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Italy Presents Its Anti-Crisis Budget

August 2011 - Finance. Legal Developments by Hassans.

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In a rapid response to the financial markets crisis, the Italian government has, several days before it was originally expected, produced an additional anti-crisis package to accelerate the balancing of the country's budget.

Following a ministerial meeting, Premier Silvio Berlusconi and the Minister of the Economy Giulio Tremonti announced policies which will impose spending cuts and tax hikes to produce a further correction of Italy's fiscal deficit of EUR45.5bn (USD64.8bn) by EUR20bn next year and EUR25.5bn in 2013.

The new measures, together with those introduced in last month's financial stability budget are expected by the government to achieve a balancing of the budget in 2013, rather than in 2014, as had been previously agreed with the European Union. In addition there will now be significant deficit reductions also in 2012.

Expectations that there should be further reductions in public spending and action against tax evasion have been fulfilled in the new draft decree. With regard to the latter, for example, the limit on cash transactions will be reduced from EUR5,000 to EUR2,500, and there will be increased sanctions against traders who do not issue receipts.

Also as expected, taxes on financial income have been harmonized at 20%, with effect from January 1, 2012. The withholding tax payable on interest received from bank deposits will, in fact, fall from 27% to that level, while the tax on interest from other financial instruments (excluding interest received from government bonds), dividends and capital gains will increase from 12.5% to 20%.

Above all else, however, is the introduction of a so-called solidarity contribution with a tax on higher individual incomes. An additional 5% tax will be levied on annual personal incomes higher than EUR90,000, while that will increase to 10% on annual incomes over EUR150,000. This additional tax will be levied for an initial period of two years.

Furthermore, the corporate income tax rate payable by energy companies in Italy, which had previously been increased by 6.5% above the normal rate, will now rise by a further 4% for three years.

The government is presenting the harsh decisions it has taken as unavoidable during the current Eurozone crisis, and as demanded from it by Europe. That being the case, Berlusconi has confirmed that he will not look to make passage of the decree through parliament a motion of confidence in the government, but will look for support from the opposition parties.

The government has also said that it would consider proposals from other parties, but that the overall fiscal effect of the package should, obviously, remain unchanged. The decree will be put before a parliament which will be immediately recalled into session.

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