Italy Ponders Tax Reforms

By Global Tax Weekly

Italy’s tax regime leaves a lot to be desired. Although, there are some disagreements, and principally how bad things are. The Tax Foundation ranks Italy 34th out of 35 OECD economies, so it’s safe to say that there’s room for improvement there. PwC, on the other hand, places the country in 112th place globally. That means it’s (albeit marginally) easier for a business to pay its taxes in Lesotho (111th), the Federated States of Micronesia (110th), and the West Bank and Gaza (109th), which is hardly a ringing endorsement of the Italian tax system. In other words, opinions of Italy’s tax regime range from dire to disastrous.

However, for all its controversial policies, one thing that Italy’s populist coalition Government is trying to achieve is to give business taxpayers something of a break. For small firms and the self-employed, there’s a flat tax in the draft 2019 Budget, while larger companies could get a tax cut on reinvested profits. An automatic VAT hike, to be triggered when fiscal targets are missed, has also been cancelled.

So, here comes Italy then, poised to rocket up the tax competitiveness league tables! Unfortunately, that’s an unlikely scenario, at least for the foreseeable future. As Italy’s taxpayers are doubtless all too aware, things aren’t as simple as merely drafting a budget and pushing it through parliament, which tends to happen in most other countries in the world. Italy was already effectively on the EU’s fiscal naughty step before the Budget was released, so it was hardly likely that it would be able to sneak a Budget full of tax cuts and spending hikes past Principal Brussels. Hence, it’s been sent back into class to think about what it’s done, and to try and get the Budget right this time. “Do you want to end up like your cousin Greece? Well then.”

It’s difficult to know where Italy goes from here. Will the tax cuts survive in their current form? Will they survive at all? The prognosis doesn’t look promising. The EU’s punishment of choice for fiscal transgressions is a fine, which is a bit like trying to cure someone of an illness by withholding their medicine. But as we’ve seen time and again, especially in the area of taxation, the EU rarely backs down on politically significant issues, no matter how controversial or unworkable the proposals might seem. Your move, Italy. If you’ve got any pieces left to play, that is.

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