INSIGHT: Covid-19—What is Italy Doing From a Tax Perspective?

The Covid-19 pandemic poses an unprecedented challenge to the global economy. The overriding priority is clearly to contain the virus and protect people’s health—and the stringent containment measures adopted by many countries so far (though of varying intensity) are to do just that.

But governments also need to address the negative impact these measures are inevitably having on the economy. We have witnessed a dangerous mix of economic effects since the beginning of the Covid-19 outbreak in China, including the disruption of global supply chains and a reduction in supply and demand of goods and services. According to the latest estimates from the Organization for Economic Co-operation and Development (OECD), the lockdown will directly affect sectors that account for up to a third of GDP in the major economies.

Many countries have thus adopted, or have announced plans to adopt, tax measures aimed at mitigating the impact of the economic crisis on businesses and individuals. Naturally, these measures are only an initial response to the contingent effects of the crisis, which have resulted mainly in a general lack of liquidity. Most countries are following a twofold approach:

• measures to suspend tax payments and filing obligations; and
• tax relief in the form of tax credits, tax allowances and tax rate reductions.

This is the approach taken by Italy, which recently approved the two decrees summarized below.

“Cure Italy” Decree

This Cure Italy (Cura Italia) Decree (Law Decree No. 18 of March 17) contains measures to strengthen the National Health Service and provide financial aid to families, workers and businesses to cope with the Covid-19 emergency.

From a tax perspective, the following are suspended for this year:

• tax compliance obligations (other than tax payments) between March 8 and May 31 for all qualifying businesses with their tax domicile, registered office or operational headquarters in Italy;
• deadlines for payment of social security contributions and employers’ withholding taxes until April 30 for qualifying businesses with tax domicile, registered office or operational headquarters in Italy and that operate in certain sectors, e.g., tourism, sports and culture. Value-added tax (VAT) payments due in March are also suspended for these businesses;
• deadlines that expire between March 8 and March 31 for payment of self-assessed VAT, social security contributions and employers’ withholding taxes for qualifying businesses that reported less than 2 million euros ($2.17 million) in revenues last year;
• deadlines for payments that expire between March 8 and May 31 deriving from tax bills issued by collection agents and from other executive acts (e.g., tax assessment notices issued by the tax authority). The tax authority’s Circular No. 6 of March 23, clarifies that the Cure Italy Decree does not suspend the 20-day term within which taxpayers must pay settled amounts (the term starts running the day the tax settlement agreement is signed);
• all activities of the tax authority concerning liquidation, control, assessment, collection and litigation between March 8 and May 31. The Cure Italy Decree also extends the statute of limitation for assessments of the 2015 tax year (which would have expired at the end of this year) by two years. The suspension applies also to deadlines by which the tax authority must reply to requests for tax rulings and to advance pricing agreement and patent box procedures; and
• all activities related to tax litigation between March 9 and April 15. The suspension also applies to terms that taxpayers have in which to appeal tax assessment notices.

The Cure Italy Decree also introduces tax credits for certain categories of taxpayers. For example, companies that sell non-performing loans to third parties by December 31 can convert certain categories of deferred tax assets (DTAs) into tax credits, even if the DTA in question is not recorded in the financial statements. The amount of DTAs that can be converted is limited to 20% of the loans disposed of. The tax credits can be:

• used to pay taxes, withholding taxes and social security contributions;
• sold (intra-group or to third parties); or
• claimed as a tax refund.

The Decree also introduces tax credits for certain categories of expenditure (e.g., sanitization of workplaces, rent of qualifying commercial properties and donations to support the management of the Covid-19 crisis).

Liquidity Decree

This government-approved decree (Law Decree No. 23 of April 8) (Liquidity Decree) contains further support measures to help businesses get through the Covid-19 emergency.

The measures incorporate the measures in the Cure Italy Decree and:

• suspend the deadlines for payment of self-assessed VAT, social security contributions and employers’ withholding taxes due in April and May for qualifying businesses. This suspension applies to businesses that generated earnings in the 2019 tax year:
  • of 50 million euros or less if they suffered at least a 33% decrease in turnover in April and May 2020 compared to the same months in the previous tax year; and
  • of more than 50 million euros if they suffered at least a 50% decrease in turnover in April and May 2020 compared to the same months in the previous tax year;
• excludes the application of penalties and interest from advance payments calculated using the “provisional method” (instead of the “historical method”) for which the sum paid is less than 80% of the amount that would be due based on the tax return related to this tax year;
• extends the suspension under the Cure Italy Decree of all activities concerning tax litigation until April 15 to May 11.

The Liquidity Decree also includes the following important, but not tax-related, measures:

• access to financing for a wide spectrum of undertakings, e.g., subject to certain conditions, financial institutions may obtain guarantees for loans granted to Italian undertakings (through SACE S.p.A, a company ultimately controlled by the Italian Ministry of Economy and Finance);
• temporary inadmissibility of requests for bankruptcy or insolvency filed between March 9 and June 30 this year. Further measures include, for example, temporary amendments to the requirement to recapitalize companies, to the principles governing the preparation of financial statements, and to the statutory subordination of shareholder loans.

The above provisions may, however, be amended when the Liquidity Decree is converted into law.

Conclusion

It is clear that the tax measures introduced in Italy (and most of the rest of the world) to counter the Covid-19 crisis should be considered short-term solutions. Indeed, their purpose is to assist businesses and people in a period marked by a general lack of liquidity. It is nonetheless easy to imagine that the epidemic will have more than just contingent effects on the global economy.

As clearly stated by country representatives and supranational organizations (e.g., the OECD), we have not faced a situation like this since World War II—and the effects will be felt for years to come.

The European Commission has also stepped up to the plate and introduced a temporary framework that increases the flexibility of state aid rules in order to widen the set of measures that member states may introduce to tackle the difficulties businesses encounter. For example, member states may (subject to certain conditions) introduce schemes to grant up to 800,000 euros per undertaking in the form of direct grants, repayable advances, tax advantages or payment advantages, which can be rapidly approved following notification.

We believe that countries must adopt unprecedented tax measures to overcome the economic crisis and relaunch the economy. Member states should also take advantage of the flexibility granted by the European Commission in relation to state aid rules.

Going Forward

Italy has already announced that it is working on another set of tax measures to support the country’s socio-economic fabric. In our opinion, the government should:

• enable businesses to survive this first phase of the crisis (during which most have been forced to stop production)—above all to help them avoid bankruptcy—to the maximum extent possible; and
• boost investment by granting tax incentives to businesses and individuals.

It would be helpful, for instance, to loosen the rules that limit the possibility of carrying forward tax losses to allow businesses to fully deduct losses against potential income. It is similarly worth evaluating whether to allow businesses to carry back their losses, as was permitted in the U.S. until the Tax Cuts and Jobs Act (loss carryback was reintroduced in the U.S. with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted on March 27).

And, given that the economic crisis is inevitably causing increased business debt, thin capitalization limits should be eliminated so that businesses can fully deduct financial expenses.

The following would also help:

• reducing the corporate income tax rate and granting a temporary exemption from advance payments for businesses hit hardest by the crisis;
• temporarily eliminating the limits on offsetting tax credits against tax debts of a different nature (known as “horizontal compensation”); and
• allowing businesses to benefit now from tax incentives that would otherwise be split over several tax years (e.g., bringing forward the higher tax depreciation granted under “super” or “hyper” depreciation rules in relation to investments made in the previous tax years).

Existing tax relief aimed at boosting equity investments should also be strengthened and expanded: for instance, significantly increasing the percentage of the notional interest deduction (currently 1.3%) and extending the scope of tax incentives for investments in innovative start-ups and small and medium-sized enterprises (SMEs). These tax incentives consist of:

• a deduction from individual income tax (detrazione) corresponding to 30% of the amount invested in each innovative start-up/SME, up to a maximum investment of 1 million euros per tax year (thus leading to a potential tax benefit of up to 300,000 euros); and
• a deduction from the taxable income (deduzione) of taxpayers liable for corporate income tax corresponding to 30% of the investment, up to a maximum investment of 1.8 million euros per tax year (thus leading to a potential tax benefit of up to 129,600 euros).

Incentives in the form of tax credits (related, for instance, to the exit tax paid in the leaving country or to the amount invested in Italy) should also be granted to companies shifting their businesses back to Italy.

Lastly, it is essential that Italy remain focused on the need for a broad package of measures to structurally reform its tax and legal systems (e.g., to grant tax certainty to investors and reduce the length of court proceedings).

From an economic perspective, the immediate priority is to give businesses the resources they need to overcome the current economic and financial crisis. The situation, albeit terrible all round, might just give Italy the push it needs to carry out reforms to make the country more attractive to foreign investors.

Stefano Simontacchi and Marco Adda are Partners and Matteo Viani is a Senior Associate with BonelliErede.

The authors may be contacted at: stefano.simontacchi@belex.com; marco.adda@belex.com; matteo.viani@belex.com

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.