17 October 2014
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Global Tax Alert
Italy announces major
change of IRAP by providing
full deduction of labor costs
Executive summary
On 15 October 2014, as part of the Draft Stability Law for 2015 (Draft Law), the Italian
Council of Ministers announced a major change regarding the reduction of the tax
burden connected with the regional tax on productive activities (IRAP). While levied at a
relatively low nominal rate, the effective impact of IRAP is often very significant because
the labor cost is generally not deductible. In this sense, the substantial change included
in the Draft Law provides for the full deduction of labor costs. The Draft Law is expected
to be discussed and formally approved by the Parliament by 31 December 2014.
Among other things, this measure should somewhat simplify the position of US
multinationals when computing the creditable portion of the IRAP paid by their
subsidiaries in Italy.
It is worth noting that this initiative follows the recent reduction of the IRAP
standard rate from 3.9% to 3.5%.1
Detailed discussion
Background
The computation of the IRAP tax basis has been criticized by Italian taxpayers
because payroll costs are generally not deductible. In fact, IRAP applies on a basis
represented by earnings before interest and taxes (EBIT) plus any add back of labor
costs; costs for labor are added back no matter the type of work agreement, e.g.,
including employment costs, quasi-employment costs, independent contractor costs
and service fees paid for the hiring of temporary workers or secondees.
Minor exceptions exist under which the cost of labor is deductible, i.e., in the case
of interns, trainees, and R&D personnel, among others. In addition, the social
contribution expenses related to employees hired with no time limit and insurance
contribution costs are generally deductible. On top of this, other limited exceptions
exist where certain lump sum deductions are allowed for each employee (cuneo
fiscale).2
Decrease of IRAP basis
IRAP has represented a very detrimental factor for
labor intensive companies, especially when they
find themselves in a loss position for statutory and
corporate income tax.
Even though measures have been introduced from
time to time to mitigate the disallowance of personnel
costs,3 the proposal included in the Draft Law
represents a milestone in the reduction of the IRAP
burden as it provides for the full deduction of labor
costs.
This measure will benefit in particular companies which
sustain a very relevant amount of costs for personnel
since they should experience a considerable decrease
in their IRAP basis.
Banks and insurance companies that are subject to
special IRAP rates (higher than the 3.5% standard)
should also greatly benefit from this new provision.
Endnotes
1. See EY Global Tax Alert, Italian Government reduces IRAP rate and enacts other tax measures, dated 28 April
2014.
2. The lump sum deduction is increased under specific circumstances (e.g., female hires, hires under 35 year
old, hires in certain regions of Italy).
3. IRAP paid on the portion of basis represented by labor costs was made deductible from the corporate income
tax basis, and an additional 10% of the residual IRAP was also allowed for corporate income tax deduction to
the extent that the company incurs interest expenses.
2
Global Tax Alert
For additional information with respect to this Alert, please contact the following:
Studio Legale Tributario in association with Ernst & Young, Milan
• Domenico Borzumato
+39 02 851 4503
[email protected]
• Marco Magenta
+39 02 851 4529
[email protected]
Studio Legale Tributario in association with Ernst & Young, Bologna
• Mario Ferrol
+39 051 278 434
[email protected]
Ernst & Young LLP, Italian Tax Desk, New York
• Emiliano Zanotti
+1 212 773 6516
• Michele Mirabella
+1 212 773 0478
• Bernardo Porcellini
+1 212 773 7773
Global Tax Alert
[email protected]
[email protected]
[email protected]
3
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