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Tax System and social system in
Italy
The Italian Tax System
It is a good idea to have a handle on the tax system of the
country where you have chosen to live, at least for a period.
This section will give you an overview, with an emphasis on
the areas where you personally have to take action.
Evasion
All modern western countries have complex tax systems that baffle
the average citizen and the average citizen is rarely very keen
on paying their taxes. Italy is no exception. Sure, there is
probably a higher rate of tax evasion in Italy than in your
country, but it's only a matter of degree, not of black and
white. Here it may appear to be a national sport, but only because
it is talked about more often. Historically, Italians disliked
paying taxes because for centuries they had to be paid to a
foreign overlord. Since 1870, when Italy became a united country,
this is no longer an excuse, but some habits die hard. Nowadays,
the combination of a lack of political will to fight tax evasion
to the hilt, especially in the south, and tax rates that are
too high in comparison with many other European countries, far
less the United States, ensures that many people still choose
to hide a slice of their income so as to reduce their effective
tax rate to a level that they consider fair.
Types of tax
The Italian legislator seems to have been inspired in the past
by three guiding principles, none of which is fairness:
a)
the shotgun approach: spray them with lots of silly little taxes
- something is bound to hit.
b)
the tangible versus intangible approach: collecting income tax
is difficult because income tends to be invisible. So identify
tangible, visible assets - particularly ones that Italians are
unlikely to want to do without (house, car, petrol, even cigarettes)
- and tax them to the hilt.
c)
the fixed versus flexible approach: even better if you can hit them with a
fixed amount (e.g. bollo auto, canone RAI) rather than an amount
that it is up to the taxpayer to decide.
These principles led to a proliferation of taxes which frankly
became absurd. Every month there was something to pay. Then
in the late '90s, "simplification" became the buzz-word. This
entailed incorporating a number of taxes into a new one (particularly
the elimination of ILOR and ICIAP, both local business taxes,
TSS or tassa sulla salute, i.e. health contributions, and various
other minor taxes, and the creation of IRAP, a regional business
tax). Admittedly, this process of "simplification" often meant
issuing acres of instructions to explain the new monster, but
at least there are now fewer taxes to pay.
Taxes in Italy are generally referred
to by their acronym. These change over time, but you will often
find Italians - or even expats - referring to them by their
old name, so we will explain them too:
IRPEG (Imposta sui Redditi delle Persone Giuridiche): this is
corporation tax on the income of limited liability and joint-stock
companies. So you will only encounter this if you set up an
S.r.l. (Societ?con responsabilit?limitata) or an S.p.A. (Societ?
per azioni).
IRAP (Imposta Regionale sulle Attivit?Produttive): this is
the relatively new tax that incorporated various other ones,
as explained above. It is a bit of an oddity because it is not
based on pre-tax profit, but on a figure that for simplicity's
sake we'll call "profit plus personnel costs" which is then
taxed, generally at 4% (the rate is decided by each region).
You will have to pay this if you have your own business, of
whatever kind. It includes health contributions, which means
that your business pays for the health cover of yourself, any
partners, and your employees (full-time, part-time, those on
fixed-term contracts).
IVA (Imposta sul Valore Aggiunta):
this is value-added tax and functions much the same as any European
VAT system. Note that VAT is different from US-type sales tax,
which is only charged to the end-customer at the retail end
of the chain. VAT is charged at every step of the chain, so
businesses involved in the chain charge VAT to the next business
in line and then deduct all of the VAT that they have been charged
by other businesses during the tax period, paying over the difference
to the government on a monthly or quarterly basis, depending
on the size of the business. The total cost is borne by the
end-customer, while the individual business only ends up paying
on the value that it has added to the goods or services in question,
which is why it is called "value-added" tax. One of the major
decisions to be made if you decide to work freelance in Italy
is whether or not to register for IVA. If you essentially work
for one client, you are probably best to push for a contratto
di collaborazione. If you then do the odd job (lavoro occasionale)
for other clients, they can be billed using a ricevuta fiscale
from which income tax is withheld at 20%. If, on the other hand,
you have or plan to have several clients, and especially if
you expect to have a variety of tax-deductible costs (computer,
rent, electricity, telephone, car, travel, office stationery,
etc) it is almost certainly worth your while signing up for
IVA. There is a bit of extra hassle involved (basic bookkeeping,
monthly or quarterly returns, and almost certainly the cost
of a commercialista (accountant, tax adviser) to keep you on
the strait and narrow), but financially you should be better
off, especially the more you earn. See Professional Advisers
for contacts.
Note that we have lots of detailed articles in our archives,
while The Informer, our monthly online publication, will give
you regular updates on any changes in Italian tax law. Access
to both The Informer and to our archives are by subscription
only. Subscribers also have free access to Lifeline, our exclusive
on-line advisory service.
IRPEF (Imposta sui Redditi delle Persone
Fisiche): this is personal income tax and is the one that you
will come across most frequently as it the one that will take
away the biggest slice of your income. Again, you don't have
to be a tax expert, but you would be wise to gain a smattering
of how personal income tax is calculated (above all what expenses
you can deduct) and when/how it has to be paid.
The most logical way of splitting this section is into "Employees"
and the "Self-employed", as the procedures vary quite considerably.
Employees
As employees, the bulk of the work is with your employer. Italy
has a sort of pay-as-you-earn system (generally referred to
as 730 after the form used) which incorporates various personal
deductions. You will be asked by your employer to provide information
on your family status (if you have a dependent spouse and/or
children), if you are making deductible mortgage payments, life
insurance premiums or supplementary pension contributions, if
you have other deductibles such as medical expenses, or if you
have other income needing to be declared. Make sure that you
keep your company up to date with any changes in these situations.
If you would prefer not to let your employer know about certain
situations - say other sources of income that you would prefer
to keep secret - then you can use an outside CAF (centro di
assistenza fiscale) or a commercialista when it comes to filing
your tax return.
In straight-forward situations, all of your income tax payment
and filing requirements will be fulfilled through the 730 system.
The company will deduct each month an amount of tax that is
one-twelfth (assuming 12 monthly payments) of the total tax
expected to be due for the year. There will then be an equalisation
(conguaglio) at the end of the year, which usually affects your
January salary.
In more complicated situations, you may have to file a separate
tax return (dichiarazione dei redditi), which is now called
a Modello Unico, though it used to be called - and many people
still refer to it as - the 740 (pronounced Sette Quaranta).
In theory, Italy (like the USA, but unlike the UK) taxes you
- if you are tax-resident in Italy - on your worldwide income.
This does not mean, however, that you should start telling the
Italian taxman all about your investments, real estate, bank
accounts etc. abroad. One thing is what you earn during your
period in Italy; what you accumulated before coming here is
quite another matter.
Note that we have lots of detailed articles in our archives,
while The Informer, our monthly publication, will give you regular
updates on any changes in Italian tax law, including deadlines.
Access to both The Informer and to our archives are by subscription
only. Subscribers also have free access to Lifeline, our exclusive
on-line advisory service. Which means that if there are tax
matters that you do not understand, you can ask us and we will
do our best to point you in the right direction.
Self-employed
Being self-employed puts a far greater burden on you in terms
of compliance compared with an employee. You would be best to
choose a commercialista early on to ensure that you start off
your business on the right footing. Even if you speak reasonable
Italian, it is probably best to have a commercialista who already
has other expat clients so that they are aware of the particular
situations that expats tend to find themselves in (e.g. awareness
of international tax and social security treaties).
The situation is simplest if you work as a collaboratore, because
from 2001 you are considered more or less as an employee for
tax purposes. This means that you are included in the 730 system,
with tax deductions taking into account your actual level of
income and tax-deductibles, instead of a flat 20% withholding
as in the past (often leading to vast overpayments that were
hard to reclaim).
If you only do odd jobs, or to start with before you have found
a definitive way of operating, you can take the lavoro occasionale
route. Once you have finished a particular project, you (or
the client company) can issue a ricevuta fiscale (a tax receipt
which is simpler than an invoice) which only shows the amount
due less 20% income tax - no IVA and no social contributions.
The drawback is that you cannot carry on using this system indefinitely.
As the word says, it is only for "occasional" (casual) work.
What's the limit? There is no specific guideline, but most people
agree that you should not issue more than 3 ricevute in a year.
The next step up is to work as a libero professionista. This
can mean that you have an "official" profession (architect,
doctor, lawyer, accountant, etc) in which case you have the
additional obstacle of obtaining reciprocal recognition of your
qualification. Even within Europe, this is not a simple matter
and the problem should not be underrated. Because without formal
recognition, you cannot practice legally in Italy. This is a
matter that The Informer follows, so we will not go into further
detail here.
On the other hand, libero professionista is often used in a
wider sense of someone who is self-employed, working freelance
or on a so-called "consultancy" basis. As mentioned earlier,
in this case you are obliged to register for IVA (VAT) purposes,
issue invoices and keep accounting records of your costs and
revenues. Your invoices will show (among other things) a 20%
withholding for income tax, which amount will be paid over to
the tax authorities on your behalf. Your clients will then issue
you with a certificate at the end of the year stating how much
tax they have deducted and paid over for you. So when it comes
to filing your tax return, all of these amounts paid in advance
are deducted from the total tax due for the year and all you
have to pay is the net amount. Depending on your income, you
may even be in credit, in which case you can apply for a rebate.
And as we shall see below, the freelancer's invoices also include
a 4% extra for pension contributions.
Lastly, you may be classed as an entrepreneur. This would be
the case if instead of working on your own, you set up a partnership
(Societ?in nome collettivo or Snc). So it is not so much a
question of the type of work you do, but the way that the business
is organised. In this case, it is the business or partnership
rather than the individual that is registered for IVA purposes.
The business issues invoices that include IVA, but there is
no withholding tax (which helps your cash flow) and no 4% extra
for pension contributions (unfortunately). In this situation,
you have to bear in mind two deadlines for income tax purposes:
31 May and 30 November. 31 May is the deadline by which you
(usually) have to pay the balance of any income tax due for
the previous year (though this is often extended), as well as
the first advance payment for the current year. 30 November
is the deadline for the second advance payment for the current
year, with the balance being paid by 31 May of the following
year.
Bear in mind that you will have to provide your accountant not
only with all of the purchase and sale invoices and any other
documentation pertaining to the business, but also any other
expenses that may be deductible for tax purposes (car purchase
and running costs, medical expenses, mortgage payments, life
insurance, pension contributions, etc).
In any case, The Informer follows these matters systematically,
with requirements and deadlines, and above all any changes in
the law, spelt out in English so that you can discuss things
with your commercialista from a relatively informed point of
view. But note that these monthly updates and the ability to
access our Lifeline advisory service are only available by subscription.
As we have said on various occasions, you will need professional
assistance to set up and run a business in Italy. Professional
Advisers with some experience of expatriates are listed at the
bottom of the page.
Other taxes
As we said earlier, Italy is the land of the thousand taxes,
so be aware that you will probably have to pay one or more of
the following taxes, usually once a year. They may be payable
to central, regional, provincial or local government. How and
where they have to be paid is explained elsewhere on the site
or in our monthly updates (available by subscription).
Car tax (bollo auto), which now includes the tax on your car
radio and the stamp duty on your Italian driving licence
Motorbike tax (bollo moto)
Scooter tax (bollo motorino)
TV tax (canone RAI)
Refuse tax (tassa rifiuti)
Municipal property tax (Imposta Comunale sugli Immobili - ICI)
SOCIAL SECURITY
Social security covers a multitude of things, but the key benefits
are Health Care and Pensions. Health care is dealt with in another
section. Suffice to say here that, for most people, access to
the national health system is provided on the basis of the health
contributions which are now paid as part of IRAP, as explained
above. So anyone who is working should be covered that way.
Those who are registered as unemployed have free access to the
health system. Those who are not working, but who can't be considered
unemployed (e.g. pensioners) have to decide if they want to
join the national health system (probably worthwhile), in which
case they have to pay voluntary contributions (min. L. 750,000
per year) or buy private health insurance.
Social security also includes unemployment benefit, but it is
minimal in Italy and only lasts for 6 months. So we will not
discuss it here.
The major topic of this section is therefore...
Pensions
This is a monumental topic, one that can and does fill books.
What we will provide here is an overview of the various ways
that you can or have to contribute to the system. We will then
briefly mention the question of Totalisation and the particular
situation of American freelancers who are obliged to pay US
self-employment tax.
Employees
As an employee, you needn't worry too much about your pension
contributions as they are automatically deducted and paid over
on your behalf. Just make sure that you receive an annual certificate
from your employer detailing the payments that they have made
on your behalf to INPS or some other pension institution.
If you have anything to think about, it's what to do about a
supplementary pension (pensione integrativa), given that state
pensions are likely to be reduced over the coming decades. The
current debate concerns the extent to which your TFR (Trattamento
Fine Rapporto or severance indemnity) should be reallocated
for this purpose. Those in first-time employment will be obliged
to allocate their TFR to a pension fund, while others will have
the choice.
Self-employed
Professionisti (with an IVA number) have to pay 12% of their
earnings to INPS as pension contributions. One-third of this
they can "claw-back" from their customers. Which is why their
invoices show an additional 4%. (Note that IVA and withholding
tax have to be paid on the total amount: fee + 4%).
Collaboratori pay a certain percentage of their earnings (currently
13% but due to rise over time to 19%) to INPS as pension contributions,
of which they pay 1/3 and the employer/client pays 2/3.
Entrepreneurs, partners and other business people have only
recently (1998) been obliged to join some specific state pension
scheme or another. Most service companies, for example, have
been lumped in with shopkeepers (commercianti), even if the
type of business is very different. The idea is to make everyone
contribute to the pot. In this case, the individual has to bear
the entire cost of the contributions, which are payable quarterly
on the basis of bollettini from INPS. The amount is approximately
16% of the income declared the previous year. Note that such
contributions, being obligatory, are tax-deductible in their
entirety.
Others
There are certain situations where an individual may be missing
just a few years' contributions to ensure a pension but find
themselves no longer in employment. The solution here is voluntary
contributions (contributi volontari), but generally speaking,
la volontaria is to be avoided, firstly because it is very expensive,
as there is no employer to pay the bulk of the contributions;
and secondly, because the contributions may not be tax-deductible
in their entirety. Not being obligatory, they fall under the
same heading as life insurance premiums, for which the deductible
limit appears to be still 2.5 mn per year. A pittance. (Addendum:
this was the situation up to the end of 2000; from 2001 voluntary
contributions are fully deductible).
Totalisation
The whole question of international pensions and social security
treaties is extremely complicated, but totalisation is one concept
that is quite easy to understand. All EU member nations and
the other countries with which Italy has a social security treaty
apply totalisation. Put simply, this means that all of the years'
contributions paid into the pension systems of qualifying countries
can be taken into consideration to decide if an individual is
due a pension or not.
For example, Italy will soon require a minimum of 20 years'
contributions to earn an earnings-related (as opposed to a basic,
old-age) pension. If you have paid 15 years in Italy, 6 in the
UK and 5 in France, then you have a total of 26 years, amply
qualifying for a pension, even if it won't be up to the maximum
(35-40 years needed). Then, if you choose to retire in Italy,
it will be up to INPS to contact the benefits agencies in the
UK and France, informing them of the situation. They will not
transfer "your" cash to INPS, but they will pay their share
of your pension. In other words, Italy will pay 15/26ths, the
UK will pay 6/26ths and France will pay 5/26ths.
And how much will that add up to? you may ask. That's impossible
to say, because it depends on a number of variables, essentially
what your average salary has been for the last n years (n is
rising steadily in an attempt to lower the average). However,
most pension systems, even INPS, are now equipped to give you
a forward estimate of your pension situation.
Bear in mind that those paying 10/13% pension contributions
are subject to separate rules. You are paying into a separate
pot and the money you pay in is identifiably "yours", rather
than being lost in the mare magnum of INPS. On the other hand,
the rules say that your pension will be based on the amount
you paid in over the years, not what you earned in the years
prior to retirement. This system is likely to render far lower
returns than Italy traditional pension system, essentially because
less is being paid in by you or on your behalf, but at least
it's something. It is therefore even more important that you
provide separately for a private supplementary pension.
US Self-Employment Tax
Interestingly, the Americans are quite blatant about it and
call this a tax, even if in Europe we would call it social contributions,
because it is definitely designed to pay you some sort of pension.
Most young Americans have few illusions about the sort of pension
they are likely to receive, but that need not concern us here.
The point is that, if you are American and working freelance
anywhere in the world, you are obliged to pay this 15% self-employment
tax to the States. Being an obligatory social security cost,
it ought to fall under the definition of a deductible expense
for Italian tax purposes. Italian tax inspectors contest this,
based on the fact that it is not an EU tax. The point is still
open to discussion, though the situation now (2003) looks less
optimistic than it once did.
From the Informer.it
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