Italy: 1998 Tax Developments: Regional Tax on Productive Activities (IRAP) for Manufacturing Enterprises, Professionals, Non-Residents and Other Entities

Last Updated: 28 October 1998
The Regional Tax on Productive Activities (IRAP) was introduced by Legislative Decree No. 446 of December 15, 1997 as an implementation of the delegation provided for by the 1997 Financial Act.
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.

1. Features

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.

9. Payments

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.

10. Assessment

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.

11. Penalties

  • 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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions