taxed, with Italy's tax burden ranked sixth highest in a recent report from the Organisation for Economic Co-operation and Development charting tax trends.

In a letter published by the Italian weekly magazine Panorama, Padoan wrote that, "In Italy, tax-compliant businesses pay too much tax. The tax burden on taxpayers who act faithfully with the tax authorities is too high and greatly compromises their competitiveness, as well as their motivation to continue with their businesses and create wealth and jobs."

"One of the taxes most opposed by businesses is the regional tax on production (IRAP)," Padoan added, "and it is also disliked by employees as it risks penalizing employment."

He confirmed that, in recognition of those views, the Government "has cancelled – not reviewed, reformulated, or reduced, but cancelled – from January 1, 2015, that part of IRAP calculated on the labor costs of employees not on fixed-term contracts. This is, above all, a benefit for those businesses that employ substantial workforces, has been requested for some time by the business sector, and will allow for a lightening of IRAP tax burdens by 30 percent."

Finally, in reply to accusations that the Government has not already reduced tax burdens, he pointed out that this year's EUR80 (USD99) monthly individual income tax bonus was classified by Eurostat [the European Union's statistical office] as a tax expenditure. "If it had been classified as what it is, a reduction of tax on employees," he said, "Italian tax burdens would have seen a reduction in 2014 from 43.3 percent of gross domestic product (GDP) to 42.9 percent."

In fact, the OECD's annual Revenue Statistics report found that the tax burden, as a proportion of gross domestic product, in Italy declined by a marginal 0.1 percent from 42.7 percent to 42.6 percent in 2013. This, however, was significantly higher than the OECD average of 33.7 percent in 2012.

In its analysis in a further report on consumption taxes, the OECD found that VAT revenues in Italy accounted for 13.8 percent of total tax revenue in 2012, well below the OECD average of 19.5 percent.

While the Italian standard VAT rate is 22 percent, which was above the OECD average of 19.1 percent at the beginning of 2014 (up from 17.6 percent on January 1, 2009), the VAT Revenue Ratio (VRR), an indicator of the performance of a VAT regime, was 0.38 in Italy in 2012, which was one of the lowest in the OECD and well below the OECD average of 0.55.

The VRR is a measure of the revenue raising performance of a VAT system, with a ratio of 1 reflecting a perfect enforcement of the tax. As in many OECD countries, this ratio fell in Italy in 2008 and 2009, coinciding with the advent of the global economic crisis. After a temporary increase in 2010-2011, Italy's VRR dropped again in 2012.

TAGS: individuals | compliance | tax | business | value added tax (VAT) | tax compliance | employees | corporation tax | enforcement | tax rates | Italy | tax breaks | revenue statistics | individual income tax | Europe

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