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Italy Approves Deficit Reduction Package

by Ulrika Lomas,, Brussels

02 August 2010

Two months after it was originally announced, the Italian government’s EUR25bn (USD32.7bn) two-year deficit-reduction fiscal package has finally been approved by both houses of parliament.

The government had explained that the fiscal package was necessary to maintain Italy’s promise to the European Union to restrain its fiscal deficit. Additional budgetary funds were required to keep to the commitment to reduce that deficit to below 3% by 2012. In effect, the measures within the package should reduce the deficit to 5% this year, 3.9% in 2011 and 2.7% in 2012.

With the country’s recovery still fragile, government action has been concentrated on reducing public expenditure and continuing measures against tax evasion, rather than increasing taxes. In essence, expected savings in public spending represent EUR15bn of the package, while increased tax revenues should account for the remainder.

There will be a freeze on public sector pay until 2013, while a reduction in remuneration will be introduced for those on the highest salaries. Stock options and bonuses, given by the country’s banks, will suffer additional taxation of 10%.

There will be a greater concentration on combating domestic tax evasion. For example, there will be a refinement of the Italian Revenue Agency’s computerised system for ascertaining a taxpayer’s probable income through the use of the additional records that are now available, such as property held or rented, assets purchased and other purchases. An investigation will be launched when that probable income is 20% or more above a taxpayer’s declared income.

In addition, the limit on the use of cash for transactions will be reduced from EUR12,500 to EUR5,000, and there will be an obligation to produce an electronic receipt for all transactions for amounts above EUR3,000. There will also be an increased participation in the action against tax evasion by the municipal authorities, and increased cooperation between the Revenue Agency and the National Social Security Institute.

Companies that start and then close their operations within a period of one year are also likely to be investigated by the Revenue Agency, as will be businesses that declare taxable losses for more than one fiscal period, unless those losses are covered by increased share capital.

Of particular note, however, and innovatory for Italy, is the introduction into the package of a possibility for companies, owned from within other European Union (EU) countries, and establishing new operations in Italy, to choose to be subject to the tax laws and rates of their resident EU country, rather than Italy. This will be available for an initial period of three years.

TAGS: compliance | tax | investment | economics | business | tax compliance | fiscal policy | law | banking | corporation tax | legislation | Italy | tax reform | individual income tax

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