Italy: The "Monti’s Measure" (Law Decree No. 201 Dated December 6th) - Italian Regional Tax (IRAP) Deduction From Individual And Corporate Income Tax (IRPEF/IRES) And New IRAP’s Deductions

Last Updated: 9 January 2012
Article by Batini Colombo Saottinis' Tax Team

1.INTRODUCTION

The Law Decree no. 201 dated December 6th 2011, the so-called "Monti's measure", includes some news for:

  • Italian Regional Tax – IRAP – deductions foreseen for employers using unlimited time employees aimed to reduce the so called "fiscal employment's charge";
  • IRAP's deductibility from Individual and Corporate Income Taxes (IRPEF and IRES).

However, both modifications will not be effective for 2011 (and related tax return "UNICO 2012" form), but they will start on tax year 2012 (therefore with relation to tax return "UNICO 2013" form).

In the following pages we analyse those news, considering also the variations brought to the Law Decree introduced during its conversion.

2.  FORFEITED DEDUCTION INCREASE FOR UNDETERMINED TIME EMPLOYEES

The Financial Law for year 2007 introduced two different Regional Tax (IRAP) deductions for employers with personnel employed for un unlimited period of time, with the aim of decreasing the incidence of improper charges on employment's cost (the so-called "fiscal wedge").

In particular, for every employee hired with an unlimited time employment agreement during the tax year, the following deduction have been introduced:

  • Pension and social security contribution have become deductible for IRAP taxable income;
  • A forfeited tax allowance of Euro 4.600,00 on a yearly basis for each employee.

For employees hired with an unlimited time agreement in the following Italian regions Abruzzo, Molise, Campania, Basilicata, Puglia, Calabria, Sardinia and Sicily, the said forfeited allowance has been increased to Euro 9.200,00 euro, always on a yearly basis.

2.1.  News Under the "Monti's Measure"

The Regional Tax deduction described above will be increased for employers hiring women (despite of their age) and employees younger than 35 (despite of their sex).

Under the above-mentioned conditions, the deductible amount is increased, on a yearly basis, up to:

  • Euro 15.200,00 euro, for undetermined time employees hired within the above mentioned disadvantaged regions;
  • Euro 10.600,00 euro, for all others.

In order to take advantage from this increase the employee hasn't necessarily to be hired in 2011, since the new deductions are applied to all employees having the required characteristics detailed above even if hired before 2011.

2.2. Effective Date

The increase will become applicable starting from the fiscal year following the one ending on December 31st 2011 (that is year 2012 for subjects having the tax year coincident with the calendar year).

Therefore, until the UNICO 2012 form, the forfeited deduction has to be calculated following the "old" amounts.

2.3.  Confirmation of Other Aspects Regurding Tax Deductions

The other aspects of the mentioned deductions are confirmed as they are, that are the beneficiary subjects and calculation's methods (i.e. adjustment of the deduction in case of starting, transformation or cessation of the employment relationship during the year).

3.  IRAP'S DEDUCTION FOR IRPEF AND IRES

IRAP's deduction from IRPEF and IRES, introduced by article 6 of the Law Decree 185/2008 (converted in the Law 2/2009) has been modified as well.

Under effects of the introduced news, will become deductible from IRPEF and IRES:

  • The part of IRAP related to the taxable amount referred to expenses for employees, netted from deductions set by the law;
  • An additional 10% of residual IRAP paid during the year, forfeited on the tax due on the taxable part of negative interests and related accessories, netted by active interests and similar incomes.

3.1. Effective Date

The new rules will become applicable from the tax year in due course at December 31st 2012 (therefore from 2012 for subjects having their tax year coincident with the calendar year). Therefore, until UNICO 2012 form, the said deduction has to be calculated with the "old" method.

In practice, from 2012 we could have the three following situations:

  • Tax payer that, with reference to the tax year when the deductions has to be operated, has suffered both employment costs and negative interests: in this case IRAP's deduction will become applicable on the taxable part of employment expenses, netted by deductions foreseen by the law, and the additional 10% deduction of the remaining IRAP paid in the tax period;
  • Tax payer that, with reference to the tax year when the deductions has to be operated, has suffered only employment costs: in this case the applicable deduction will be the just the one paid on personnel expenses, netted by deductions foreseen by the law;
  • The tax payer that, with reference to the tax year when the deductions has to be operated, has suffered just negative interests: in this case, the applicable deduction will be just the 10% of the IRAP paid in the tax year.

3.2.  Confirmation of Other Aspects Regarding Tax Deductions

The other aspects of the deductions should be confirmed as they are, among which beneficiary subjects and deductible amount's calculation method.

With reference to these last ones, we deem that the so-called "tempered cash principle" will remain applicable: in practice, the base on which calculate the deductible amount should be always made by the amounts paid during the tax year, confirmed that prepayments count under the limits of the tax effectively paid during the tax period.

I.e., assuming that in 2012 the following amounts have been paid for IRAP:

  • IRAP 2011 balance due Ý 100.000,00 euro;
  • 1° IRAP 2012 prepayment Ý 48.000,00 euro;
  • 2° IRAP 2012prepayment Ý 72.000,00 euro;
  • Total IRAP due for 2012 Ý 105.000,00 euro;
  • IRAP 2012 balance equal to a tax credit of Ý 15.000,00 euro.

Since the tax due for 2012 is 105.000,00 euro and is lower than the two prepayments paid in the same year (48.000,00 + 72.000,00 = 120.000,00), the deductible amount to be considered will be 205.000,00 euro, deriving from the following sum:

  • Balance due for 2011 (100.000,00 euro);
  • The prepayments paid in 2012 within the amount of the tax due for the same 2012 (105.000,00 euro).

The deductible amount will be therefore calculated on 205.000,00 euro, according to the above mentioned specifications.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Batini Colombo Saottinis' Tax Team
 
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