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Italy Debates More Budgetary Options

September 2011 - Tax & Private Client. Legal Developments by Hassans.

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With the Italian parliament being called back from holiday to consider the draft decree containing the anti-crisis budget measures which the government has put forward to accelerate the balancing of the country's budget, other policies are already being touted to replace its more contentious elements.

The overall effect of the new budget, announced by Premier Silvio Berlusconi and the Minister of the Economy Giulio Tremonti, will be the imposition of spending cuts and tax hikes to achieve a balancing of Italy's budget in 2013, rather than in 2014 as previously expected. The further correction to Italy's fiscal deficit will total EUR45.5bn (USD65.5bn) over two years - EUR20bn in 2012 and EUR25.5bn in 2013.

However, as had already been intimated by Berlusconi when he introduced the package as unavoidable in terms of the Eurozone financial crisis, the passage of the decree through parliament will not be a motion of confidence in the government, which will look for support from the opposition parties.

Berlusconi has also said that proposals would be considered from other parties, but that the overall fiscal effect of the package should, obviously, remain unchanged. Such proposals have not been long in being put forward.

While the harmonization of the withholding taxes on financial income at 20% from January 1, 2012 had been largely expected, and does not appear to be causing much controversy, the two-year solidarity contribution tax on higher individual incomes and the additional cuts in local authority spending have raised the most protest.

An additional 5% tax will be levied on annual personal incomes higher than EUR90,000, and that will increase to 10% on annual incomes over EUR150,000. Berlusconi has already intimated that this additional taxation is against all his tax-cutting principles (and also an attack on the taxpayers from whom he has received solid political support in the past), and it is being contemplated, in some quarters, whether at least the top 10% rate could be avoided.

The planned additional reduction in local authority spending, amounting to some EUR6bn in 2012 and another EUR3.2bn in 2013, has also been protested. Given the reduction in services which the cuts could entail, local politicians are increasingly requesting the government to find other sources of funds.

At the top of the list of alternative options is a proposal to increase the 5%-7% penalties that were imposed on Italian individuals who repatriated or regularized previously-undeclared assets of EUR104.5bn during the tax amnesty which ended in April last year. While most proponents of this option see a minimal further penalty of 1%-2%, some are looking for a more substantial increase to 5%. It is estimated that the revenue available by this means could reach between EUR1bn and EUR5bn, depending on the level of sanction chosen.

While Berlusconi has not come out against this option, Tremonti has expressed his doubt, as the move could be declared unconstitutional. On the other hand, the Partito Democratico, the largest opposition party, is enthusiastic, but finds the suggested additional penalty of 1% to be laughable, and is looking for up to 15%.

Another option is seen to be an increase in value added tax (VAT). In his effort to avoid the top-rate income tax increase, Berlusconi has recently lent his support to such a proposal, but Tremonti has thrown cold water on a VAT rise, given the effect it might have in restricting domestic consumption and, thereby, Italy's gross domestic product. However, the major proponents of this option point to the fact that increasing the ordinary VAT rate from the current 20% to only 21% would provide the government with EUR6bn more tax revenue.

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