The purpose of this tax is to simplify the tax system by reducing the number of taxes applicable and to start the process of regional tax autonomy.
IRAP is a regional tax on net production deriving from the activity carried out on the territory of a Region.
If the activity is carried out in the territory of several Regions, the net production value must be proportionally split among the regions where the activity is carried out, by considering, as a general rule, the amount of compensation due to all personnel. To this regard, some specific rules apply for banks, financial companies, insurance companies and farming enterprises.
The tax basis is the carrying out of autonomously organised activities conducted on a regular basis to produce and exchange goods or supply services. Activities carried out by companies and bodies, including Government Administrations, are, in any case, considered as tax basis.
The statutory IRAP rate is 4.25%. Nevertheless, some different temporary rates are foreseen depending on the kind of activity (banking, insurance and farming entities).
IRAP constitutes an autonomous tax obligation for each fiscal year, which coincides with the fiscal year adopted for income tax purposes.
IRAP applies starting from January 1, 1998. However, for entities whose fiscal year does not coincide with the calendar year, some different dates of entry into force are provided.
According to the law, the tax is of a tangible nature: it may be due also in presence of financial periods which generate a loss.
IRAP is not deductible for income tax purposes, unlike most of the abolished taxes which were deductible.
2. Taxes and abolished contributions
Along with the introduction of IRAP, the following taxes and contributions were abolished:
a) National Health Service Contributions;
b) Local Income Tax (ILOR);
c) Municipal Tax on Productive, Artistic and Professional Activity (ICIAP);
d) Tax on State Concessions for VAT positions;
e) Net Worth Tax on Enterprises.
3. Taxable entities
The following entities are subject to the tax:
- resident or non-resident companies and entities of any kind, subject to Corporate Income Tax;
- partnerships (i.e., S.N.C., S.A.S. and comparable entities) and individual entrepreneurs;
- individual or associated artists and professionals;
- agricultural producers who are not exempt from VAT.
The tax does not apply to:
- mutual investment funds;
- pension funds;
- European Economic Interest Groups (but see below).
4. Taxable base
The tax applies to the net production attributable to the activity carried out in the territory of the region.
The following areas are excluded from IRAP taxable base since, from a civil law point of view, they are entered after the value of net production:
- the financial area (proceeds, costs and value adjustments);
- the extraordinary area (positive and negative components).
The determination of the production value varies depending on the nature of the taxpayer (banks, insurance companies, manufacturing companies, etc.) and on the adopted accounting regime.
However, the Decree sets forth the general rules applicable to all parties and establishes whether or not some costs are deductible for IRAP purposes.
The following items are not deductible:
- costs relating to employed personnel;
- compensation for independent collaborations which are not carried out on a regular basis;
- costs for personnel employed on an ongoing and co-ordinated basis;
- compensations for services treated as subordinate employment;
- profits allocated to associated in participation contributing only by work;
- the part of financial leasing attributable to interests payable.
It is worth noting that the general rule adopts an accrual, and not a cash, principle.
On the other hand, the following items are deductible:
- contributions for compulsory accident insurance in the work place;
- trainee and apprentice expenses;
- expenses, within the limits of 70%, for the personnel hired with apprentice employment contracts.
In order to determine the taxable base, it is necessary to take into consideration the accounting items relevant for civil law purposes, along with the above-mentioned exclusions and exceptions.
These items have to be adjusted according to the tax provisions applicable for income tax purposes.
5. Specific rules
The taxable base varies depending on the activity carried out by the taxpayer.
The cases specifically ruled by the Decree are the following:
- manufacturing enterprises (there is no difference between ordinary and simplified accountancy);
- banks and financial companies;
- insurance companies;
- professionals working individually or on an associated basis;
- agricultural producers earning farming income;
- public and private non-commercial entities;
- non-resident persons;
- companies participating in European Economic Interest Groups.
For most enterprises, the taxable base must be calculated starting from the profit and loss account. Taxpayers who are not obliged to file the profit and loss account (e.g., partnerships, individual enterprises, entities with a simplified accounting system) have to classify the amounts in question in accordance with the rules provided for its drawing up.
The tax applies to the produced added value resulting from the difference between the "Production Value" and "Deductible Production Costs" (raw materials and goods, services, enjoyment of third parties' goods, depreciation of tangible and intangible assets, stock variation and other management costs).
With respect to professionals, the taxable base results from the difference between the received compensation and the costs relating to the activity carried out (including the depreciation of tangible and intangible assets, but excluding interests payable and the expenses for employed personnel).
As regards non-residents, the value deriving from the conduction of commercial or non-commercial activities, arts and professions within a Region for more than three months by means of a permanent establishment, a fixed base or an office or deriving from the carrying out of farming activities within said territory is deemed to have been produced in it.
As regards the concept of residence, it is possible to make reference to the Italian Income Tax Consolidated Text.
6. Application of Tax Treaties
Although the Decree states that, for international Conventions purposes, IRAP is treated as the abolished levies/contributions (particularly, ILOR), in practice, every Convention will have to be re-negotiated on this issue, in that IRAP is not generally an income tax and may thus not be treated as ILOR (or other abolished taxes) was.
Until now, no re-negotiations have taken place, although Italian and U.S. Tax Authorities have reached an agreement with respect to the creditability of IRAP for the U.S. income tax and for the Italy-United States Convention purposes.
Nevertheless, said agreement is only temporarily applicable to IRAP due for 1998; it has been concluded in view of a newly negotiated Convention (to be approved within the end of 1998) which will cover also IRAP.
The tax credit recognised by the U.S. is to be determined as a portion of IRAP paid (or due), calculated by means of a formula specifically set forth by the U.S. Tax Authorities.
7. Tax benefits
A favourable regime granting special benefits is foreseen for:
- enterprises benefiting from a ten-year ILOR exemption because of their territorial location;
- taxpayers with a presumptive regime for determining income;
- enterprises located in the South of Italy;
- building co-operatives with undivided property and social co-operatives;
- new productive activities.
8. Tax returns of taxpayers
It is necessary to file an autonomous IRAP return in accordance with the modalities of filing and with the deadlines established for income tax returns.
The IRAP tax return has to be filed in any case:
- if no tax is to be paid;
- in the case where the taxpayer is not obliged to file the income tax return.
The tax is collected through the taxpayer's payment to be effected in the modalities and terms established for income tax.
Starting from January 1, 1998, IRAP taxpayers are no more required to pay the abolished contributions/levies; however, they have to pay IRAP advanced payments, in May and in November, according to the results disclosed by the financial statements of the previous fiscal year.
A specific "safeguard clause" is foreseen in order to reduce the amount of the advance payment relating to the first taxable year proportionally to the amount of the abolished levies and contributions.
The first IRAP advanced payment may be reduced only if some conditions are met:
1. the major tax burden due to the new tax must exceed 50% of the amount of abolished levies and contributions;
2. this major tax burden must exceed the limit of the absolute increase, determined on the basis of the different IRAP taxable base brackets.
If the two conditions occur, it is possible to reduce the first advance payment by a sum equal to the difference between the major tax burden and the limit of absolute increase.
Taxpayers reducing the advance payments may apply this clause also when settling their advance payment. In other words, the taxpayer may pay the minor amount between the IRAP due for the year 1998 (IRAP calculation on real data) and the maximum IRAP due (reduced thanks to the "safeguard clause");
The difference between IRAP due (computed on real data) and IRAP effectively paid (the minor amount as for the above calculation) constitutes a tax reduction:
- in the amount of 50% for 1999;
- in the amount of 25% for 2000.
Until the fiscal year in course on December 31, 1999, the assessment lies within the competence of the Tax Authorities (direct tax offices or the newly introduced "Sole Tax Bureau"). Successively, it will be of regional competence.
In any case, the provisions relating to the assessment of income taxes apply.
The Decree explicitly enables the Tax Authorities to verify the modalities of classification of positive and negative components in the profit and loss account as an implementation of the rules foreseen by the Accounting Principles: they are thus becoming a benchmark for the Revenue.
Tax Courts are entrusted with litigations according to the rules of new tax procedures.
- Failure to file: administrative penalty from 120 to 240 % of the tax due (the minimum threshold is Lit. 500.000).
- Inaccurate tax return: administrative penalty up to the double of the amount of the higher tax due.
- Violations relating to contents and to the documentation of tax returns: penalty from Lit. 500.000 to Lit. 4.000.000.
- Late or omitted payments: administrative penalty of 30% of the unpaid tax. Interests due for late payment.
- Violations connected with book-keeping: penalties established for direct taxes and VAT apply.
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.