Corporate taxation in Italy: looking backward and forward

Andrea Manzitti 3 May 2012

www.beplex.com

Tax burden trends on the long run

In 1965, the overall Italian tax burden was 25,4% on GDP, the sixth lowest among OECD countries, comparable to the US ratio (24,7%). In 2010, the same ratio rocketed to 43,1%, the fourth highest.

Tax-to-GDP trends since 1965 (including social security contribution)

50.0

45.0 43,0% 42,9% 40.0 36,3% 35,0% 31,7% 30.0 Italy

35.0

33,8%

% on GDP

France
25.0 25,4% 20.0 Germany United Kingdom Spain OECD Total 15.0

10.0

5.0

Source: OECD, Centre for Tax Policy and Administration

0.0

2010

1965

1975

1985

1995

2000

2005

2008

2009

Tax burden trends: a focus on Europe

Variation of the overall tax burden (including social security contribution) in the EU (in GDP points and in %)
difference 1995-2009 difference 2000-2009

Over the last 15 years, Italy has performed the second most dramatic rise in tax levy in Europe (after Cyprus).

+3,1 (+ 7,75%)

+1,4 (+3,5%) +0,2 (+0,57%) -0,1 (-0,25%) -1,1 (-2,57%) -2,2 (-5,25%) -2,3 (-7%) -3,5 (-10,32%) Italy Germany France Spain United Kingdom EU-27 -1 (-2,53%)

-1,8 (-5,15%)

-2,5 (-5,66%)

-2,1 (-5,19%)

Taxation trends in the European Union, Annex A, by the European Commission - Taxation and Customs Union Eurostat, 2011.

Tax burden trends: a focus on Italy

Overall Tax Burden (including social security contribution) as % on GDP
50.0 45.0 40.0 38,2% 35.0 30.0 % on GDP 25.0 20.0 15.0 10.0 5.0 Overall Tax and SSC Burden 0,3% 0,2% 14,5% 13,9% 13,4% (forecast: 45,1%) 42,3%

indirect taxes
direct taxes extraordinary capital gains taxes Social contributions "effettivi" social contributions "figurativi"

0.0 2008
1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010

2011

2012

Source: Italian Bureau of Statistics (Istat) [www.istat.it]; Italian Court of Audit (Corte dei Conti) [President speech before the Italian Chamber of Deputies, 13 March 2012, page 3]

Forecasting Italian Tax Burden for the upcoming years: gloomy expectations
Sources: Confindustria, Scenari economici, 2011 Banca dItalia (Bank of Italy,), Audizione preliminare sulla legge di stabilit 2012 Cgia Mestre (Association of small sized enterprises of Mestre, Venice) ,
www.cgiamestre.com

What Overall Tax Burden in Italy for 2011 and 2012?

2011 2012

45.50% 45.10%
45%

44%

44%

43.80%

43.59%

Prometeia, Forecasting Report, April 2012 Eutekne, 2011, www. eutekne.it

Centro Studi Confindustria Prometeia

42.50%

42.70%

42.56%

Cgia Mestre

Banca d'Italia

Eutekne

Trends in General Government Debt

140
120,9% 120,7% 119,8% (2012 forecast)

120

100 85,9% 84,3% 80,9% 63,3% 60 55,6% 55,4% 51,2% 68,3% Italy Germany France Spain United Kingdom

80 % GDP

40

20

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Despite efforts on reducing the Italian government debt, the latter is expected to increase by 3,7% (2011-2013), the second highest in the World after Spain (+11,2%).
Source: Eurostat database; Eurostat interim report 2012; IMF, Fiscal Monitor-Balancing Fiscal Policy Risks, 2012

Tax Burden and Government Debt in Italy

140 116,1% 118,6% 108,2% 105,1% 103,9% 103,4% 105,4% 106,1% 103,1% 105,8% 120,7%

120

100

80

% on GDP

Public Debt 60 41,3% 41,0% 40,5% 41,0% 40,4% 40,1% 41,7% 42,7% 42,6% 42,8% 42,3% 40 Total tax burden on GDP (%)

20

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Istat

Purchasing power trends in the EU

Trends in GDP per capita in PPS (purchasing power) in the main economies of the EU (100= EU 27)
130 125 120 GDP per capita (100= EU 27) 115 110 105 France, 108 Italy; 101 119 118 118 Germany, 118

115

United Kingdom, 112

100
97 95 90 85 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Spain, 100

Source: Eurostat

Drawing conclusions on Italian Taxation

according to Paying Taxes 2012 (PWC - World Bank)

Total Tax Rate 170

Total tax Rate in Italy amounts to 68,5% of companies' commercial profits, the highest in the whole European Union.
Data set out that: Data set out that:

Time to comply 127

Although time to comply with VAT is considerably shorter in Italy if compared to the average of the European Union (32 hours instead of 68 hours), and corporate income tax time is quite low (just 39 hours a year), companies in Italy are engaged much longer for paying other taxes, on average 285 hours a year. This result is mainly due to payroll tax compliance, which takes 214 hours a year for companies.

Overall score 133

Italy performs poorly, if compared to other developed countries. France holds the 55th position, Germany the 87th, the Uk the 18th, Spain the 40th.

- 22,8% of profit is spent in profits taxes; - 43,4% in labour taxes; -2,3% in other taxes. France has a similar tax rate, arising to 65,7%, whilst Germany has a total tax rate of 46,7% and UK and Spain boast much lighter ratios, around 37-39%. The EU average amounts to 43,4%, the World average 44,8%.

Direct and Indirect taxes

The share of indirect taxes on the total tax revenue (32,1 %) lies well below the EU-27 average (37,7 %), reflecting Italy's heavy reliance on direct taxes (35,8 % v. 31,1 % EU average). Revenues from VAT and excise duties, at 5,7 % and 2,1 % of GDP respectively, represent the second lowest and the third lowest value in the EU. This result is greatly due to the favorable VAT regime on housing.
Source: Taxation trends in the European Union, Annex A, by the European Commission - Taxation and Customs Union Eurostat, 2011.

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Breaking down Italys tax revenue

16

The table outlines the trends in the composition of tax revenue (calculated as a percentage on GDP).
% on GDP

15,4% 15

14

13,9% 13,8%

13

Direct taxes

12

Indirect taxes

11

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: Taxation Trends in the European Union, the 2011 report drafted by the European Commission- Taxation and Customs Union.

Social contributions

10

11

Tax evasion and Tax avoidance clawback

Revenue tax evasion and tax avoidance clawback
14 12.7 12 11

10

9,1*

(billions)

8 6.4 6 4.4 4

6.9 total revenue from Tax Administration activity (*2009 data includes 577 millions of state aid repayment)

0 2006 2007 2008 2009 2010 2011

12

Tax evasion and Tax avoidance clawback-2

% of tax assessments broken down into taxpayers' categories (2011)
Large Taxpayers 0,4% Middle-sized Enterprises 2,3% Individuals 71,7% Small-sized enterprises- self employed 25,6%

Total n Large taxpayers Middle-sized enterprises Small-sized enterprises- self employed Individuals 2.763 16.080 178.263 500.142

Assessed tax (million )* 5.532 7.748 13.566 3.587

Total amount of tax assessments

697.248

30.433

* : figures only relate to taxes which have been challenged by the competent authorities (no reference is made to revenue collected) Source: Italian Revenue Agency (Agenzia delle Entrate), Evasion clawback: 2011 outcomes, 29 March 2012: www.agenziaentrate.gov.it

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Tax evasion and Tax avoidance clawback-3

Revenue from tax assessments broken down into taxpayers' categories* (2011)
Registration Tax 7%

Individuals 27%

Large Taxpayers 31%

Revenue (million )* Large taxpayers Middle-sized enterprises Small enterprises-self employed 1.711 579 1.361 1.468 399

Small enterprisesself employed 25%

Middlesized enterprises 10%

Individuals Registry

* : figures do not include taxes which have been registered in the tax collection rolls (tributi iscritti a ruolo), i.e. taxes in connection to which a tax collection procedure has been initiated by the competent authorities
Source: Italian Revenue Agency (Agenzia delle Entrate), Evasion clawback: 2011 outcomes, 29 March 2012: www.agenziaentrate.gov.it

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Tax Litigation in Italy - claims before First Instance Tax Courts

Claims filed before First Instance Tax Courts
350000 300000 250000 200000 168267 total amount 150000 100000 50000 18888 8309 0 2003 2004 2005 2006 2007 2008 2009 31.258 13.268 300000 265.060 200000 100000 48.205 20.330 0 1996 1998 2000 2002 2004 2006 2008 243.608 299.498

Decisions delivered by the First Instance Tax Courts

600000 500000 400000 total amount

22.004 10.164

The table shows the dramatic soar in tax litigation over the last decade before the Commissioni Tributarie Provinciali (first instance) and Regionali (Court of Appeal).

whole Italy Lombardy Tuscany

Despite the growth of filings, the pace of the decision-making has dropped.

15

Source: Ministero dellEconomia e delle Finanze, Consiglio di Presidenza della Giustizia Tributaria, Relazione 2008 e 2009

Tax Litigation in Italy-2 - claims and decisions by Second Instance Tax Courts
Claims filed before the Second Instance Tax Courts
70000 63.319 60000 100000

Decisions delivered by the Second Instance Tax Courts

120000 103522

50000
total amount

80000

total amount

40000 37.199 30000

60000

45.048 40000 20000 20000 10000 5.297 2.134 0 2003 2004 2005 2006 2007 2008 2009 Whole Italy Lombardy 7.789 2.939 0 2000 2001 2002 2003 2004 9198 2387 2005 2006 2007 2008 2009 9.166 4.224

Source: Ministero dellEconomia e delle Finanze, Consiglio di Presidenza della Giustizia Tributaria, Relazione 2008 e 2009

Tuscany

N.B.: regional data are not avaiable before 2006

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Tax Litigation in Italy - 3 - average losing ratios (2009)

Total succumbence (soccombenza totale) Partial succumbence (soccombenza parziale)
8% 37% Public Administration Taxpayer 63%

Public Administration Taxpayer

92%

Agenzia delle Entrate (Tax Administration) Agenzia del Territorio ( Land Registry) Enti Locali (Local authorities) Others Public Administration Taxpayer

35,10% 24,80% 49,50% 51,40% 37,20% 62,80%

Agenzia delle Entrate (Tax Administration) Agenzia del Territorio ( Land Registry) Enti Locali (Local authorities) Others Public Administration Taxpayer

9,10% 11,40% 6,60% 2,40% 8,50% 91,50%

Source: Ministero dellEconomia e delle Finanze, Consiglio di Presidenza della Giustizia Tributaria, Relazione 2009

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Notional income tax rates in Italy

Corporate income tax (IRES) is levied at the rate of 27,5%.
The rate is increased to 38% for companies that, in the previous financial year, had (i) revenues exceeding 10 million, (ii) a taxable income higher than 1 million, and (iii) carry on certain activities in the fields of energy production and supply (the so-called Robin Tax, regulated by Law Decree no. 112/2008 as subsequently amended).

Regional tax on productive activities (IRAP) applies in addition to corporate income tax and is levied at the standard rate of 3,9%, increased to 4,65% for banks and 5,90% for insurance companies. Regions are entitled to modify the standard rate by up to 0,92%.

18

Actual income tax rates in Italy

from Corporate tax burden - Comparing taxation regimes 2011 study by Deloitte Confindustria
A Confindustria - Deloitte comparative study investigated the differences in the actual corporate tax burden in a pattern-corporation, featuring: 27.500.000 turnover, 896.503 revenue before taxes; 180 employees; 65% of the production is exported. Effective tax burden resulted as follows (2009 taxation regimes are applied) :

Italy: 57,22%
France: 60,73%; Germany: 48,54%; UK: 41,41%; Spain: 32,47%.

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Law Decree 201/2011 (D.L. Salva-Italia)

a turnaround in Italian tax policy? Seeking a balance between direct and indirect taxation; Mario Monti: gradual shift of tax revenue from direct to indirect taxes () in order to equilibrate the tax system Increasing the impact of indirect taxes on the overall tax revenue: introduction of Imu, increasing taxes on wealth. Reduction of direct taxation through tax incentive on corporate capitalisation: the Ace (Aiuto alla crescita economica)

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Reform of the Italian tax framework

The draft articles approved on 16 April 2012
Amendments aimed at clarifying and simplifying the calculation of Corporate Income Tax and IRAP, in accordance with accounting principles (in particular, with reference to the deduction of losses on

bad debts)
Revising rules on cross-border operations:
tax residence; CFC rules;

tax regime of dividends from tax havens;

deduction of costs incurred with black-listed entities; withholding tax regime applicable to cross-border payments of income; taxation of Italian and foreign permanent establishments; deduction of losses incurred by foreign subsidiaries.

New rules on tax deduction of tax depreciation installments, general expenses, and on the definition of costs related to the business activity.
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Reform of the Italian tax framework

The draft articles approved on 16 April 2012
Enhanced cooperation between tax administration and enterprises; tax risk management and tax compliance provisions aimed at attributing responsabilities within the overall framework of internal audit; amendments to the current tax rulings framework; amendments to current tax criminal law, aimed at streamlining the application of criminal liability only to fraud, simulation and use of false documents;

exclusion of criminal liability for tax avoidance;

favoring decriminalization for minor breaches.

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Reform of the Italian tax framework

The draft articles approved on 16 April 2012
Revision of the existing anti-avoidance discipline, in order to implement the general principle of the prohibition of abuse of law (to be applied to non-harmonised taxes);

abuse of law = misuse of provisions of law in order to benefit from an undue tax saving;
the abusive behaviour is characterised by the predominant purpose of profiting from fiscal benefits; no abuse of law if the operation is grounded on non-negligible extra-fiscal reasons (including when

the operation does not give rise to immediate revenues for the taxpayer, being motivated by
organisational needs); tax administration is required proving the abusive scheme and the way it is applied, duly motivating the measure inflicted;

the taxpayer must prove the sound non-tax motivations;

no collection of interest and adminsitrative penalties before the issuance of the first instance decision.
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