Italy: Draft legislation directing the government to reform the tax system

The Council of Ministers on 16 March 2023 approved draft legislation directing the government to reform the tax system, which was one of the priorities identified in the National Recovery Plan.

The draft legislation is divided into three main sections—the general aims of the tax reform, the criteria for the reform of certain taxes, and the criteria for the reform of tax procedures and sanctions—which are outlined below. 

• More efficient tax framework and a lower tax burden (in order to stimulate economic growth and higher birth rate)
• Prevention of and reduction in tax avoidance and evasion (including through greater use of technology and the establishment and enhancement of reward-based forms of cooperation between taxpayers and the tax administration)
• Reorganization of the tax reporting and payment system
• Alignment with EU principles and OECD recommendations (in particular, implementation of the BEPS project)
• Introduction of measures to improve international tax competitiveness (including by providing investment incentives, while adhering to the principle of non-harmful tax competition)
• Review of the charter of taxpayer rights

• With regard to individual (personal) income tax (IRPEF), gradual reduction in taxation, while rationalizing the way in which taxpayers can deduct various types of expenses (focusing on protecting homes, health, education and pension schemes, and on improving the energy efficiency and earthquake proofing of existing housing stock)
• With regard to corporate income tax (IRES), application of a lower rate provided income is reinvested (including by recruiting new workers) in the two financial years after which it is earned, as well as:
  • Simplification of the systems by which tax bases are realigned with book values
  • Rationalization of the system by which tax is calculated from accounting data
  • Review of the deductibility of interest expense
  • Overhaul of the regime governing the offsetting of tax losses and the circulation of tax losses of companies participating in extraordinary transactions or tax groups
  • Elimination of distortions deriving from application of the rules on business contributions and those on share exchanges made through contributions
  • Simplified taxation of third-sector entities
  • Rationalization of the rules governing inactive companies, criteria for determining business income, tax incentives for businesses and the mechanisms for calculating and claiming them, territorial tax aid (in compliance with the EU rules on State aid), and taxation of enterprises that access mechanisms governed by the Business Crisis and Insolvency Code
  • Overhaul of regional production tax (IRAP), designed to gradually phase out the tax and simultaneously introduce a surtax
• With regard to value added tax (VAT), tax bases brought closer into line with EU law, as well as:
  • Revision of exemption rules
  • Reduction of the number of VAT rates
  • Revision of rules on deductions, with a view to aligning them more closely with the actual use of goods and services employed in VAT transactions
  • Restriction of the “pro rata” rule (i.e., the rule on the deductible percentage of input VAT) to goods and services used for more than one purpose (special rules are being planned for the real estate sector)
  • Rationalization of VAT group rules and rules for third-sector entities
• With regard to indirect taxes other than VAT, simplification of registration tax, inheritance and gift tax, and stamp duty
• With regard to excise duty and other indirect taxes on production and consumption, new rates for energy products (motor and other fuels) and electricity, and the promotion of the generation of electricity, methane gas and natural gas from biomass or other renewable sources
• With regard to customs, modernization of the Italian rules in order to align them with developments in EU law, including:
  • Enhancement of the customs one-stop shop to simplify interaction between customs bodies and businesses
  • Complete digitalization of the goods import and import processes
  • Streamlining of the procedures by which duties are calculated, assessed and collected

• Alignment of the deadlines for reporting and paying taxes
• Introduction of reward-based mechanisms to encourage the use of pre-populated returns
• Suspension of service of notices in August and December
• Greater use of digital technology during tax assessments
• Reinforcement of cooperative compliance system by gradually reducing the entry threshold, increasing the associated rewards (especially with regard to administrative and criminal penalties), and introducing special endorsement mechanisms in the form of certificates issued by qualified professionals
• Introduction of two-year advance tax agreement for smaller firms
• Application of the “right to be heard” principle as condition of validity for all tax assessments
• Improvement in efficiency of the tax collection system (including through annual planning of collection processes and gradual elimination of the system of listed debts and tax bills)
• Elimination of mediation process in tax litigation and digitalization of tax proceedings (including simplified procedural rules, obligation to use standard templates for submissions, introduction of penalties for failure to use online facilities, and, upon request by one of the parties, the holding of remote hearings with the right of the other party to attend in person)
• Wide-ranging changes to tax, administrative and criminal sanctions (including those for infringements of customs and excise rules)
   

Read an April 2023 report [PDF 273 KB] prepared by the KPMG member firm in Italy