There is nothing like a change of
administration in Italy to get my fingers tapping away on my keyboard
again. Almost as soon as Mario Draghi was announced as the new head of
the technocrat government in Italy, then there was plenty to write about
again.
So, what is on my mind so soon after my last blog If you haven't guessed already it's the subject of tax again.
So, what is on my mind so soon after my last blog If you haven't guessed already it's the subject of tax again.
Reforms afoot?
I
think for about as long as I can remember I have been writing about
proposed tax reforms in Italy. I remember the tax reforms which never
really saw the light of day from 2014 to 2016 when Matteo Renzi was PM
of Italy. Equally I remember the flat tax plans of Salvini during his 15
months in power, which once again went nowhere.
So, can Mario Draghi push through some well needed reforms in one of the world's most complicated tax codes, systems of deductions, detractions and incentives? Let's have a look at what is currently being discussed.
Tax free allowance in Italy?
Firstly, Draghi and his team want to re-structure the income tax code in Italy to make it more favourable for the mid-low income earners. They purportedly want to keep the current system of progressive tax rates (because it is fairer) but modify them to a) assist lower-mid income earners and b) also provide stimulus to workers so businesses can grow and flourish early on rather than, as is presently the case, taxing income too high, too quickly.
The talk is that Draghi is very keen on the German model of progressive tax rates which can be seen below:
Taxable Income for single taxpayers:
Income Band Tax Rate
€0 to €9408 0%
€9409 to €57051 14% - 42%*
€57052 to €270500 42%
€270502+ 45%
So, can Mario Draghi push through some well needed reforms in one of the world's most complicated tax codes, systems of deductions, detractions and incentives? Let's have a look at what is currently being discussed.
Tax free allowance in Italy?
Firstly, Draghi and his team want to re-structure the income tax code in Italy to make it more favourable for the mid-low income earners. They purportedly want to keep the current system of progressive tax rates (because it is fairer) but modify them to a) assist lower-mid income earners and b) also provide stimulus to workers so businesses can grow and flourish early on rather than, as is presently the case, taxing income too high, too quickly.
The talk is that Draghi is very keen on the German model of progressive tax rates which can be seen below:
Taxable Income for single taxpayers:
Income Band Tax Rate
€0 to €9408 0%
€9409 to €57051 14% - 42%*
€57052 to €270500 42%
€270502+ 45%
* Your rate of tax in this band is determined based on your total income.
° Married and civil partnership couples are assessed together and the band levels above are doubled (not the tax rates!)
You
will notice that the German progressive tax rates have a nil rate band,
otherwise called a tax allowance, similar in structure to many other
progressive tax regimes, e.g. the UK and USA.
The nil rate band is particularly popular because it means that the first 'x' amount of income is not taxed for anyone. Presently, Italy has a system of tax credits, which mimic the tax allowance for some people, but mean that income is still taxed, even at a lower level, and then a tax credit needs to be applied for each year.
The nil rate band is particularly popular because it means that the first 'x' amount of income is not taxed for anyone. Presently, Italy has a system of tax credits, which mimic the tax allowance for some people, but mean that income is still taxed, even at a lower level, and then a tax credit needs to be applied for each year.
Funding the shortfall
The
big question is how does the Italian government fund this tax change,
because it is a tax reduction for most people. They will purportedly
do it in 3 ways:
SIMPLIFYING A COMPLEX SYSTEM
It
is assumed that the currently complex system of deductions, detractions
and bonuses/credits etc will be overhauled and that a number of them
will be pulled altogether or simplified. Personally, I am in favour of
simplification. The current system is far too complicated and I often
find that people have not applied for, or haven't deducted expenses
for certain benefits to which they are entitled, but no one has informed
them (a.k.a. their commercialista). Hence a simplified tax code would
likely benefit more people who need it.
PROPERTY TAXES
This
is always a sensitive subject for political parties in Italy but one of
Draghi's ideas is to reintroduce the idea of a tax on the Prima Casa:
IMU. I am sceptical as to whether he would get that through because it
is such a political hot potato in Italy, but it is being thrown about as
an option. However, the other idea is to review and revise the system
of valore catastale. This value, which is used for a number of
taxes (see below), has not been revised for many years and so is usually
a value which can diverge widely from the true market value of a
property.
A revision to bring the valore catastale and the market value of a property more in line with each other would be a clear increase in taxation and would increase the following imposte:
A revision to bring the valore catastale and the market value of a property more in line with each other would be a clear increase in taxation and would increase the following imposte:
Successione:
The tax calculated on a property in Italy on death (succession or inheritance).
Donazione:
Donazione:
Calculated in the same way as the above, but rather
than the tax paid on death, it is paid when a property is donated during the life of an individual.
Imposta di Registro:
Imposta di Registro:
The tax paid to register the atto when a property is bought.
Imposta Ipotecaria:
Imposta Ipotecaria:
Tax paid when a property is re-registered.
Imposta Catastale:
Imposta Catastale:
Similar to the imposta ipotecaria for a transfer of a property into another's ownership.
(All the above are calculated using the valore catastale as their base value, with various coefficients applied to arrive at the correct taxation).
(All the above are calculated using the valore catastale as their base value, with various coefficients applied to arrive at the correct taxation).
Most of the taxes listed above are for one off events, such as purchase or re-registration of a property. The valore catastale would also affect the ongoing taxes for property owners which are payable each year, namely:
TARI: The refuse tax
IMU: The tax on second properties (currently!)
FLAT TAX REGIMES
One
last tax reform could be the possibility of bringing a stop to various
flat tax regimes. Currently, Italy offers a range of flat tax offers to
various categories of people. The ones that mainly affect my clients
are:
1. The regime forfettario flat tax regime of 15% taxation on incomes up to €65000pa.
2. The 7% pensionati flat tax is the offer of a 7% taxation for a period of 10 years for anyone who is taking a pension income and takes up residence in a southern state in a comune with less than 20000 registered abitanti.
3. The €100000 per annum for 15 years, flat tax regime, to attract the wealthy to transfer their residency in Italy.
If the noises that are currently being heard are correct, then Mario Draghi is not a great fan of flat tax regimes and he may look to overhaul the system with these in mind.
1. The regime forfettario flat tax regime of 15% taxation on incomes up to €65000pa.
2. The 7% pensionati flat tax is the offer of a 7% taxation for a period of 10 years for anyone who is taking a pension income and takes up residence in a southern state in a comune with less than 20000 registered abitanti.
3. The €100000 per annum for 15 years, flat tax regime, to attract the wealthy to transfer their residency in Italy.
If the noises that are currently being heard are correct, then Mario Draghi is not a great fan of flat tax regimes and he may look to overhaul the system with these in mind.
CLAMPING DOWN ON TAX EVASION
The
third, and more important way that Draghi is proposing to raise tax
revenue, without raising taxes on the most needy, is to clamp down on
tax evasion.
The Common Reporting Standard
Apart
from the usual issue of payment in cash in Italy which is beyond the
scope of my E-zine, the main thing to note about the tracking down of
undisclosed financial information, particularly abroad, is the
2016 Common Reporting Standard. This is a multilateral agreement between
almost all countries in the world, to share financial information with
one another based on the residency of any individual and not the
location where an asset is held.
In Italy, it is evident that it is in full force and I have seen, on a number of occasions, that it works seamlessly.
Not
a week goes by when I am not contacted by someone who has assets
reported incorrectly or have failed to declare them in Italy. In many
cases it is done unintentionally, but the tax code does not make
exceptions for the unintentional or 'I didn't know I had to do it'. The
question I am asked is 'will they be able to find out?' and my response is always 'I
think we can assume that they know, and if they haven't contacted you
then it is their choice not to do so rather than a question of them not
knowing'.
Low hanging fruit
Given
that Draghi is stating that he wants to go after undeclared assets,
then I would suggest that based on the multilateral share of tax and
financial information agreements, undeclared or incorrectly declared
assets will be low hanging fruit for the Agenzia delle Entrate and easy
pickings. So, as I reported in my previous E-zine:
'If in doubt, declare the account'
(and your income/assets/gains too)
(and your income/assets/gains too)
Tax savings for most
I
am regularly accused of being a bit of a doomsayer on my E-zine but I
am only trying to report the information and we mustn't forget that
should these tax reforms proposed by Draghi and his team then it would
most likely mean a net reduction in tax for most people. By how much, we
will have to wait and see.
The bigger question is to what extent the proposed reforms will gain parliamentary approval and to what degree they will be watered down. I am naturally pessimistic when it comes to this particular point, but I have been surprised by the actions that Italy has taken on a few occasions in the past. The most recent of course, was the decision to go into hard lockdown at this time last year due to the spread of the virus. Italy was viewed as a leper by most other nations around the world, but the decision was quickly replicated and acknowledged by other nations as the best and most sensible option at the time.
The bigger question is to what extent the proposed reforms will gain parliamentary approval and to what degree they will be watered down. I am naturally pessimistic when it comes to this particular point, but I have been surprised by the actions that Italy has taken on a few occasions in the past. The most recent of course, was the decision to go into hard lockdown at this time last year due to the spread of the virus. Italy was viewed as a leper by most other nations around the world, but the decision was quickly replicated and acknowledged by other nations as the best and most sensible option at the time.
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