01 October 2012

IMF: Italy - Technical assistance report: The delega fiscale and the strategic orientation of tax reform

This report constitutes technical advice provided by the staff of the IMF to the authorities of Italy in response to their request for technical assistance. It reviews the delega fiscale, currently with parliament, and the strategic directions for tax reform for which it could pave the way.

The delega fiscale (DF) provides a framework for significant structural improvement. It is (understandably) silent on some of the most challenging problems of the current tax system, notably the high labour tax wedges and narrowed base of the Imposta sul Valore Aggiunto (IVA). Nonetheless, implementing the strategic directions of change it sets out would substantially improve core parts of the tax system.

Three sets of measures go to core elements of tax design and implementation:

• Bringing cadastral values closer to market values. Realistic alignment of cadastral prices with market prices is essential for greater fairness in property taxation, paving the way for its more effective use as a central element of the local public finances.
• Establishing greater certainty and transparency for taxpayers and tax authorities. The central goal of protecting taxpayers’ rights while safeguarding revenue from abuse will be substantially furthered by clarifying when tax schemes will be regarded as abusive; ensuring criminal procedures do not apply when fraud is not an issue; and encouraging companies to better manage risky tax positions.
• Unifying the treatment of retained earnings across different types of business. This is a further welcome step towards easing distortions of business decisions on organisational form and investment levels, careful attention to detail being needed to ensure that these important objectives are fully realised.

Other provisions of the DF would also bring marked improvements in a range of areas. Routine analysis and assessment of tax gaps is critical to improving compliance; regular reporting of tax expenditures and building on extensive recent work is key for transparent review of their effectiveness; recognising the importance of green taxation is a step towards returning Italy to a leadership role in the area; and VAT grouping, while having a revenue cost, can significantly reduce distortions from VAT exemption in key sectors.

Much detail remains to be spelled out, and some provisions could be made more effective… Cadastral revaluation could be eased, for example, by making use of self-reporting; and allowing the Imposta sul Reddito Imprenditoriale (IRI) as an option adds complexity and can only lose revenue.

However, the essentials of the DF are sound and build on strengths of the current system that have been reinforced by recent reforms. Introduction of the Allowance for Corporate Equity (ACE) was an important step towards greater neutrality for businesses’ investment and financing decisions, taking Italy closer to a form of ‘dual income tax’ (taxing capital income at a low flat rate, labour income at progressive rates). Recent measures, including the property tax increase and taxes on financial securities, suggest a desire to supplement this with tools bearing on forms of wealth. Among the issues that remain is whether an explicit wealth tax, and/or a strengthening of inheritance taxes, might have a greater role to play.

Full report

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