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	© 2012 International Monetary Fund October 2012
	IMF Country Report No. 12/280

	July 29, 2012 January 29, 2001 January 29, 2001
	January 29, 2001 January 29, 2001
	Italy: Technical Assistance Report—The _Delega Fiscale_ and the Strategic Orientation

	of Tax Reform


	This paper on Italy was prepared by a staff team of the International Monetary Fund as background
	documentation for the periodic consultation with the member country. It is based on the information
	available at the time it was completed in September 2012. The views expressed in this document are
	those of the staff team and do not necessarily reflect the views of the government of Italy or the
	Executive Board of the IMF.

	The policy of publication of staff reports and other documents by the IMF allows for the deletion of
	market-sensitive information.

	Copies of this report are available to the public from


	International Monetary Fund • Publication Services

	700 19 [th] Street, N.W. • Washington, D.C. 20431
	Telephone: (202) 623-7430 • Telefax: (202) 623-7201
	E-mail: [publications@imf.org](mailto:publications@imf.org) Internet: http://www.imf.org

	#### International Monetary Fund Washington, D.C.

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	# _The Delega Fiscale and the_ _Strategic Orientation of Tax Reform_

	### Michael Keen, Ruud de Mooij, Luc Eyraud, Justin Tyson, Stephen Bond, and Lawrence Walters

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	## INTERNATIONAL MONETARY FUND

	### Fiscal Affairs Department ITALY : THE DELEGA FISCALE AND

	THE STRATEGIC ORIENTATION OF TAX REFORM

	#### Michael Keen, Ruud de Mooij, Luc Eyraud, Justin Tyson, Stephen Bond, and Lawrence Walters September 2012



	![](assets/figures/cr-2012-280-fig-p0004-001.png)

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	The contents of this report constitute technical advice provided
	by the staff of the International Monetary Fund (IMF) to the
	authorities of Italy (the “TA recipient”) in response to their
	request for technical assistance. This report (in whole or in part)
	or summaries thereof may be disclosed by the IMF to IMF
	Executive Directors and members of their staff, as well as to
	other agencies or instrumentalities of the TA recipient, and upon
	their request, to World Bank staff and other technical assistance
	providers and donors with legitimate interest, unless the TA
	recipient specifically objects to such disclosure (see Operational
	Guidelines for the Dissemination of Technical Assistance
	Information:
	http://www.imf.org/external/np/pp/eng/2009/040609.pdf).
	Disclosure of this report (in whole or in part) or summaries
	thereof to parties outside the IMF other than agencies or
	instrumentalities of the TA recipient, World Bank staff, other
	technical assistance providers and donors with legitimate interest
	shall require the explicit consent of the TA recipient and the
	IMF’s Fiscal Affairs Department.

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	Contents Page


	Preface ........................................................................................................................................4


	Acronyms ...................................................................................................................................5


	Executive Summary ...................................................................................................................6


	The _Delega Fiscale_ and the Strategic Orientation of Tax Reform ............................................7


	I. Tax Reform and the _Delega Fiscale_ .......................................................................................8

	A. The Importance of the _Delega Fiscale_ ......................................................................8
	B. Recent Tax Reforms: Aims, Challenges, and Unfinished Business .........................8
	C. Building on Progress ...............................................................................................11


	II. Observations on the Articles of the _Delega Fiscale_ ............................................................12


	III. An Assessment of the _Delega Fiscale_ ...............................................................................36

	Tables
	1. Summary of Largest Tax Expenditure Items .......................................................................19
	2. Gambling and Games in Italy, 2011 ....................................................................................34

	Figure 1. Gambling Revenues and Tax Rates, 2006–11 ..........................................................34

	Box 1. Decomposing the IVA Policy Gap ...............................................................................17

	Appendix I. Text of the _Delega Fiscale_ ...................................................................................40

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	PREFACE

	In response to a request for technical assistance on tax policy from Dr. Vieri Ceriani,
	Undersecretary of State in the Ministry of Economics and Finance (MEF), a mission from the
	International Monetary Fund’s Fiscal Affairs Department (FAD) visited Rome, Italy during
	the period July 12–27, 2012. The mission comprised Mr. Michael Keen (head), Ruud
	De Mooij, and Luc Eyraud, (both FAD); Justin Tyson (EUR); and Lawrence Walters and
	Stephen Bond (both experts).

	The mission met with Professor Mario Monti, President of the Council of Ministers; Vittorio
	Grilli, Minister of Finance; Dr. Vieri Ceriani, Undersecretary of State (MEF); Professor
	Fabrizia Lapecorella, Director General of the Tax Department (MEF); and senior
	representatives of institutions listed at the end of this report.

	The mission is extremely grateful for the outstanding support provided by Dr. Vieri Ceriani,
	Professor Fabrizia Lapecorella, Dr. Cosimo Scagliusi, and Dr. Maria Teresa Monteduro in
	organizing and facilitating the work of the mission.

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	ACRONYMS


	ACE _Aiuto alla Crescita Economica_ ——‘Aid for Economic Growth,’ an
	Allowance for Corporate Equity form of business tax, introduced in
	December 2011.


	BOI Bank of Italy


	DF _Delega fiscale—_ framework law for tax reform proposals


	DIT Dual Income Tax


	EU-ETS European Union Emissions Trading System


	FAT Financial Activities Tax


	GAAR General Anti-Avoidance (or ‘Abuse’) Rule


	ICI _Imposta Comunale sugli Immobili—_ local property tax, replaced by the
	IMU in December 2011 _._


	IMU _Imposta Municipale_ —property tax introduced in December
	2011(replacing the ICI).


	IRAP _Imposta Regionale sulle Attività Produttive—_ regional production tax,
	an origin-based value added tax.

	IRES _Imposta sul Reddito delle Società_ —Corporate Income Tax.


	IRI _Imposta sul Reddito Imprenditoriale_ —new business income tax
	envisaged in the _delega fiscale_ .


	IRPEF _Imposta sul Reddito delle Persone Fisiche_ —personal income tax.


	IVA _Imposta sul Valore Aggiunto_ —value added tax (VAT).


	MEF _Ministero dell’Economia e delle Finanze_ —Finance Ministry


	NWT Net Wealth Tax


	PIT Personal Income Tax


	SC Social Contribution

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	EXECUTIVE SUMMARY

	The _delega fiscale_ (DF) provides a framework for significant structural improvement . It
	is (understandably) silent on some of the most challenging problems of the current tax
	system, notably the high labor tax wedges and narrowed base of the _Imposta sul Valore_
	_Aggiunto_ (IVA). Nonetheless, implementing the strategic directions of change it sets out
	would substantially improve core parts of the tax system.

	Three sets of measures go to core elements of tax design and implementation :

	- _Bringing cadastral values closer to market values_ . Realistic alignment of cadastral
	prices with market prices is essential for greater fairness in property taxation, paving
	the way for its more effective use as a central element of the local public finances.


	- _Establishing greater certainty and transparency for taxpayers and tax authorities_ .
	The central goal of protecting taxpayers’ rights while safeguarding revenue from
	abuse will be substantially furthered by clarifying when tax schemes will be regarded
	as abusive; ensuring criminal procedures do not apply when fraud is not an issue; and
	encouraging companies to better manage risky tax positions.


	- _Unifying the treatment of retained earnings across different types of business_ . This
	is a further welcome step toward easing distortions of business decisions on
	organizational form and investment levels, careful attention to detail being needed to
	ensure that these important objectives are fully realized.


	Other provisions of the DF would also bring marked improvements in a range of areas .
	Routine analysis and assessment of tax gaps is critical to improving compliance; regular
	reporting of tax expenditures and building on extensive recent work is key for transparent
	review of their effectiveness; recognizing the importance of green taxation is a step toward
	returning Italy to a leadership role in the area; and VAT grouping, while having a revenue
	cost, can significantly reduce distortions from VAT exemption in key sectors.


	Much detail remains to be spelled out, and some provisions could be made more
	effective … Cadastral revaluation could be eased, for example, by making use of selfreporting; and allowing the _Imposta sul Reddito Imprenditoriale_ (IRI) as an option adds
	complexity and can only lose revenue.

	…but the essentials of the DF are sound and build on strengths of the current system
	that have been reinforced by recent reforms . Introduction of the Allowance for Corporate
	Equity (ACE) was an important step toward greater neutrality for businesses’ investment and
	financing decisions, taking Italy closer to a form of ‘dual income tax’ (taxing capital income
	at a low flat rate, labor income at progressive rates). Recent measures, including the property
	tax increase and taxes on financial securities, suggest a desire to supplement this with tools
	bearing on forms of wealth. Among the issues that remain is whether an explicit wealth tax,
	and/or a strengthening of inheritance taxes, might have a greater role to play.

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	7


	THE _DELEGA FISCALE_ AND THE STRATEGIC ORIENTATION OF TAX REFORM


	This report reviews the DF _,_ [1] currently with parliament, and the strategic directions for
	tax reform for which it could pave the way . The aim is not to review all paragraphs and
	sub-paragraphs, some of which are very detailed and context-specific, but to focus on the
	core strategic choices that the DF represents, with a particular focus on policy aspects.

	The discussion is structured as follows . Section I places the DF in the broader context of
	the design of the Italian tax system, and recent changes to it. Section II then considers its key
	provisions, leading to an overall assessment in Section III. A series of appendices elaborate
	on technical issues.


	1 “Draft Law Concerning the Powers Delegated to the Government to Lay Down Legal Provisions for a More
	Equal, Transparent, and Growth-Oriented Tax System.” The text reviewed in this report is in an appendix.

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	I. TAX REFORM AND THE _DELEGA FISCALE_


	A. The Importance of the _Delega Fiscale_


	1. The DF sets out principles to guide key elements of subsequent structural tax
	reform, rather than delivering reform in itself or altering the overall level of taxation . It
	empowers the government to introduce, within nine months of its entry into law, legislative
	decrees consistent with the principles it sets out. [2] The focus of the DF is wholly on the
	structure of the tax system, in that among the guiding principles is the requirement that the
	overall package of reforms be revenue-neutral: [3] questions as to the overall level of revenue
	are thus left aside, and so are not addressed in this report.


	B. Recent Tax Reforms: Aims, Challenges, and Unfinished Business


	2. The principles set out in the DF need to be assessed relative to both the wider
	structure of and recent developments in the Italian tax system . Key elements of this
	context are


	_The system has many aspects of a Dual Income Tax_

	3. A ‘dual income tax’ (DIT) [4] taxes labor income at progressive rates but capital
	income at a low single rate . It differs from a ‘comprehensive’ income tax in distinguishing
	between capital and labor income (rather than subjecting the sum of the two to a single
	progressive scale) and from an ‘expenditure’ tax in that it taxes the normal return to capital.
	To avoid arbitrage opportunities and facilitate implementation, the textbook prescription is to
	set the corporate income tax rate equal to the single rate on capital income. [5]


	4. Several features of the Italian tax system have DIT features… including the single
	and very similar rates applied to rental income (21 percent); [6] interest income (20 percent)
	other than from government debt (12.5 percent); dividends not associated with a “qualified”


	2 Article 1. In addition, Article 16 provides that these decrees may be revised, consistent with the principles of
	the DF, within 18 months of their entry into force.


	3 Article 17.


	4 The term is also used to refer to the form of corporate tax implemented in Italy for some years around the turn
	of the century (which was essentially akin to an ACE but with a reduced (rather than zero) rate on the imputed
	return to equity). Throughout this report, it has the meaning given in the text.


	5 If the corporate tax rate exceeds the flat tax on interest income, for instance, there is a tax gain from lending to
	corporations.


	6 In this case, as an option to taxation under the _Imposta sul Reddito delle Persone Fisiche_ (IRPEF).

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	(i.e., substantial) shareholding [7] (20 percent or more); and capital gains on most financial
	instruments (20 percent).


	5. …though there remain some differences from the textbook DIT . These include
	the taxation of (49.72 percent of) dividends under progressive _Imposta sul Reddito delle_
	_Persone Fisiche_ (IRPEF) rates for qualified shareholdings, the potential taxation of capital
	gains on real estate at the IRPEF rate (with an option to pay at 20 percent), and the absence
	of any attempt to apply differential taxation of labor and capital income to unincorporated
	businesses. Notable too is that distributed corporate earnings (in excess of a normal rate of
	return) are taxed at effective rates that are close to the top marginal IRPEF rate rather than
	the rate on interest income. [8]


	6. The DIT has many merits, and, though not without drawbacks, has provided a
	coherent anchor for tax reform in Italy . Pioneered in (and still being perfected by) Nordic
	countries, such a structure has several potential merits: perhaps most compelling, the
	increased international mobility of financial capital makes it increasingly difficult to tax
	capital income at rates as high as the top marginal rate felt appropriate for labor taxation. [9]
	Potential drawbacks of the DIT are the need, in principle, to distinguish capital from labor
	income—when small businesses can readily shift between the two—and the perception of
	inequity in charging a lower tax rate on those, likely to be among the better off, more heavily
	dependent on capital income. Progress toward a DIT has in any event provided a coherent
	and practicable framework for strengthening tax design in Italy—in the process of unifying
	previously very dissimilar rates on different forms of interest income, for instance, and
	providing a setting for the ACE. The essential structure, moreover, appears to be widely
	accepted. There is thus a very strong case for measures that further implement the underlying
	principles of the DIT, and address such weaknesses as remain.


	_Taxation of property and consumption has increased…_

	7. The introduction of the _Imposta Municipale_ (IMU) at the start of 2012
	fundamentally reformed, and increased, property taxation . In replacing the previous
	_Imposta Comunale sugli Immobili (_ ICI), it brought primary residences back into the tax base
	and scaled up cadastral values (by 49 percent overall). The marked increase in property tax


	7 Two percent or more for listed companies; 20 percent or more for unlisted companies.


	8 Given an _Imposta sul Reddito delle Società_ (IRES) rate of 27.5 percent, the effective tax rate for non-qualified
	shareholdings is 42 percent (��0.275��0.2��1 �0.275��; for a qualified shareholder paying IRPEF at
	the top (state) marginal rate of 43 percent it is (a little over) 43 percent (�0.275 ��0.43��0.5��1 �
	0.275).


	9 There are others. A low rate on capital income may, for instance, ease the distortions that arise from the
	inability, in practice, to tax all forms of capital income at the same rate (the difficulty of taxing capital gains on
	accrual, in particular, making it hard to equalize their treatment with that of, say, interest).

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	revenue to which this led—a projected €10.7 billion (around 0.7 percent of GDP) in 2012—
	also has important implications for longer-term reforms aimed at increasing municipalities’
	ability to finance their activities (both overall and at the margin) from local taxation rather
	than transfers from the state. In particular, recent reforms of municipal finance, tax
	autonomy, and equalization schemes in the context of greater fiscal federalism will likely
	have to be revisited; [10] these wider issues of fiscal federalism, however, are beyond the scope
	of this report).


	8. In 2011, the standard IVA rate was increased and taxes on some luxuries
	introduced . The increase in the standard IVA rate from 20 to 21 percent in 2011 does not,
	however, address the more fundamental point that Italy has one of the weakest performing
	VATs in the EU: reflecting the presence of reduced rates and imperfections of compliance.
	C-efficiency (the ratio of IVA revenue to the product of aggregate consumption and the
	standard rate) remains one of the lowest in the EU (41 percent, compared to an unweighted
	OECD EU average of 58 percent). [11] New excises on boats and private planes are clearly
	targeted on the very wealthy, but the limited revenue they raise (0.3 percent of GDP) means
	that they can have only very limited distributional effects.


	_…and that of labor somewhat fallen_

	9. Expanded deduction of labor costs under the _Imposta Regionale sulle Attività_
	_Produttive_ (IRAP), and of the labor component of the IRAP against the _Imposta sul_
	_Reddito delle Società_ ( IRES), go some way to reducing labor taxes . The effects seem likely
	to be fairly modest, however: the former apply only to those under 35 and women on
	permanent contracts, while the latter imply an effective rate reduction of less than 1 percent. [12]
	The overall revenue cost of these measures was put at only about €1.6 billion in 2012—and
	an increase in the regional surcharge on the IRPEF offset this. [13]


	10 See, for example, legislative decree No. 23 of 2011 on municipal federalism
	(http://www.portalefederalismofiscale.gov.it/portale/it/c/document_library/get_file?uuid=085a7e51-5da5-429fb5c0-b62f8015f99f&groupId=10157).


	11 Some care is needed in such international comparisons; the authorities believe, for instance, that the upwardadjustment of GDP for the informal economy is more complete in Italy than in some other countries. How to
	assess the performance of the IVA is discussed further in Section II.


	12 Assuming the standard IRAP rate of 3.9 percent, since 10 percent of the IRAP was deductible already, the
	reduction in the effective rate on labor costs is �0.9��0.039��0.275 �0.0097.


	13 To the extent that these effects effectively finance a reduction employer’s labor cost by increasing taxes on
	final consumption (of commodities and housing services), the effect will have been equivalent to a fiscal
	devaluation: reducing the euro price of exports (assuming the reduction in labor costs to have been passed on)
	and increasing the relative price of imports in Italy (the increase in IVA affecting both imports and domestic
	production), but the cut in labor costs only the latter. Any effect is likely to have been modest, however: even
	assuming the IRPEF surcharge was borne by workers, the extent of the shift was likely under 1 percent of GDP,
	and part of the property tax falling on commercial properties is likely if anything to have raised production

	(continued)

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	_Tax distortions to firms’ financing and investment decisions have been reduced_


	10. The recent introduction of an Allowance for Corporate Equity ( _Aiuto alla_
	_Crescita Economica_ ; ACE) has eased the tax bias toward debt finance and made equity
	injections more attractive . By providing a tax deduction for a notional return on additional
	equity injected into companies, this system reduces the cost of such finance and eases the tax
	incentive to use debt rather than equity finance. These are very attractive properties—the
	importance of avoiding tax incentives to artificially high leverage, especially but not only for
	financial institutions, has emerged only too clearly since 2008. Given too the positive
	experience of several countries with ACE or similar systems, [14] many now advocate
	widespread adoption of the ACE. [15] With its own past experience of forms of business
	taxation with ACE-type features, this is an area in which Italy has been a leader—and is now
	once again.


	C. Building on Progress


	11. Some significant weaknesses of the current tax system remain . Labor tax wedges
	are high—the implicit tax on labor is the highest in the EU in 2010—and the effectiveness of
	the IVA in performing its basic function, of raising substantial revenue as a broad-based
	consumption tax, remains poor. [16] There is considerable complexity: in the tendency to offer
	taxpayers options such as substitute taxes, in the creeping piecemeal complications in
	deductions from, and deductibility of, the IRAP—and more generally in the vast range of tax
	expenditures. [17] And administrative and judicial concerns continue to dampen taxpayers’
	confidence. The recent increases in taxes on transactions and particular forms of wealth—
	real property and some financial assets—raise wider issues as to the role of such taxes in the
	wider tax system.


	12. Continued progress requires sustaining and pursuing further the basic aims
	underpinning the developments described above : building a coherent income tax structure
	along DIT lines, making fuller use of potentially less distorting taxes, and enhancing
	neutrality in relation to business decisions. The DF must be judged largely on whether it
	provides a framework for their continued and wider application.


	costs. The design and likely impact of fiscal devaluations are discussed by de Mooij and Keen (2012) and, with
	reference to Italy, Eyraud (2012).


	14 Reviewed in Klemm (2007).


	15 The Mirrlees Review (Mirrlees et al., 2011) recommends its adoption by the U.K., for instance, and IMF
	(2010a) is supportive. De Mooij (2011) elaborates on these issues.


	16 Discussed in Section II.


	17 Discussed in Section II.

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	II. OBSERVATIONS ON THE ARTICLES OF THE _DELEGA FISCALE_


	13. This section provides observations on the various articles of the DF . Not all of the
	provisions are reviewed: many reflect very particular features of Italy’s circumstances and
	legal traditions; others lie largely beyond the tax policy remit of the report. The focus is on
	the key strategic decisions represented by each substantive Article. [18] A short summary
	assessment follows in Section III.


	Article 2— _Review of the immovable property cadastre_


	14. The update and reform of cadastral values and cadastral management envisaged
	in this article of the DF—one of the most important and detailed—are widely and
	rightly regarded as essential. Revenue from the tax as a percent of GDP is broadly in line
	with other EU and OECD countries, though within this range there is room for Italy to
	increase collections from this source. The key structural issue is equity. Current taxable
	values are over 20 years old. Real estate prices since then have increased six-fold in some
	regions, and by only half that in others, and there are similar variations within every major
	city in Italy. This asymmetry and variability across the country, and within market areas,
	makes the current cadastre unfair and inefficient. Simple adjustments to overcome disparities
	in assessed values are untenable. The revaluation called for in Article 2 articulates the
	government’s response to this very real need.


	15. The valuation methods proposed are consistent with international best practice,
	shaped to the Italian context . There are many ways to implement an effective property tax
	system. [19] The valuation methods proposed in the DF are recognized internationally as an
	appropriate basis for effective and fair property taxation in advanced economies.
	Appropriately, Article 2 reflects a pragmatic adaptation of these methods to Italian
	circumstances and history.


	16. The substantial increase in taxable values could finance a large reduction in
	IMU rates—and perhaps even more beneficially in transactions taxes . The taxable base
	for housing is still less than half the average market value nationally, so that comparable
	revenue at the national level could be raised after comprehensive revaluation with less than
	half the current tax rate. A strong case can be made, consistent with the overall terms and
	aims of the DF, for using some of this revenue increase to reduce distortionary taxes on
	transactions related to real property.


	17. Applying any common national rate structure to a revalued base will mean
	substantial (and broadly progressive) revenue shifts between and within jurisdictions,

	18 Articles 1 and 16, which set out deadlines and procedures for the DF and related legislation, are omitted.


	19 Walters (2011).

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	because there is such wide disparity in the current ratio of market value to taxable value. The
	likely impact of revaluation is most easily gauged for housing. Here revaluation to market
	value will likely nearly triple revenues at current rate and credit structures. If revenue
	neutrality at the national level is desired, continuing to apply common rate across all
	municipalities would mean a significant redistribution of aggregate revenues. Some regions
	would see increases as large as 30–50 percent; others would see declines of the same
	magnitude. Since the degree of undervaluation tends to be higher where market values are
	higher, this redistribution would be broadly progressive. The implications, within the wider
	structure of fiscal federal relations, will need close consideration.


	18. The impact on individual households is likely to be similarly dramatic . At
	present, the average owner-occupied home in Italy has a tax obligation of €152 (ignoring the
	credit for children still at home). But this value varies substantially across the country. In
	Basilicata, the tax on the average primary residence is €7, while in Lazio it is €309. With
	revaluation, taxes on owner-occupied housing are likely to increase in some regions by as
	much as 70 percent, while in other areas they are likely to be zero for the median
	homeowner.


	19. The suggestion that cooperation with municipalities be enhanced is welcome and
	could be expanded, perhaps by developing municipal cadastral commissions in some
	cities . As the cadastral revisions become public, there will undoubtedly be property owners
	who feel that the new value is incorrect. Article 2 mentions provincial and central cadastral
	commissions charged with resolving these disputes. An additional option to consider is a
	cadastral commission at municipal level for medium and large cities, consisting of land
	owners from the municipality who are not public employees, but have some training in the
	valuation methods employed by the Land Agency. These municipal commissions would
	serve without remuneration and would function as the first level of appeal for disputes that
	cannot be resolved informally with the Land Agency. In addition, municipalities should be
	assigned some role in maintaining the accuracy of the cadastre. Experience in many other
	countries is that this task is best seen as a partnership between local government and land
	record managers. As local reliance on the property tax increases, local governments will
	likely be quite willing to assist in these roles.


	20. Implementing Article 2 without incurring additional costs will be a major
	challenge, and the crucial task of maintaining the cadastre and cadastral values will
	require resources . Maintaining land and building records for over 83 million parcels, market
	information for 30,000 reference market areas, and carrying out individualized appraisals for
	over one million specialized cadastral properties will strain the Land Agency. Some of the
	management tasks can be effectively shared with municipalities and other local agencies. But
	this too will require resources. And once updated, the cadastral values must be maintained
	and updated every two to three years, otherwise the current valuation inaccuracies and
	inequities will quickly return. One approach that has proven effective in other countries is to
	dedicate a small portion of the property tax revenue for the maintenance of the assessment

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	and collection system. Determining the exact share will require a careful analysis of budget
	needs at both the central and local level, but some such allocation should be considered.


	21. One option for collecting additional required data is self-declaration by the
	taxpayer . It has proven feasible in other countries to require the taxpayer to complete an
	objective description of their property as part of the tax collection process. For sure, not all
	taxpayers will complete the additional form and some will submit erroneous data. The Land
	Agency will need an audit staff and strategies (perhaps for instance targeting regions in
	which particular problems are anticipated) as well as procedures to verify samples of
	submitted data, with well-publicized appeals procedures and penalties for those who
	deliberately falsify data. But many taxpayers will submit reasonably accurate data—and selfreporting would considerably reduce the cost of gathering additional information. Such an
	approach would not be perfect or costless, but might provide a fruitful way to accelerate
	progress.


	22. It will be important to review property tax exemptions, particularly those
	relating to agricultural land . This is quite consistent with Article 4 of the DF. Roughly
	60 percent of the land in Italy is currently exempted from the property tax. Broadening the
	base of the property tax further could substantially reduce tax rates or enhance local
	revenues. This is not to say that all exemptions are unjustified. Rather, the argument is that
	all exemptions from the property tax merit careful review to assure that their objectives
	remain valid and that they are sufficiently effective, including relative to other policy
	instruments, in achieving them.


	23. The reform of the property tax needs to be viewed within the wider context of
	strengthening fiscal federal relations . A need for some form of explicit equalization system
	is readily apparent from the distribution of IMU collections already received in the first
	installment in 2012: some regions collected twice the national average, while others are at
	only one-half the national level. Moreover, the equalization schemes already envisaged, but
	not yet implemented, under earlier fiscal federalism reforms will need to be reconsidered in
	light of the revisions to the tax base.


	Article 3 - _Estimating and Monitoring Tax Evasion_

	24. ‘Tax gap’ analysis of the kind envisaged—quantifying revenue losses from
	imperfect compliance—can be an important step toward fairer and more efficient
	taxation . Understanding the scale of these losses, whether from deliberate evasion or other
	sources of imperfect implementation of the tax rules, can suggest scope for increasing
	revenue in ways that do not penalize or further distort the behavior of the compliant, and
	which increase the horizontal equity of the system. And publicizing their extent can build
	public support for measures to do so.

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	25. Tax gap analysis can also help to monitor and incentivize the performance of the
	revenue agency and identify emerging risks . Caution is needed in comparing tax gaps
	across countries, as methodologies and local circumstances may vary widely. Comparisons
	for a given country over time, however, can be helpful both in assessing the effectiveness of
	interventions by the revenue agency and in identifying emerging compliance risks. It is
	striking, for instance, that the Revenue Agency’s estimates suggest that the IVA gap
	continued on its downward trend throughout the hard times of recent years—in most
	countries, slowdowns are associated with widening compliance gaps (as businesses finance
	themselves in part by delaying remitting tax). [20] This is a puzzle that may be useful to explore
	further.


	26. The DF refers only to ‘top-down’ analysis—based on national accounts—but
	there is a need for other methods, too . This is for two reasons:


	- _Quantifying the overall gap does not in itself help design interventions_ . Estimates of
	the aggregate gap in themselves are uninformative about the specific nature of
	imperfections in compliance, and hence for the design of responses by the revenue
	administration.


	- _There are some taxes for which the method is ill-suited_ . The DF calls for analysis to
	be provided for all the main taxes. The top-down method is relatively straightforward,
	and has already been developed in Italy for the IVA and IRAP since in each case the
	base is closely related to national account aggregates and rates do not vary greatly
	across taxpayers. It could also be applied to the IMU (along lines spelled out in
	Walters, 2012). For the IRES and IRPEF, comparing national accounts data with
	declared incomes can (and, we understand, has) been used to estimate the gap
	between the actual and potential tax base. More is needed in these cases, however—
	especially for the IRPEF—to estimate the gap in terms of tax payments themselves,
	since the tax theoretically due in these cases depends critically not only on economywide aggregate but also on their distributions across taxpayers.


	27. ‘Bottom-up’ and other forms of analysis are needed to address these limitations .
	While the full methodology of the former is rarely disclosed, the essence is to gross up
	revenue losses discovered on audit or criminal investigation, [21] using information on the
	criteria guiding audit selection, [22] to arrive at estimates for the full population. In this way, the


	20 See Sancak, Velloso, and Xing (2010).


	21 This assumes of course that audits succeed in identifying undisclosed amounts.


	22 If it is felt inappropriate to share these criteria outside the tax administration, such analyses would need to be
	conducted by the administration itself.

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	16


	U.K.—which has been a leader in this area [23] —arrives at estimates of the IVA revenue losses
	due to a variety of sources, such as non-registration and missing trader fraud, enabling it to
	identify specific areas in which interventions are likely to be most productive of revenue. For
	the IVA, this approach thus complements top-down results. In other cases—notably personal
	taxation—use of operational information, combined potentially with eclectic use of survey
	information (on household income and consumption, for instance) is the only realistic
	possibility. [24]


	28. Annual calculation and publication of the results of tax gap analyses, as
	envisaged in the _DF_ is important … While some details of the methods used will likely
	need to remain confidential, as they reflect operational practices, publication of the results
	themselves is critical to monitoring the revenue administration and sustaining public
	pressures for action. And annual calculation is needed to identify emerging challenges and
	trends.


	29. …but (as with some other aspect of the DF) the resources required should not be
	underestimated . While top-down methods for the IVA and IRAP have already been applied
	in Italy, these are, as noted above, in some respects the simplest cases. And while
	establishing an expert committee with oversight in this area is wise, (Article 2.1(c)), the
	expectation that this highly specialist and time-consuming work comes at no budgetary cost
	is unreasonable. It may be appropriate to cap this cost, but the cap cannot plausibly be zero if
	it is to be of adequate quality.


	30. To further guide reform priorities, there is scope to develop integrated analyses
	of weaknesses of both tax policy and administration . For the IVA, the overall shortfall of
	C-efficiency [25] from 100 percent can in principle be decomposed into terms relating to both
	the ‘tax gap’ in the sense above—perhaps better referred to as a compliance gap (as in IMF,
	2010b)—and a ‘policy gap’ reflecting the extent that the consumption actually taxed is not all
	brought into tax at the standard rate. For Italy, for instance, OECD (2010a) reports that Cefficiency in Italy was around 41 percent in 2008; combining this with a compliance gap of
	around 30 percent, as the studies of the Revenue Agency suggest, implies a policy gap also of
	around 41 percent: that is, revenue was around 41 percent of what it would have been had the
	then-standard rate been applied to the actual consumption brought into the IVA. These
	calculations are illustrative, in that they derive from distinct data sources that are not fully

	23 An excellent account of the methodologies used in relation to VAT, excises, income tax, social contributions,
	and other taxes is in HMRC (2011).


	24 Some techniques may be helpful even though they yield no estimate of the tax gap: a narrowing differential
	between the income and consumption reported in household surveys, for instance, can suggest improved
	compliance (Ivanova, Keen, and Klemm, 2005).


	25 This is the ratio of VAT revenues to the product of the standard IVA rate and consumption; Ebrill et al.
	(2001) discuss the strengths and weakness of this as an indicator of IVA effectiveness; OECD (2010a), which
	refers to this as the ‘VAT revenue ratio,’ discusses issues in its calculation.

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	17


	comparable. Nonetheless, they give some sense of the relative potential of design and
	compliance improvements: halving the compliance gap, maintaining all tax rates unchanged,
	would thus raise about 1.3 percent of GDP; halving the policy gap, [26] keeping the standard
	rate unchanged, would raise about 2 percent. [27] (The policy gap can in turn be decomposed
	into elements reflecting rate differentiation and the operation of exemptions: Box 1 illustrates
	for Italy). A similar approach has not yet been developed for other taxes, but there is
	potential to do so for those in which a uniform rate is a natural benchmark.



	![](assets/figures/cr-2012-280-fig-p0020-008.png)









	![](assets/figures/cr-2012-280-fig-p0020-002.png)

	![](assets/figures/cr-2012-280-fig-p0020-003.png)

	![](assets/figures/cr-2012-280-fig-p0020-004.png)

	![](assets/figures/cr-2012-280-fig-p0020-005.png)

	![](assets/figures/cr-2012-280-fig-p0020-006.png)

	![](assets/figures/cr-2012-280-fig-p0020-007.png)

	26 De Mooij and Keen (2012) show how the policy gap can in turn be decomposed into elements reflecting rate
	differentiation and the operation of exemptions.


	27 These calculations use the ratio of IVA revenue to GDP in Italy of 6 percent of GDP (OECD, 2010a).


	28 Ministero dell’Economia e delle Finanze, 2011, _Gruppo di lavoro sull’erosione fiscale: Relazione Finale,_
	http://www.mef.gov.it/documenti/open.asp?idd=28892.



	![](assets/figures/cr-2012-280-fig-p0020-001.png)

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	18


	Article 4— _Monitoring and Restructuring of Tax Erosion_

	31. Identifying and quantifying tax expenditures are critical for a complete
	understanding, and informed public discussion, of the overall impact of the tax system .
	‘Tax expenditures’ are government revenues foregone as a result of differential or
	preferential treatment, relative to some benchmark system, of specific sectors, activities,
	regions, or agents. They can take many forms, including allowances (deductions from the
	base), exemptions (exclusions from the base), rate relief (lower rates), credits (reductions in
	liability), and tax deferrals (postponing payments). Tax expenditures can have major
	consequences for the fairness, complexity, efficiency, and effectiveness of not only the tax
	system itself but, since they often serve purposes that might be (or are also) pursued through
	public spending, of the wider fiscal system.


	32. Article 4(1) of the DF is in line with best practice for the transparent and, no less
	important, regular disclosure of tax expenditures . It provides for the annual publication of
	a list of tax expenditures according to criteria and methods that will be supported by an
	external review body. This is consistent with—indeed goes somewhat beyond—the standards
	set out in the IMF _Code of Good Practices on Fiscal Transparency_ and the OECD _Best_
	_Practices for Budget Transparency_, which specify that information be provided at the time of
	the government’s annual budget on all fiscal activities, irrespective of the institutional
	arrangement under which they take place, including tax expenditures. [29]


	33. Very substantial work has already been undertaken on the quantification of tax
	expenditures in Italy . A report, commissioned by the _Ministero dell’Economia e delle_
	_Finanze_ (MEF), identifies and costs 720 measures of this kind, classified according to their
	intended purpose (Table 1 lists the 20 largest items). [30][,][31] One complication in quantifying tax
	expenditures, and comparing them internationally, is in identifying the appropriate
	benchmark regime against which to measure deviations—on which there is no general
	agreement. The MEF report, by choosing general taxation principles rather than current
	legislation as the benchmark, provides very extensive coverage by international standards—
	which gives a strong basis for meeting the requirement of this article and facilitates


	29 International Monetary Fund, 2007, _Code of Good Practices on Fiscal Transparency_, Article 3.1.3,
	http://www.imf.org/external/np/fad/trans/code.htm and OECD, 2002, _Best Practices for Budget Transparency,_
	http://www.oecd.org/dataoecd/33/13/1905258.pdf _._


	30 Ministero dell’Economia e delle Finanze, 2011, _Gruppo di lavoro sull’erosione fiscale: Relazione Finale,_
	_http://www.mef.gov.it/documenti/open.asp?idd=28892._


	31 One set of items listed, but not quantified, are those tax expenditures mandated by EU rules. Though natural,
	in that there is no possibility of recovering these revenue losses, and common practice, in a wider context this
	does risk these provisions escaping the scrutiny they deserve.

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	Table 1. Summary of Largest Tax Expenditure Items [1]


	Description Value Percent Comment
	(billions) GDP


	Personal Income Tax

	Tax credit for wage income from employment, pensions, self- 37.73 2.40 This regime is a substitute for the fact that Italy has no
	employment and similar income lower personal income tax threshold


	Tax credit for dependent relatives 10.50 0.67 This benefit is sometimes considered a measure of ability
	to pay and part of the benchmark system rather than a tax
	expenditure



	Tax exemption (excluded from base) for contributions to welfare
	and pension schemes for employees


	Lower PIT rates for payment of separation allowances and
	”golden handshakes”


	Tax exemption (excluded from base) for compulsory
	contributions to welfare and pension schemes for self-employed


	Tax credit for medical expenses and health assistance services


	Tax exemption (excluded from base) for income from the
	"family support" check


	Substitute tax (10 percent) on productivity related bonuses



	10.10 0.64 Pension contributions are excluded and pension income is
	taxed


	5.10 0.33 Unwinds tax progressivity that would come from what is
	effectively multi-year income in one period


	4.31 0.27 Pension contributions are excluded and pension income is
	taxed


	Considered to have welfare objective


	2.36 0.15

	1.83 0.12 The Family Support check is an income support
	expenditure program run by INPS



	1.48 0.09



	Partially a labor market policy to incentivize decentralized
	bargaining



	Lower PIT rates for payment of arrears to employees 1.22 0.08 Unwinds tax progressivity that would come from receiving
	past years' income in the current period



	Tax credit for interest paid on mortgage for principal residence
	(or construction of principle residence)


	Various financial substitute taxes (lower rates) on interests,
	dividends, capital gains and other forms of return



	1.34 0.09


	Capital Taxation


	13.17 0.84 Substitute tax regime by-passes the requirement to tax
	capital income according to the progressive PIT schedule
	by mimicking a DIT regime

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	Table 1. Summary of Largest Tax Expenditure Items (concluded)


	Description Value Percent Comment
	(billions) GDP



	Reduced rates on the interest and bonuses from government
	securities and other forms of public debt e.g., postal bonds

	Substitute tax in lieu of registrations, stamp duty, mortgages
	etc. for government concessions


	Domestic and foreign-source dividends received by a resident
	corporate taxpayer are 95 percent exempt from IRES.


	Substitute tax (16 percent) for capital gains from goodwill,
	trademarks and other intangible assets resulting from
	extraordinary operations, such as restructuring and mergers

	Full deduction from IRAP tax base of SSC costs related to
	permanent workers; full deduction from PIT and CIT tax base
	of IRAP on labor costs (plus partial deductibility of interests
	costs) [2]

	Substitute tax for capital gains arising from "extraordinary"
	operations, such as mergers, divisions, and transfers of
	companies


	Substitute tax on capital gains from revaluation of assets held
	on the balance sheet at historical cost



	1.38 0.09 Supports government bond market


	2.23 0.14


	Corporate Income Tax


	8.38 0.53 Measure to avoid double taxation


	7.43 0.47 Tax provision to promote dynamism and incentivize new
	activity


	6.69 0.43 Provision mainly to reduce labor tax wedge


	6.40 0.41 Measure to favor restructuring, which brings higher
	depreciation charges (lower taxes) from corporate in the
	future


	4.18 0.27 Generates current revenue for the authorities in exchange
	for higher depreciation charges (lower taxes) from
	corporations in the future


	Value-added Tax



	VAT reduced rate (10 percent) 24.60 1.57 Mainly food items, cultural/educational products and new
	dwellings


	VAT reduced rate (4 percent) 14.60 0.93 Mainly food items, medical and pharmaceutical products,
	restaurants and hotels, new owner-occupied housing

	Sum of largest tax expenditure items 167.27 10.66


	1 Earlier estimates of tax expenditures related to the property market are excluded in light of the recent changes to property taxation.
	2 Full deduction of IRAP labor costs from PIT and CIT was introduced in Law 214/2011 and is not explicitly costed in the table, which instead includes estimates based on earlier
	lump-sum deductions per employee.

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	21


	subsequent updating. [32] One especially welcome feature of the MEF study that will be
	important to preserve is the indication of the intended purpose of each item.


	34. Quantifying tax expenditures is only an (essential) first step to analyzing them
	and—as importantly, Article 4(2) envisages—reducing those not generating offsetting
	benefits . [33] This is not always straightforward, in that their impact on behavior is often hard to
	identify; even then, however, some sense can be given of whether it is plausible that the
	response could be large enough to warrant the revenue cost incurred. It is also important to
	compare tax expenditures with alternative spending measures and, more generally, to assess
	them in the light of what can be achieved on the spending side. For example, some of the tax
	expenditures with social objectives, such as the dependent relative tax credit or the IMU
	credit for children still living at home, potentially overlap with the objectives of social
	assistance programs run by the National Institute for Social Security (INPS) and the relative
	costs and merits of both delivery options need to be considered. [34]


	35. Tax expenditures can compromise fairness and efficiency, may be poorly
	targeted to their intended beneficiaries—and are vulnerable to lobbying . Tax
	expenditures can be a poor way of pursuing equity objectives. In a progressive tax system,
	for instance, any policy that reduces taxable income will benefit most those in the highest
	marginal tax bracket (and convey no benefit to those out of the tax system)—a strong
	argument for using tax credits (or spending measures) instead. And while the large tax
	expenditures associated with the reduced IVA rates in themselves increase progressivity,
	much of the benefit from them will go to the better off, so that the same equity objectives
	could likely be pursued at less revenue cost through social spending. Tax expenditures can
	also create unintended or unwelcome distortions: the current deduction of mortgage interest,
	for instance, may have been appropriate when imputed income from owner-occupation was
	effectively taxable, but now simply encourages leveraged housing finance. And special
	interest groups may find it easier to argue for tax breaks than for explicit spending support—
	those tax expenditures that benefit particular sectors should be carefully scrutinized.


	36. But not all tax expenditures are necessarily bad . In some cases, they may replicate
	effects that are treated elsewhere as part of the benchmark system: the largest single tax
	expenditure in Italy, for instance, is a tax credit that serves essentially the same purpose (of
	excluding the lowest income from tax) as basic tax-free amounts served elsewhere. Many

	32 Since 2010, annual State Budget documents have included a list of all tax expenditures, but only at the central
	government level and measured against current legislation—a narrower benchmark than that of the MEF
	Report.


	33 Some large tax expenditures have already been cut with recent reforms. The revaluation of cadastral values
	will eliminate previously identified tax expenditures related to property and transfers taxes.


	34 Some work has been done on the overlap in terms of objectives between social welfare programs and tax
	expenditures, but more is needed to understand the overlap in terms of beneficiaries and the cumulative effect in
	terms of public support to target groups.

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	22


	countries offer preferential tax treatment for pension savings: how far doing so stimulates
	additional savings is contentious, but the commonality of the practice needs to be recognized.
	Delivering benefits in the form of tax reductions may in some cases be more administratively
	convenient than establishing new special schemes.


	37. Particular caution is needed in aggregating tax expenditures because the
	aggregate revenue gain from eliminating two tax advantages may differ from the sum of the
	gains from eliminating each in isolation . [35]


	Articles 5–10 - _Chapter II: Fighting Tax Evasion and Revising the Relationship between_

	_Tax Authorities and Taxpayers_

	38. One of the most important—and welcome—aspects of the DF is the focus on
	reducing tax uncertainties faced by taxpayers and tax authorities, while guarding
	against avoidance/abuse . There is a clear need, as private sector representatives and the
	authorities agree, for greater certainty and clarity in identifying and dealing with potentially
	contentious tax matters.


	39. Three broad areas of action proposed in the DF together offer a coherent
	framework for improvement : reassuring taxpayers by reducing the scope of criminal
	actions (Article 8), providing a clear definition of, and protection against, abusive schemes
	(Article 5), and fostering transparency and responsiveness in identifying and managing
	uncertain tax positions (Article 6). [36]


	Decriminalization

	40. The rapidity with which tax matters currently lead to criminal charges is a
	major concern of taxpayers . Once the sum at issue exceeds 10 percent of declared income
	or €2 million, criminal charges may be levied—and these amounts are, for any sizable
	business, quite low. Thus, issues that would be administrative matters in other countries
	quickly escalate into criminal ones. Ultimately, it seems, criminal sanctions are rarely (if
	ever) imposed when there is no question of tax fraud. Nonetheless, exposure to criminal


	35 Suppose, for instance, that some sector benefits from both a narrowed tax base and a reduced tax rate. Then
	the sum of the tax expenditures associated with each understates the revenue gain from eliminating both
	(because, for instance, the revenue gained by increasing the rate is greater once the base has been broadened).
	The direction of bias, could, however, be in the opposite direction, with the aggregate of tax expenditures
	overstating the revenue gain from eliminating all.


	36 Many of the provisions in these articles reflect detailed matters of practice and legal structures in Italy, and
	are not commented on here.

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	23


	charges imposes personal stress and carries reputational risks for individuals and firms [37] (and
	can be hard to explain to foreign investors); and carrying the formal possibility of penalties
	that are never imposed, because too harsh, undermines the credibility of the wider tax
	enforcement system.


	41. Criminal sanctions are generally, and appropriately, reserved in most countries
	for matters of tax fraud or evasion—and Article 8 aims at establishing this in Italy, too .
	The hardship that criminal investigation imposes presumably gives a very strong incentive
	for taxpayers to be fully compliant. But it is also clearly perceived as in a fundamental sense
	unjust, and less objectionable ways to encourage compliance can be found (as other
	provisions in this chapter, discussed below, aim to do). Details beyond the scope of this
	report clearly matter (such as whether the maximum jail term of six years envisaged is
	appropriate). What is clear, however, is that removing the routine application of criminal
	charges would greatly increase the confidence of the private sector, and do little to hamper
	effective tax administration.


	A General Anti-Avoidance (or ‘Abuse’) [38] Rule (GAAR)

	42. It seems widely agreed that recent jurisprudence has increased uncertainty as
	to—and widened the range of—the circumstances in which tax schemes will be struck
	down . Article 37-bis [39] sets out a general principle of artificiality in tax arrangements, though
	limiting its application to specified transactions. More recently, however, a series of Supreme
	Court decisions, based on constitutional principles, appear to have widened and muddied the
	circumstances in which tax schemes may be overturned (even, it was reported to the mission,
	when the tax law explicitly offered the course taken as an option for the taxpayer).


	43. Adoption of a GAAR, as envisaged in the DF and as done in many though by no
	means all countries, can ease this uncertainty—for both taxpayer and tax authorities .
	Details vary, but the essence of a GAAR is to allow tax authorities to disregard arrangements
	that have no clear business rationale other than to reduce tax liability. They thus at least make
	clear to all concerned what the basic test will be.


	44. Paragraph 1 of Article 37-bis provides a natural starting point for a GAAR,
	though many important details would need to be specified . This provision is in just the
	spirit of a GAAR, stating that


	37 Indeed it is in principle possible for criminal charges to be upheld even if the taxpayer wins on the tax issue in
	dispute.


	38 Terminology in the U.K., where adoption of such a rule is anticipated, replaces ‘avoidance’ with ‘abuse’.


	39 Of Presidential Decree No. 600 of 29 September 1973; this entered into force in 1997.

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	24


	_The tax authorities have the power to disregard for tax purposes acts, facts and_
	_legal arrangements, also in their functional connection, lacking a valid business_
	_purpose, aimed at by-passing rights and duties provided for by tax rules, and at_
	_obtaining tax reductions and tax reimbursements which would not be legally_
	_available._ [40]

	45. This appears to have been widely accepted as general principle, and so—with
	removal of the limitation to specific transactions that follows in Article 3—could, it would
	seem, provide a reasonable basis for a GAAR in Italy. But much more is needed than this, for
	instance: to ensure that the rule does not overturn the purpose of any deliberate tax incentives
	(which only work in so far as they lead precisely to decisions that would have no business
	rationale in their absence); and to determine the applicability of administrative penalties (as
	well as interest) for disallowed schemes (to avoid giving taxpayers a ‘one-way bet’ in testing
	contentious schemes). But the essential notion of avoidance/abuse in 37-bis seems to have
	widespread support.


	46. Establishing an Advisory Panel can help build taxpayers’ trust in the application
	of a GAAR . Such a panel of independent experts is proposed in the U.K., for example: it
	would have no powers of decision but would be free to comment on decisions in specific
	cases. This has played an important part in building acceptability for proposals in the U.K.
	France has a broadly similar committee whose advice is non-binding but places the burden of
	proof on the party whose position it does not support and might also serve a useful purpose
	in Italy, given the recent dissatisfaction with the application of anti-avoidance decisions. [41]


	Enhancing the relationship between taxpayers and tax administration

	47. There is increasing interest in building more transparent and cooperative
	relationships between tax administration and taxpayers—especially the largest—along
	the lines of Article 6 . This means taking transparency and dialogue to levels beyond those
	usual in large taxpayer offices, by establishing agreed rules of behavior for both sides. OECD
	(2010b) sets out a framework for such a relationship in relation to banks, and such schemes
	have been adopted in South Africa and the U.K.—this also seems the be the first intended
	group in Italy. [42] This framework anticipates that taxpayers would commit, for instance (and
	inter alia), not to engage in aggressive tax planning, and to notify and discuss with the
	revenue administration tax issues subject to significant uncertainty; in return, the tax


	40 Translation for this report.


	41 A consultative committee on anti-avoidance rules operated in Italy from 1998 to 2007, but was criticized for
	inconsistency and lack of independence from the tax administration.


	42 There are other examples not limited to banks: under the Dutch Horizontal Monitoring program initiated in
	2005, for instance, the taxpayer commits to notify the Dutch Tax Administration of any issues with possible and
	significant tax risk; in return, the revenue authority provides timely advice on the disclosed issues

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	25


	administration might commit to consider sharing its assessment of such schemes or providing
	advance rulings. Penalties might also be reduced in relation to schemes that were notified to
	the tax administration.


	48. There is scope for mutual benefit in such arrangements, making the envisaged
	experimentation very worthwhile . Experience in relation to commitments not to engage in
	aggressive tax practices has not been wholly encouraging, [43] but the potential for mutual
	benefit from a habit of disclosure seems clear. Both sides enjoy reduced uncertainty, and
	theory suggests further benefits: since positions disclosed are likely to be ones for which the
	taxpayer has a strong case, the tax administration gains from its greater ability to focus on
	undisclosed tax positions and the increased likelihood that strong positions will not be
	challenged. [44] Experience with such schemes is generally regarded as encouraging, [45] though
	ultimately an ability to identify and challenge undisclosed positions, and ensure strong
	compliance more generally, remains critical—suggesting that, as appears to be the intention
	in Italy, it is wise to begin by applying the scheme to a small and critical group of taxpayers.


	Article 11 - _Unification of taxation on business income and on income from self-employment_

	_and provision of lump-sum schemes for smaller taxpayers_

	49. Neutrality in the treatment of capital income has been significantly improved by
	recent reforms, especially by introduction of the ACE . This eliminates the tax on the
	normal return to equity at the level of the business. It thus neutralizes the preferential tax
	treatment of debt finance, which was present under the old system. With the ACE, interest
	and normal equity returns are taxed only at a personal level. Returns above that are taxed at
	both the corporate and the individual level.


	50. Present tax arrangements are not neutral, however, between different
	organizational forms . The concern raised is that retained profit of a corporation is subject to
	IRES, and liable for tax at personal level only if the profit is realized; corporations can thus
	postpone personal tax payment by deferring realization. Partnerships and sole
	proprietorships, however, do not have this option as their entire accrued business income is
	liable for IRPEF. On the other hand, to the extent that income is distributed, these groups are
	generally tax favored, since the top marginal rate of the progressive IRPEF—which is an
	upper limit to the average rate—is either exactly equal to (for qualified shareholdings) or one


	43 Of one scheme in the U.K., a treasury spokesman is reported as saying: “The government is clear that these
	are not transactions that a bank that has adopted the code should be undertaking” ( _Guardian_, “Barclays £500m
	tax loophole closed by Treasury in rare retrospective action”; 28 February 2012, available at
	http://www.guardian.co.uk/business/2012/feb/28/treasury-closes-barclays-tax-schemes).


	44 De Simone, Sansing, and Seidman (2012).


	45 The OECD’s Forum of Tax Administration is currently undertaking a review of its use and impact.

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	26


	percentage point above (for non-qualified shareholdings) the effective average rate implied
	by the combination of the IRES and dividend taxation (42 percent). Moreover, the ACE itself
	is particularly beneficial for those paying IRPEF rather than IRES, both because the notional
	return to equity is then deducted at a higher rate (at least for those with reasonably high
	incomes) and because they enjoy the allowance with respect to all equity, whereas IRES
	payers receive it only in respect of equity built up since the introduction of the ACE.


	51. The _Imposta sul Reddito Imprenditoriale_ (IRI) proposed in Article 11(a) of the DF
	would substantially ease these distortions . The IRI, the team understand, would be
	levied—at the same rate as the IRES—on retained earnings; all outflows to owners or
	managers would be deductible (as of course would be the ACE allowance) but fully taxable
	at personal level under the IRPEF (with no attempt to differentiate between returns to labor
	and capital incomes). Firms liable to IRI would thus be taxed exactly like corporations with
	respect to their retained earnings; and the difference in respect of distributions would depend
	on the gap between the IRPEF rate and the effective combined rate of IRES and dividend
	tax—which at higher income levels is small. The reform would thus bring considerably
	greater neutrality between those currently taxed under the IRES and partnerships, sole
	proprietors and others now taxed under the IRPF. (Greater neutrality would also be served, it
	should be noted, by narrowing differences in tax bases, for instance in the period for which
	losses may be carried forward). This would be an important finishing touch in Italy’s move
	toward a business-neutral tax for entrepreneurs.


	52. While the aim of the IRI reform is to improve neutrality, the likely impact on
	investment is also of interest—but uncertain . Clearly, the tax rate on reinvested earnings
	will fall for sole proprietorships and partnerships entering the IRI regime. But this may not
	make retention-financed investment more attractive for them, since tax is ultimately due on
	the consequent earnings when they are paid out—at the IRPEF rate, both now and under the
	IRI regime. On the other hand, by increasing the availability of internal finance the reduced
	rate on retained earnings may help overcome barriers to investment from any capital market
	imperfections that restrict these firms’ access to external finance. The impact on investment
	from this aspect of the reform is thus unclear, and merits further study: but the potential
	neutrality gains seem clear, and the impact on overall investment may in any event be
	dominated by wider effects on the business climate from the full package of reforms.


	53. The special regime for very small businesses envisaged in Article 11(b) has some
	appeal, though alternatives could also be considered . The cost of tax compliance for
	micro taxpayers is often disproportionate compared to their tax payments, so that a simplified
	regime for this group can have significant appeal. A lump-sum payment is clearly the
	simplest of all. However, the risk of the lump-sum approach is that the revenue
	administration loses control over businesses if no, or very little, information is collected
	about taxpayers’ income. To keep them within the administration’s control, an alternative
	regime that could be considered is the cash-flow tax. Such a tax could well be extended to
	other, somewhat larger firms that do simplified accounting. The advantage of the cash-flow
	tax is that it offers relief for small businesses that is equivalent to the ACE (which is not

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	granted to firms with simplified accounting). Note, however, that the introduction of a cashflow tax might require a transitional period, as some firms might have significant interest
	obligations (which would not qualify as a cost under a cash-flow regime).


	54. Making the IRI optional, as envisaged in Article 11(c), runs significant
	budgetary risk . Optionality is obviously attractive for business: they could, and presumably
	would, all else equal, opt for whichever regime offers them the lowest tax liability. The
	converse is of course a risk to government’s revenue. Moreover, options can tend to
	significantly complicate the tax administration, increasing both administration and
	compliance costs. If a compulsory regime would be too burdensome for some companies in
	the short term, optionality might be considered during a short transitional period. But
	ultimately, there should ideally be a single regime for all businesses other than the smallest
	enterprises. Determining the set of companies for which the IRI is to be mandatory would be
	a critical element in the final design of the reform.


	Article 12 - _Rationalization of the determination of business income and net production_

	55. This provides in general terms for the clarification and review of a wide range of
	tax provisions, highlighting especially those relating to international matters . Little
	detail is provided on which comments can be offered; the broad aim of addressing
	uncertainties, eliminating unnecessary complexities (in a tax system that has a fairly clear
	overarching structure but many complicated details), and adapting to changing circumstances
	is an objective clearly to be welcomed. The international environment in which tax policy is
	shaped, in particular, is changing rapidly, so that tax rules require ongoing monitoring and
	revision (not least in the light of emerging European case law). One such issue raised in
	several discussions, by both the private sector and the authorities, is the concern that current
	CFC rules are significantly more burdensome than elsewhere. It is important that such rules
	serve the purpose of safeguarding revenue by discouraging avoidance of taxation through the
	accumulation as passive income in low tax jurisdictions of income more properly taxable in
	Italy. This though needs to be balanced against the needs to provide a certainty to business
	that they currently feel is lacking, and to limit costs of administration and compliance. This
	area is one clearly needing close attention.


	56. The ACE can change the significance of some of the issues flagged in the article .
	For example, accelerated depreciation for tax purposes was favorable for companies under
	the previous IRES system because it offered a more valuable deduction due to discounting.
	Under a ‘textbook’ ACE, however, accelerated tax depreciation would make no difference
	for firms in the sense that faster depreciation in this period leads to a lower value of equity
	next period and so reduces the amount of ACE that is granted in later years. The overall
	effect would be that the rate of depreciation has no impact on the present value of the

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	associated tax deduction. [46] Differences would arise, of course, in terms of cash-flows to the
	firm, and to the extent that the tax rate may change over time. Nonetheless, the ACE would
	in principle make the precise determination of depreciation rates less material than under a
	standard income tax. This is only so, however, if the notional return is calculated on equity
	that reflects tax rather than accounting depreciation. This is not the case in Italy, however—
	implying that the ACE does not fully realize its neutrality potential. Similar issues arise in
	relation to the limitations to the deductibility of loan devaluations (mentioned in
	Article 12(1)(a))—which imply that banks are forced to spread these losses over an 18-year
	period—which will have no effect on the net present value of the tax payments if losses
	deducted against tax also reduce equity for tax purposes. [47] Whether the ACE indeed achieves
	this effect requires closer attention than the mission has been able to give to the similarities
	and differences between book and tax equity, and regulatory capital.


	Article 13— _Rationalization of IVA and other indirect taxes_

	Grouping rules for IVA

	57. Significant distortions can arise from unrecovered input IVA in exempt
	activities—most notably in the financial sector . Exemption means that while IVA is not
	charged on sales, IVA paid on inputs cannot be recovered, with effects that cascade through
	the system as the prices charged by exempt businesses to other firms increase to reflect their
	increased input costs. This violates the fundamental aim of the IVA of taxing consumption
	rather than production, generating social costs of three types:


	- _A distortion of real decisions_ as businesses rearrange their affairs to avoid this input
	tax—including by artificial vertical integration of their activities (and, indirectly, as
	the effect on businesses input costs ripple through the production chain);


	- _A competitive disadvantage_ within the EU, [48] to the extent other member states charge
	lower IVA rates on exempt activities—of particular concern in Italy given a
	perception that banks are taxed more heavily there than elsewhere, for instance
	through the limitation of deductibility to 95 percent of interest paid;


	46 This neutrality property of the ACE depends on how exactly it will be applied. In particular, unrealized
	depreciation should appear as equity on the balance sheet of the firm as it is used for tax purposes.


	47 Of course, immediate realization would affect the liquidity of the bank. A 2011 reform provides that deferred
	tax assets of banks can be transformed into liquid assets as the central government recognizes it as an eligible
	claim, independent of a bank’s future profitability.


	48 Exports to third countries of financial services and other exempt items are generally zero-rated (that is, input
	IVA is recoverable).

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	- _A loss of_ _transparency_, as the effective rate at which final consumption items are
	taxed reflects also the cascading input taxes, in ways reflecting complexities of
	production relationships.


	58. While these difficulties potentially arise in relation to all exempt activities, they are a
	particular concern—in Italy as elsewhere—in relation to the financial sector (exempt on the
	bulk of its activities) and, it seems, education and health services.


	59. There is a strong case for adopting IVA grouping rules, consistent with EU
	requirements, [49] proposed in the DF _,_ to ease these distortions . [50] By enabling companies
	within a group to be treated for IVA purposes as a single taxpayer, such rules eliminate IVA
	on intra-group transactions. They do not eliminate the difficulty, since unrecovered input
	IVA will still arise on purchases from companies outside the group—but they can ease it,
	both directly and indirectly, by making artificial schemes to avoid unrecovered input IVA
	redundant. Sixteen member states currently allow IVA grouping, though with significant
	differences in detail.


	60. Grouping will reduce revenue, and planning possibilities need attention . The
	revenue loss is simply the converse of the tax saving to grouping companies (and since
	grouping would be optional, taxpayers would choose to group only if it reduces their
	liability). The Italian Bankers’ Association reported unrecovered input IVA in Italy of around
	€1.7 billion, and an estimate (some years old) that grouping would cost around €500–600
	million. (In the U.K., the cost of grouping was put at around £800 million in 1998). There are
	also avoidance issues to address. Some countries, for instance, have allowed non-taxable
	persons to be included in IVA groups: this provision (currently the subject of infringement
	proceedings against some member states) allows the recovery of input tax that would not be
	recoverable even if, for instance, exemption were replaced by zero-rating. [51] The point appears
	to have been especially important in relation to holding companies, which are likely to be
	non-taxable persons (being regarded as conducting no economic operations) but nevertheless
	incur substantial IVA on management and other services that they would not normally be
	able to recover. [52]


	49 Article 11 of the VAT Directive (2006/112/CE, 28 November 2006) allows member states to offer VAT
	grouping (and requires prior consultation with the VAT Committee) that, but does not provide common rules;
	Commission (2009) sets out the European Commission’s views on how these should be applied. Van Doesum
	and Van Norden (2009) argue that these views are overly restrictive on the application of grouping.

	50 By reducing input tax, grouping can also help companies otherwise due refunds but experiencing delay or
	difficulty receiving them.


	51 As a matter of economic principle, one might argue that such input costs should indeed be recoverable to
	avoid the distortions set out above.


	52 Other planning schemes revolve around timing transactions when in and out of the group (supplying services
	to a group member while in the group, purchasing them from third parties when outside): see Millar (2004).

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	61. While grouping will increase the competitiveness of financial institutions within
	the EU, it may also somewhat exacerbate concerns—not unique to Italy—that financial
	services are under-taxed relative to other commodities . The IVA exemption of financial
	services—which is standard in the EU, and very common elsewhere—reflects conceptual
	difficulties in levying the tax on margin-based services. [53] Simply eliminating input taxation
	(by, for instance, zero-rating financial services) would eliminate the difficulties noted above,
	but would also mean that the final consumption financial services are favored relative to
	other goods and services in not being subject to IVA. [54] There has been long-standing
	discussion within the EU of cash-flow forms of taxation by which the IVA might be applied
	to financial services, but these remain some way from implementation. [55] An alternative
	suggestion has been to instead apply a ‘Financial Activities Tax’ (FAT) on the sum of wages
	and profits of financial institutions, as an (imperfect) substitute for the IVA. In Italy, the
	IRAP on financial institutions already has much the same structure as a FAT; and is applied
	at a somewhat higher standard rate than that for the generality of sectors (4.65 percent rather
	than 3.9 percent), which goes some way to address the distortion between sectors at issue in
	this context. The limitations on interest deductibility may have a somewhat similar effect. A
	full assessment of the tax treatment of the financial sector in the light of lessons learned since
	the crisis of 2008, however, is beyond the scope of this report.


	Registration duty and similar

	62. The review of the wide range of transactions taxes envisaged is welcome, given
	their potentially distortionary effects . A strong case can be made for using some of the
	revenue that might be raised by the revaluation of cadastral values, in particular, to reduce
	those most likely to adversely affect transactions in the housing market.


	Article 14 - _Environmental taxation_

	63. The strong interest in more effective environmental taxation signaled in
	Article 14 is welcome . Italy was among Europe’s frontrunners in green taxation during the
	late 1990s, when it introduced several new environmental taxes and charges on, for example,


	53 The difficulty, for instance, is in allocating the spread between a bank’s borrowing and lending rates (which
	reflect the value of the services it provides), between the two sides of the transaction—as is needed for crediting
	mechanism to work. On this, and the cash-flow approach mentioned below, see for example, Ebrill et al (2001).


	54 The deeper issues here—whether more revenue would be raised by applying an effective VAT to financial
	services than is raised by the current denial of input credits, and of whether finial services ought to be taxed at
	all—remain contentious. See, for instance, Huizinga (2002) and Lockwood (2010).


	55 Other schemes to limit input taxation of financial institutions have been proposed and implemented in some
	non-EU countries, such as zero-rating of dealings with registered businesses (as in New Zealand). Huizinga
	(2002) proposes combining this with cash-flow treatment of transactions with all others.

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	NOx emissions, batteries, lubricant oil, waste, water, and noise. In 1998, it also launched an
	ambitious proposal for a carbon tax, [56] which was foreseen to gradually increase over time. At
	this point, Italy was among the five European countries with the highest share of
	environmentally related taxes: well over 3 percent of GDP. Since then, however, the
	importance of green taxes has declined. The carbon tax, introduced in 1998, was repealed a
	year later when oil prices increased. Other environmental taxes did not keep pace with GDP
	and by 2010, Italy ranked twelfth in the EU in terms of the revenue-to-GDP share of
	environmental taxes—a performance that falls short of Italy’s past leadership position.


	64. A leading feature of Article 14 is the envisaged enactment of the principles set
	out in the proposed Energy Tax Directive, “coordinated” with its implementation
	elsewhere . This proposed directive [57] aims to better align the taxation of energy products with
	the energy and climate change objectives of Europe’s 2020 strategy, [58] and in particular to
	secure that emissions not within the current EU-Emissions Trading Scheme (EU-ETS)—
	which currently covers only around half of EU carbon emissions [59] —receive broadly
	comparable fiscal treatment to those within. Its coverage would thus be primarily emissions
	from motor fuels (diesel, gasoline, LPG), heating fuels used by firms and households (fuel
	oils, kerosene, gas, coal) and the agricultural sector. Minimum excise rates on fuels, for
	instance, would be revised to include a minimum CO2-related component, based on a price of
	€ 20/t CO2 and a minimum energy related component of € 9.6/GJ for motor fuels and
	€ 0.15/GJ for heating fuels.


	65. The extension of effective and broadly comparable carbon pricing to sources
	outside the EU-ETS is a coherent objective [60] —but at rates in the current draft directive


	56 Article 8 Law No.448/1998.


	57 COM(2011)/169. The proposal might be revised in light of the negative (but non-binding) vote of the
	European Parliament in April 2012. The Directive requires unanimity in the European Council to be enacted.


	58 This, for example, sets targets for CO2 emission reductions, renewable energy and energy efficiency: see
	http://ec.europa.eu/europe2020/.


	59 The EU-ETS (Directive2003/87/EC) requires covered firms to hold allowances for their carbon emissions.
	These can be traded on the EU market, which ensures that the marginal cost of emission reduction is minimized
	across covered activities. The EU-ETS covers emissions from around 11,000 installations (power stations,
	combustion plants, oil refineries, iron and steel, cement, glass, lime, bricks, ceramics, pulp, paper, and board).
	Since 2012, the aviation sector is also covered. In 2013, the scope of the ETS will be extended to other sectors
	(petrochemicals, aluminum industries) and other greenhouse gas emissions (N2O and per fluorocarbons).
	Countries will also auction more allowances, instead of foregoing revenue by grandfathering them as was done
	before.


	60 As a response to the highly volatile and often low permit prices under the EU-ETS (which fails to strike the
	right balance between incremental abatement costs at different points in time and discourages firms from
	investing in low-carbon technologies) schemes have been proposed to impose a minimum carbon price on ETScovered sources as a way of putting a floor on carbon prices: the U.K., notably, will impose a carbon price floor
	through a levy on power stations as of April 2013, with the permit price and levy summing to at least a

	(continued)

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	would hardly affect Italy . The efficiency advantages of carbon pricing as a way to reduce
	emissions is stronger the wider is the set of emissions covered: otherwise, the cheapest
	methods of reducing emissions may not be exploited. For practical purposes, however, the
	draft directive would have little direct [61] relevance to Italy, as the excise minima proposed are
	below the current rates of excise duty. [62]


	66. The structuring of fuel prices pointed to in the draft directive holds the prospect
	of a more thoughtful way of setting fuel excises . As in many countries, these taxes have
	been shaped by a series of essentially ad hoc choices: they may be seen as charging for road
	use, to correct for congestion externalities, or as simply revenue-raising instruments. Careful
	consideration of each component can lead to more coherent policy design: wider use of
	congestion pricing, for instance (now only applied in Milan), might allow some reduction of
	fuel excises. In this context, concern has been expressed that the principle of a minimum tax
	related to energy generated as such (which perhaps has a less clear rationale than the
	minimum carbon-related tax) may prove unduly onerous in relation to gas products.


	67. Earmarking a large part of the revenue from new green taxes, [63] envisaged in
	Article 4, may have political appeal, but could significantly reduce their potential
	benefit . The DF provides that any new carbon tax revenues be used “as a matter of priority”
	to finance the promotion of renewable energy sources and measures that help disseminate
	low-carbon technologies. There is logic in this as providing reassurance that the funding of
	renewable energy policies will be sustained, to the extent that—as appears to be intended and
	appropriate—there is a corresponding cut in the distorting tax on electricity that currently
	finances renewables. More generally, earmarking can increase the acceptability of new taxes
	when it is feared government will make ineffective use of the additional revenue they raise. [64]
	But the value of another public euro spent on promoting renewable energies or low-carbon
	technologies needs to be weighed against its value in alternative uses, including borrowing or
	tax reductions. If, as seems especially plausible in present circumstances, these alternatives


	minimum all-in carbon price set by the government. Such schemes have the merit of ensuring some revenue to
	the government (when the floor price is binding), even when permits are allocated for free; they have the
	disadvantage, however, that when the minimum tax exceeds the permit price, the fall in the demand for permits
	in the country adopting the scheme will lead, through a reduction in the permit price, to an exactly offsetting
	increase in emissions (and reduced incentive to invest in cleaner technologies) elsewhere. Moreover, the
	emission reductions in the country adopting such a scheme might be more costly at the margin than in the rest
	of Europe in light of the higher carbon price.


	61 There would be an indirect and broadly beneficial indirect effect from the impact elsewhere, not only through
	reduced emission but also through an equalization of input costs.


	62 Cingano and Faiella (2011) simulate scenarios of an additional carbon tax on the transportation sector in Italy,
	suggesting that significant emissions reductions can be achieved.


	63 Revenues will also increase as more allowances are auctioned from 2013.


	64 Brett and Keen, (2000).

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	yield higher social benefits, then earmarking will carry potentially significant costs. This
	makes it especially important to undertake cost–benefit analysis of these forms of spending,
	rather than simply forcing an automatic link by earmarking.


	68. Additional revenues from green taxes could, for instance, be used to reduce
	income taxes or social security contributions—a ‘green devaluation’ . Current tax wedges
	on labor income in Italy are high: cutting them could increase competitiveness, as discussed
	in Section I, and although (in contrast to financing this by an increase in VAT or residential
	property taxation) the increased environmental tax would likely quickly increase product
	prices to the extent that it bears on inputs, this would be a move toward socially more
	efficient pricing. Indeed with efficient recycling of the additional revenues raised, the
	economic costs of a green tax reform might be negligible, while the environmental benefits
	are significant. [65]


	Article 15— _Gambling_

	69. Article 15(1) seeks to rationalize and simplify the disparate laws governing
	gambling, including the excise tax regime . [66] Its primary objectives are to bring regulations
	in line with EC standards; simplify a complex regulatory framework; and better align tax
	base and rates across different games.


	70. The current structure is indeed complex, and implicit rates have been falling .
	Each form of gambling has its own legislative framework setting out tax bases, rates, and
	minimum payouts. Table 2 shows that implicit excise rates on different games—expressed
	both relative to ‘gross wagers’ (sales revenue, in the form of bets placed) and ‘gross
	revenues’ (sales minus winnings)—vary widely across games. [67] Gross wagers (winnings plus
	gross revenue) have been rising over the last six years, largely due to the rising popularity of
	games with higher player payouts, such as slot machines and online (distance) gambling. The
	overall implicit tax rate has been falling (Figure 1).


	65 De Mooij, Keen, and Parry (2012).


	66 Gambling retail establishments are also subject to normal income taxes, although these are not discussed in
	the Article or here.


	67 Although international comparisons are complicated by scarcity of data, it should be noted that rates vary
	very widely: Clotfelter (2005) and Cnossen, Forrest, and Smith (2009) give examples of rates that go from
	2 percent (greyhound racing in Connecticut) to 50 percent (lotteries in Poland).

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	Table 2. Gambling and Games in Italy, 2011


	Games Gross Wagers Winnings Gross Revenue Tax



	Implicit Tax Rate



	(billion euros) (sales) (player loss) Of gross wagers Of gross revenue


	Lotto 6.8 4.0 2.8 1.7 25.0 60.7

	Other number games 2.4 1.0 1.4 1.1 45.8 78.6

	Lottery 10.2 7.4 2.8 1.3 12.7 46.4

	Sports Betting 3.9 3.0 0.9 0.2 5.1 22.2

	Horse Betting 1.4 1.0 0.4 0.1 7.1 25.0

	Bingo 1.9 1.3 0.6 0.2 10.5 33.3

	Slot machines 44.9 35.7 9.2 3.9 8.7 42.4

	Distance Gambling 2.3 2.0 0.3 0.1 4.3 33.3

	Other 6.2 6.0 0.2 0.04 0.6 20.0


	Total 80.0 61.4 18.6 8.6 10.8 46.5


	Source: _Ministero dell’Economia e delle Finanze_ (MEF).


	Figure 1. Gambling Revenues and Tax Rates, 2006–11



	90

	80

	70

	60

	50

	40

	30

	20

	10

	0


	71. Key tax policy issues, in countries that opt for legalization and taxation, are the
	selection of the appropriate tax base and rate . Theory offers no firm guidance as to
	whether gross wagers or gross revenue is the more appropriate—depending on which one
	views as better approximating the value of the service being provided. For Article 15(1), it
	seems to be envisaged that gross wagers will be the tax base for most games. Rates must
	balance conflicting objectives. If gambling is seen as a harmless form of entertainment, the
	starting point would be to tax it at rates similar to competing forms of entertainment. Further
	considerations raise conflicting objectives. A potentially inelastic tax base, and concerns at
	potential externalities and self-control problems [68] point to higher rates; limiting the risks of

	68 The problems of addictive gambling, arguably, are primarily suffered by the gambler rather than others.
	Standard externality arguments then do not apply, but ‘internality’ considerations—related to the difficulties
	such gamblers have in exercising self-control—may rationalize higher taxation to discourage initial steps to
	addiction and act as a commitment device addressing self-control problems: see, for instance, Gruber (2010).



	20
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	illegal gambling (which has its own externalities) and the increased mobility of the base
	implied by the growth of offshore gambling, point in the opposite direction. Variations in the
	force of these considerations may suggest differential taxation across alternative games but,
	as in other areas, a close alignment of rates can offer significant advantages in administration
	and compliance.


	72. Offshore (online) gambling has emerged as a particular challenge . Licensing to
	offer games can be linked with tax payment, but difficulties of enforcement combined with
	strong international tax competition for highly mobile providers have led to downward
	pressure on tax rates. For example, for some forms of online gambling where competition
	leads to very high player returns (winnings) in the order of 97 or 98 percent, gross revenues
	are taxed instead of gross wagers. Taxing gross wagers would force retailers to reduce
	payouts or face losses and might force providers into the informal sector (offshore).
	Developments in this area pose a clear challenge to the potential for raising or even
	maintaining revenue from gambling, but this objective has to be balanced with the benefits of
	encouraging legality of operation.


	73. Article 15(2) envisages allocating some of the revenues from gambling to address
	some of the social problems it creates . Specific interventions are envisaged to prevent and
	treat compulsive gambling, and regulate advertising; and it appears that some gambling
	revenues will be earmarked toward these ends. While this type of earmarking of gambling
	revenues is not uncommon, as it reinforces the apparent benefit element of the tax and
	highlights the special concerns in the area, these advantages should be weighed against the
	greater rigidity that earmarking introduces into the public finances—an issue discussed at
	more length in connection with Article 14 above. Article 15(2), encouragingly, also
	envisages that some interventions would be funded through regular spending programs.


	Article 17 - _Financial burdens_


	74. The intention that the legislation implementing the DF be revenue-neutral is
	appropriate, but may need clarification . Imposing revenue-neutrality makes clear that the
	focus of the reform is on structural improvement. Close analysis will be needed to ensure that
	revenue-losing measures—such as VAT grouping—can be matched with revenue-increasing
	ones; and that the winners and losers are identified. More immediately, it appears that the
	wording of the article is open to the interpretation that overall revenue may not fall, but could
	increase. To ensure a focused debate, it will be important to establish the authorities’
	intention unambiguously.

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	III. AN ASSESSMENT OF THE _DELEGA FISCALE_


	75. The DF provides a framework for significant improvement in both the design
	and the implementation of the Italian tax system . Its provisions cover a wide and diverse
	range of tax matters, some more important than others but all having coherent aims and
	holding potential for improvement. They add up to a substantive and thoughtful package.


	76. Three sets of measures stand out as strengthening core elements of the tax
	structure :


	- _Bringing cadastral values closer to market values_ . Property tax assessments are
	more than twenty years out of date, and relative property prices have diverged widely
	since then: in some regions, they have increased by 500 percent; in others, by less
	than half that. Realistic alignment of cadastral prices with market prices will be an
	important step to improved fairness in property taxation, and so pave the way for
	more effective use of this instrument and more coherent fiscal arrangements between
	central government and municipalities.


	- _Establishing greater certainty and transparency for taxpayers and tax authorities_ _._
	Key directions to this end—protecting the rights of taxpayers while also safeguarding
	revenue against abusive practices—among those in the DF are provisions for
	clarifying the circumstances in which tax schemes will be regarded as abusive,
	ensuring that criminal procedures do not apply when fraud is not an issue, and
	fostering good practices for companies in managing and disclosing risky tax
	positions.


	- _Addressing distortions from the differential treatment of retained earnings in_
	_different forms of business_ . This is a further welcome step toward easing distortions
	of business decisions on organizational form and investment levels, careful attention
	to detail being needed to ensure that these important objectives are fully realized.


	77. Several other provisions can also be expected to bring significant improvements
	in tax design and implementation (though precisely how is clearer in some cases than others):


	- _Routine analysis and assessment of tax gaps—leading to better design_
	_interventions_ . Understanding the extent of and emerging trends in, revenue shortfalls
	is increasingly recognized as a critical tool for improving compliance. Substantial
	progress has been made in developing this capacity for analyzing the IVA and IRAP.
	This is already leading to better understanding of emerging trends, and—its ultimate
	aim—the design of responses to them. To deepen analysis of this kind, and extend it
	to other taxes, a more eclectic range of approaches will likely need to be used than
	indicated in the DF.


	- _Regular and thorough reporting of tax expenditures, leading to scaling back of_
	_those unwarranted_ . Here too there is substantial progress to build on, in the very

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	thorough (much more so than is the case in many other countries) enumerating,
	costing, and classification of tax expenditures recently produced by the ministry of
	finance. Regularizing this as part of the budget process will be an important step to
	transparency. The ultimate aim, of course, is to continuously monitor these with a
	view to eliminating or scaling back those found not to yield benefits commensurate
	with their costs, or better served by other means. It is the latter and difficult step that
	is ultimately critical.


	- _VAT grouping can significantly reduce distortions—but the revenue costs need_
	_investigating_ . Extending the ability to receive input costs will ease distortions from
	VAT exemption in key sectors. What remains is to identify how large this revenue
	cost is—and hence identify, as the DF requires, offsetting measures—and, for the
	longer term, reviewing the overall design of the tax treatment of the financial sector.


	- _The review of the international tax provisions envisaged is important to maintain_
	_coherence and competitiveness in this important area_, though the lack of detail—
	and inherent complexity of the topic—has precluded useful comment here.


	- _Recognizing the importance of green taxation is welcome and could set the stage_
	_for a review of environmental taxation_ . The primary purpose of this provision is to
	prepare for introduction of a new Energy Directive, progress on which appears to be
	stalled. How great the scope is for strengthening other areas of environmental
	taxation—in relation to congestion pricing, for example—is unclear; there may be
	scope for a review of possibilities in this area.


	- _Simplification and clarification, in relation to gaming and in other areas, can only_
	_be welcome_ .


	78. Some provisions could be made more effective in achieving their aims …Cadastral
	revaluation could perhaps be eased, for example, by making use of self-reporting; and
	allowing the IRI as an option adds complexity and can only lose revenue.


	79. … and important details will need to be spelled out in the subsequent legislation .
	Some of the articles are quite detailed (such as Article 2 on cadastral values); in other cases
	(such as Article 11 on the IRI, and Article 12(1)(b) on the review of international tax
	matters), implementation and evaluation will need particular care.


	80. The measures envisaged are potentially conducive to the growth objective
	stressed in the title of the DF, though the extent of this impact is unquantifiable .
	Sustainability aspects would clearly be served by better designed environmental taxation. A
	fairer and more effective property tax could enable better use of a source that, some evidence
	suggests, is relatively growth-friendly, and which is key to local government finance and
	governance; it could also enable a reduction in high transactions taxes, which are likely to be
	especially distortionary. More informed responses to compliance problems, clarification of
	anti-abuse rules, and enhanced relationships with major taxpayers can all lead to revenue

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	38


	gain that will aid consolidation or allow a reduction in more distorting taxes. All these and
	other effects can be expected to lead to modest efficiency and growth gains, but cannot
	meaningfully be quantified.


	81. The DF builds on strengths of the current system that have been reinforced by
	recent reforms . The recent strengthening of the property tax, in particular—bringing the
	yield closer to advanced country norms—has already signaled an intention to shift toward tax
	bases that are likely less harmful to growth than alternatives, and to reinforce horizontal
	equity across taxpayers. Adoption of the ACE form of business tax has been an important
	step toward greater neutrality of the tax system in its treatment of investment and financing
	decisions—not least in the financial sector, where the potential costs of a tax bias toward debt
	finance are likely to be especially high. It takes Italy closer to a unique form of DIT, a model
	that continues to provide a coherent overall architecture for the income tax system.


	82. The DF does not address some of the deepest weaknesses of the Italian tax
	system, but could not be expected to . It is silent, for instance, on the generally high labor
	tax wedges—in 2011, Italy had the sixth highest tax wedge on labor income among OECD
	countries (for a single worker at the average wage without children)—and on the narrowed
	base of the IVA (as discussed in Section II). Recent measures, including the property tax
	increase and taxes on financial securities, suggest a desire to supplement it with other tools
	bearing on forms of wealth. Among the fundamental issues that remain is whether an
	explicit, comprehensive tax of this form, and/or a strengthening of inheritance and gift taxes
	might come to play a greater role. Trying to resolve all the challenges that the Italian tax
	system faces in present extraordinarily difficult times would be highly ambitious. Instead, the
	DF focuses on a series of measures, across a broad and diverse range of tax concerns, on
	which there appears to be—and in some cases, has been for some time—both a significant
	degree of consensus and scope for real improvement. The condition of revenue-neutrality
	imposed on the measures to implement the principles it sets out is critical in this context,
	since it makes clear that the focus of the reform is on structural improvement, not on
	addressing wider issues as to the appropriate long-run scale of government or short-run fiscal
	position.


	83. Maintaining and elaborating on the key principles set out in the DF will be
	critical if the prospect of significant improvements it offers is to be realized . The core
	proposals are, for the most part, relatively uncontentious from a technical perspective (though
	the detail will of course be critical, and there will be winners and losers, most notably from
	the cadastral revaluation). Many, indeed, have had considerable support for many years. Now
	appears to be a window of opportunity to realize these improvements.

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	39


	Organizations Met by the Mission Team


	- Agenzia delle Dogane―Italian Customs Agency

	- Agenzia delle Entrate―Italian Revenue Agency

	- Agenzia del Territorio―Italian Land Registry Agency

	- Amministrazione Autonoma dei Monopoli di Stato―Independent Administration of State

	Monopolies, Ministry of Finance:

	- Associazione Bancaria Italiana (ABI) ―Italian Banking Association

	- Associazione Nazionale Fra Le Imprese Assicuratrici (ANIA) ―Association of the

	Italian Insurance Companies

	- ASSONIME―Association of Italian Joint-Stock Companies

	- Banca d’Italia―Bank of Italy

	- Confederazione Nazionale Coldiretti―Italian Association of Farmers

	- Commissione tecnica per l’attuazione del federalismo fiscale (COPAFF) ―Technical

	Commission on Fiscal Federalism Implementation

	- Confagricoltura―Confederation of Agriculture

	- Confederazioine Generale Dell’Agricoltura Italiana

	- Confederazione Generale Italiana del Lavoro (CGIL) ―Italian General Confederation of

	Labor

	- Confederazione Italiana Agricoltori―Confederation of Italian Farmers

	- Confederazione Italiana Sindacato Lavoratori (CISL) ―Italian Confederation of Trade

	Unions

	- CONFINDUSTRIA―Confederation of Italian Industry

	- Council of Economic Advisers

	- Dipartimento delle Finanze―Italian Tax Department, Ministry of Finance.

	- General Electric―Tax Department

	- INPS―National Institute for Social Security

	- Istituto per la Finanza e l'Economia Locale (IFEL)―Institute for Finance and Local

	Economy

	- Ministero dell'Ambiente e della Tutela del Territorio e del Mare―Ministry of

	Environment, Land and Sea

	- Ministero dello Sviluppo Economico, Dipartimento per l’Energia―Ministry of Economic

	Development, Department of Energy

	- Parliamentary Committee on Fiscal Federalism Implementation

	- Procter & Gamble―Tax Department

	- Rete Imprese Italia―Italian Businesses Network (SME Confederation)

	- Unione Italiana del Lavoro (UIL) ―Italian Labor Union

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	Appendix I. Text of the _Delega Fiscale_ [69]


	DRAFT LAW CONCERNING THE POWERS DELEGATED TO THE
	GOVERNMENT TO LAY DOWN LAW PROVISIONS FOR A MORE EQUAL,

	TRANSPARENT AND GROWTH-ORIENTED TAX SYSTEM


	Article 1


	( _Powers delegated to the Government_
	_to lay down law provisions for the revision of the tax system_ )

	1. The Government is empowered to adopt, within nine months of the date of entry into force
	of this law, one or more legislative decrees, aimed at a review of the tax system, in
	compliance with the principles and guiding criteria laid down in this law.


	69 Of June 7, 2012.Unoffical translation.

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	CHAPTER I


	General provisions aimed at an equal and rational tax system


	Article 2


	( _Review of the immovable property cadastre_ )


	1. By the legislative decrees under Article 1 the Government is empowered to carry out a
	review of the immovable property cadastre by assigning each building unit the relevant
	asset value and cadastral rent, in particular applying the following principles and guiding
	criteria to urban building units registered in the building cadastre:
	a) provide for co-operation procedures with the municipalities in whose territory the

	immovable property is located;
	b) define the territorial areas of the immovable property reference market;
	c) work with reference to the standard average values expressed by the market over the

	three-year period before the year of the entry into force of the decree;
	d) re-determine the definitions of ordinary and special cadastral uses, on account of the

	changed economic and social conditions and the resulting different uses of the
	property;
	e) determine the ordinary average asset value according to the following criteria:
	1) for building units with ordinary cadastral use, through an estimate procedure which:
	1.1) uses the square meter as standard of measurement, specifying the criteria for

	calculating the building unit surface;
	1.2) uses statistical functions suitable for expressing the relationship between market
	value, location and building characteristics of the property for each cadastral use
	and for each territorial area;
	1.3) where the values cannot be determined on the basis of the statistical functions
	under 1), the method described under following n. 2 applies;
	2) for building units with special cadastral use, through an estimate procedure which:
	2.1) operates on the basis of direct estimates with standardized methods and
	specific measurement parameters applied for each special cadastral use;
	2.2) if it is not possible to make direct reference to market values, uses the cost
	criterion for mainly owner-occupied property, and the income criterion for
	property for which profitability is the main characteristic;
	f) determine the ordinary average rent for building units through an estimate procedure

	which:
	1) uses statistical functions suitable for expressing the relationship between average
	rental income, location and building characteristics of the property for each cadastral
	use and for each territorial area, where consolidated data on the rental market are
	available;
	2) if there is no established rental market, by applying to the asset values specific rates
	of return that can be derived from the market, in the three-year period preceding the
	year of entry into force of the legislative decree;
	g) provide mechanisms for the periodic adjustment of the values and rents of urban

	building units, in relation to the changes of the parameters used to define the asset
	value and rent.

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	2. By the legislative decrees under paragraph 1, the Government is also empowered to pass
	provisions aimed at:
	a) redefining the powers and composition of provincial cadastral commissions and of the

	central cadastral commission, ensuring that they include representatives of the Agency
	for the Territory, as well as qualified teachers and professionals in the field of
	economics and urban and rural valuation, statisticians and experts in econometrics, as
	well as magistrates belonging, respectively, to ordinary and administrative courts and
	tax commissions, also for the purpose of providing for preliminary rulings for the
	settlement of disputes;
	b) ensure the co-operation between the Agency for the Territory and the municipalities;
	c) provide that the Agency for the Territory may employ, by means of special agreements,

	technicians appointed by professional associations for the purposes of the surveys;
	d) ensure, at national level by the Agency of the Territory, the uniformity and quality of

	processes and their co-ordination and monitoring, as well as the consistency with the
	market data for cadastral values and income in the relevant territorial areas;
	e) notwithstanding the provisions of Article 74 of Law no. 342 of 21 November 2000, use

	appropriate, also collective communication tools in order to inform property holders
	about the new rents, in addition to the publication in the municipal notice board;
	f) identify, reorganize, change and repeal the rules currently governing the building

	cadastral system;
	g) identify the fiscal year as from the new rents and asset values are applied;
	h) when the new cadastral values become effective for tax purposes, provide for the

	modification of the relevant tax rates and of any deductions, exemptions or allowances,
	aimed at avoiding an increase in the tax burden with particular reference to taxes on
	transfers.

	3. The implementation of this Article shall not lead to any new or additional burdens for
	public finance. To this end, for the activities under this Article, the facilities and expertise
	already existing within public administrations shall be primarily used.

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	Article 3


	( _Estimate and monitoring of tax evasion_ )


	1. By the legislative decrees under Article 1, the Government is empowered to pass
	provisions aimed at:


	a) defining methods for detecting tax evasion, applicable to all the main taxes, based on a

	comparison between the national accounts data and those of the tax registry, using for
	this purpose, transparent criteria, stable over time and ensuring their adequate publicity.
	b) providing that the results are calculated and published annually;
	c) setting up a working group not entitled to attendance fees, refunds or remuneration, at

	the Italian National Institute of Statistics ( _ISTAT),_ made up of maximum fifteen experts
	appointed by the above Institute, the Ministry of Economy and Finance and other
	Ministries or public authorities concerned.

	2. The Government draws up an annual report, in the framework of the budgetary procedure,
	on the strategy adopted and the results achieved in the fight against tax evasion.

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	Article 4


	( _Monitoring and restructuring of tax erosion_ )


	1. Notwithstanding the provisions of Article 3, paragraph 2, the Government annually draws
	up, in the framework of the budgetary procedure, a report on tax expenditure, where tax
	expenditure means any form of exemption, exclusion, reduction of taxable income or of
	tax, preferential regime, based on methods and criteria stable over time, which also allow
	a comparison with spending programmes; the setting up of a working group, made up of
	maximum fifteen experts appointed by the Ministry of Economy and Finance and other
	administrations concerned and not being entitled to attendance fees, refunds or
	remuneration may be provided for, if necessary.

	2. By the legislative decrees under Article 1 the Government is empowered to issue
	provisions aimed at eliminating, reducing or reforming tax expenditures that appear, in
	whole or in part, unjustified in light of the changed socio-economic situation or that are
	duplications, without prejudice to the priority to be given to the protection of family,
	health, economically or socially disadvantaged, artistic and cultural heritage, research and
	environment. By the same decrees the Government is also empowered to introduce
	measures intended to rationalise and stabilize the 5 per thousand tax return fund (‘ _5 per_
	_mille_ ’), on the basis of the increased revenue or the reduced costs achieved through the
	implementation of this Article.

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	CHAPTER II


	Fight against tax evasion and avoidance and revision of the relationship between tax

	authorities and taxpayers


	Article 5


	( _Rules on the abuse of rights and tax avoidance_ )

	1. With the legislative decrees as of Article 1, the Government is delegated to implement the
	review of current anti-avoidance provisions in order to introduce the general principle of
	the prohibition of abuse of rights, extended to non-harmonised taxes, implementing the
	following principles and criteria
	a) to define the abusive conduct as distorted use of legal instruments suitable to get a tax

	saving although such conduct does not infringe any specific provision;
	b) to guarantee the taxpayer’s freedom of choice between different operations entailing

	also a different tax burden, and, for such a purpose:
	1) to consider the aim of getting undue tax advantages as main reason of the abusive
	operation;
	2) to exclude the existence of an abusive conduct if the operation is justified for
	relevant reasons unrelated to taxation; to establish that such reasons are also those
	not necessarily producing an immediate profitability of the operation but meet
	organisational needs and consist in a structural and functional improvement of the
	taxpayer’s business;
	c) to provide for the unforceability against Tax Administration of legal instruments as of

	letter a) and the ensuing power of Tax Administration to deny the tax saving;
	d) to regulate the regime of the proof laying on the Administration the burden to prove

	the abusive intention and the modes of functional manipulation and alteration of the
	legal instruments used as well as their compliance with an ordinary market logic and
	conversely laying on the taxpayer the burden to allege the existence of sound
	alternative or concomitant reasons unrelated to taxation justifying the use of such
	instruments;
	e) to set forth the inclusion in the grounds of the tax assessment a formal and precise

	identification of the abusive conduct, in default of which it is void;
	f) to lay down specific procedural rules ensuring an effective adversarial procedure with

	the Tax Administration and safeguarding the right of defence at any stage of the
	assessment procedure and in any stage and tier of the tax judgment;
	g) to envisage that in case of appeal penalties and interest are collectable after the decision

	of the provincial tax court.

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	Article 6


	( _Tax risk management, business governance and tutoring)_


	1. By the legislative decrees as of Article 1 the Government is empowered to introduce law
	provisions setting forth forms of enhanced communication and cooperation between
	undertakings and Tax Administration, as well as business structured systems for tax
	management and control, for larger subjects too, with a clear responsibility allocation in
	the framework of the overall internal control system.

	2. While introducing the provisions as of paragraph 1, the Government can also provide for
	incentives in the form of minor fulfilments for taxpayers and reduction of possible
	penalties.

	3. By the legislative decrees as of Article 1 the Government is empowered to introduce law
	provisions to review and extend the so-called “tutoring” in order to guarantee an improved
	assistance to taxpayers, in particular to the smaller ones and being individuals, for the
	performance of their fulfilments, drawing up of tax returns and tax calculation.

	4. By the legislative decrees as of Article 1 the Government is empowered to introduce law
	provisions to review tax rulings, to ensure a greater homogeneity also for the purposes of
	a better judicial protection and a greater timeliness in the drafting of opinions.

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	Article 7


	_(Simplification)_


	1. By the legislative decrees under Article 1 the Government also provides for:
	a) the systematic review of the tax regimes and their reorganization so as to remove

	unnecessary complexities;
	b) the revision of the requirements, with particular reference to unnecessary burdens or

	superfluous rules resulting, in whole or in part, in duplications, or being of little use to
	the Tax Administration in its control and assessment activities or, in any case, not in
	accordance with the principle of proportionality;
	c) the revision, in the light of simplification and streamlining, of the functions relating to

	withholding agents and tax return filing, tax assistance centres and tax intermediaries,
	promoting the use of information technology.

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	Article 8


	_(Review of the penalty system)_


	1. Review of the penalty system according to the criteria of predetermination and
	proportionality vis-à-vis the seriousness of conduct, providing for liability to imprisonment
	of between a minimum term of six months and a maximum term of six years, by
	emphasising, on account of adequate penalty thresholds, the authoritative definition of the
	offence of fraudulent and counterfeiting conduct or conduct aimed at producing and using
	false documents; identification of the boundary between tax avoidance and evasion and
	related penalties; review of the regime for false declarations and of the administrative
	penalty system in order to better relate sanctions, in accordance with the principle of
	proportionality, to the actual seriousness of conduct involved; possibility of reducing
	penalties for less serious cases, or applying administrative rather than criminal penalties.
	2. Definition of the scope of rules on the doubling of assessment terms, by providing that this
	doubling of terms applies only in the presence of the actual filing of charge pursuant to
	Article 331 of the Code of Criminal Procedure within a time limit related to the expiry of
	the normal time-limit.

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	Article 9


	_(Strengthening of knowledge and control actions)_


	1. By the legislative decrees under Article 1, the Government is empowered to introduce
	provisions for the strengthening of controls, according to the following principles and
	criteria:

	a) strengthening of the use of targeted controls by the Tax Administration, through

	proper and complete use of the elements contained in databases and envisaging,
	where possible, synergies with other public authorities with a view to improving the
	effectiveness of the control methods;
	b) introduction of the obligation to ensure absolute confidentiality in _knowledge and_

	_control actions_ until the complete definition of the assessment; effective compliance,
	during control activities, with the principle of minimising the obstacles to the
	taxpayer’s normal course of business, ensuring at any rate the respect of the principle
	of proportionality; strengthening of the inter partes procedure in the phase of
	investigation and subordination of the subsequent assessment and settlement acts to
	the exhaustion of the inter partes procedure;
	c) strengthening and rationalization of traceability of payments, expressly providing for

	the payment methods subject to traceability;
	d) strengthening of the use of e-invoicing.

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	Article 10


	_(Review of tax litigation and collection by local authorities)_


	1. By the legislative decrees under Article 1, the Government is empowered to introduce
	provisions to strengthen the taxpayer’s right to judicial protection, as well as to enhance
	the efficiency of revenue collection powers of local authorities, according to the
	following principles and criteria:
	a) provision of measures to speed up the settlement of disputes within the tax courts’

	jurisdiction, providing to this end for preliminary-ruling procedures to settle small
	pecuniary disputes.
	b) extension of the conciliation proceedings to the appellate stage and to the judgment

	for revision;
	c) enhancement of the tax courts’ efficiency through a redeployment of court staff on

	the territory;
	d) review of the legislation governing the revenue collection by local authorities, in

	order to ensure, in particular, the certainty, efficiency and effectiveness of their
	powers of recovery, competitiveness, certainty and transparency in the cases of
	outsourcing of such powers, as well as forms of guarantee concerning transparency,
	efficacy and timeliness of the acquisition by local authorities of the revenue collected.

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	CHAPTER III


	Review of taxation depending on growth,
	internationalization of businesses, and environmental protection


	Article 11
	_(Unification of taxation on business income and on income from self-employment_

	_and provision of lump-sum schemes for smaller taxpayers)_


	1. By the legislative decrees under Article 1, the Government is empowered to introduce
	provisions to redefine taxation on income according to the following principles and
	criteria:
	a) assimilation of taxation on all business income or income from self-employment,

	including when in association with business partner, for current taxable persons liable
	to IRPEF and IRES, subjecting them to a single tax, in particular, providing for the
	deduction from the taxable base of the above single tax of the sums withdrawn by the
	artist or professional or partners or associates, or by the entrepreneur or partners, and
	inclusion of the above sums in the calculation of the entire income liable to IRPEF of
	the artist or professional and partners or associates and the entrepreneur or partners;
	b) introduction for smaller taxpayers, of schemes which provide for the lump-sum

	payment of a single tax due to replace those due, upon condition of an unchanged trend
	of the total amount due, coordinating them with similar existing schemes;
	c) possibility of providing for forms of optionality.

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	Article 12


	_(Rationalisation of the determination of business income and net production)_


	1. By the legislative decrees under Article 1, the Government is empowered to introduce
	provisions to reduce the uncertainties in determining income and net production and to
	promote the internationalization of economic operators active in Italy, in pursuance of
	recommendations from international institutions and the European Union, according to
	the following principles and criteria:
	a) introduction of clear criteria, consistent with the rules on preparation of financial

	statements, in particular to determine the time of realization of loan losses, and
	extension of the tax regime for insolvency proceedings also to the new institutions
	introduced by the reform of bankruptcy law and the legislation on over-indebtedness,
	as well as to similar procedures provided for in other legal systems;
	b) review of taxation rules on cross-border transactions, with particular emphasis on

	identifying the tax residence, on the transparency imputation regime of foreign
	controlled companies or companies that are affiliated, the regime for repatriating
	dividends from countries with preferential tax regimes, the regime for the deductibility
	of commercial transaction costs of entities established in those States, the regime for
	the application of cross-border withdrawals, the tax regime of permanent
	establishments abroad and those located in Italy of non-residents, the regime of
	relevant losses from group companies resident abroad;
	c) review of the regimes for deduction of depreciations, overhead expenses and special

	categories of costs, safeguarding and specifying the notion of inherence and limiting
	differentiations between economic sectors.

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	Article 13


	( _Rationalisation of VAT and other indirect taxes_ )

	1. By the legislative decrees as of Article 1 the Government is empowered to introduce law
	provisions for the transposition of Directive 2006/112/EC, according to the following
	principles and criteria:
	a) rationalisation, for simplification purposes, of special systems depending on the

	particular nature of the sectors involved;
	b) implementation of the VAT group regime as laid down in Article 11 of Directive

	2006/112/EC.

	2. By the legislative decrees as of Article 1 the Government is empowered to introduce law
	provisions to review registration duty, stamp duty, mortgage tax and cadastral duties,
	charges on government licences, insurance and entertainment according to the following
	principles and criteria:
	a) simplification of fulfilments and rationalisation of tax rates;
	b) unification or removal of particular cases.

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	Article 14


	( _Environmental taxation_ )

	1. In view of the policies and measures adopted by the European Union for sustainable
	growth and _green economy_, as well as the Proposal for a Council Directive COM (2011)
	169 amending Directive 2003/96/EC restructuring the Community framework for the
	taxation of energy products and electricity, the Government, by the legislative decrees as
	of Article 1, is empowered to introduce new forms of taxation aiming at preserving and
	guaranteeing environmental balance ( _incentives and_ _green taxes_ ) and to review the rules
	on excise duties on energy products depending on carbon content. The Government is
	therefore authorised to adopt, in line with the provisions of the aforesaid Proposal for a
	Directive, the principle of carbon tax exclusion for the sectors regulated by Directive
	2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within
	the Community and to envisage that the revenue from the introduction of the carbon tax
	is to be used as a matter of priority to finance the promotion system of renewable energy
	sources and environmental protection measures with particular reference to the
	dissemination of low carbon technology. The taking effect of the provisions of the
	legislative decrees provided for by this Article will be coordinated with the date of
	transposition in the Member States of the harmonised legislation on the matters at
	European level.

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	Article 15


	_(Public games)_


	1. By the legislative decrees under Article 1, the Government is empowered to implement
	the reorganization of the existing provisions relating to public games, applying the
	following principles and criteria:
	a) organic and systematic collection of existing provisions according to their general

	application or sectorial legislation, of individual games as well;
	b) adaptation of these provisions to the most recent standards, also developed by case
	law, at European level;
	c) formal co-ordination of provisions collected and explicit repeal of provisions that are

	inconsistent or outdated;
	d) review of legislation concerning State taxes on individual games, expressly defining

	those that are fiscal in nature depending on the different types of public games, as
	well as of legislation on horse racing.

	2. By the legislative decrees under Paragraph 1, the Government is also empowered to:
	a) introduce specific provisions for the prevention, treatment and recovery of forms of

	compulsive gambling, based on scientific and technical guidelines and with
	implementation of specific projects, funded from the proceeds of appropriate
	sanctions, as well as by allocating to this end a specific share of the national health
	fund, to be allotted with CIPE decision implementing Article 1(34) of Law No 662 of
	23 December 1996, at the proposal of the Minister of Health, in consultation with the
	Minister of Economy and Finance, in agreement with the Permanent Conference for
	Relations between the State, Regions and autonomous Provinces of Trento and
	Bolzano;
	b) counter the forms of game advertising which fail to conform to what is considered to

	be lawful under current law, and however prohibit in all media any forms of
	misleading advertising or advertising not indicating, also in relevant information
	documents, the uncertainty of winning;
	c) adequately protect minors from game advertising and however ensure, also

	combating different forms of attraction, the respect of the ban on games with money
	winnings, also duly regulating the location of suitable premises for games on the
	territory.

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	CHAPTER IV


	Final provisions


	Article 16


	( _Procedure_ )


	1. The drafts of the decrees as of Article 1 shall be submitted to the parliament for the
	relevant Parliamentary Committees to express their opinions which are delivered within
	thirty days of the date of transmission. The term is deferred by ten days if explicitly
	requested by the Committees themselves to the relevant Chamber where it is necessary
	due to the complexity of the subject or the number of legislative decrees. If the deferral
	has been requested and limited to the subject for which it is granted, the terms to exercise
	the delegation are deferred by 10 days. After the expiration of the term set for the
	expression of an opinion or the possibly deferred one, a favourable opinion is considered
	to have been given.

	2. The government is authorised to issue one or more legislative decrees laying down
	improving and supplementing provisions to this law within eighteen months of the date of
	entry into force of the legislative decrees themselves, in compliance with the principles
	and criteria set forth in this law and following the same procedure as of this Article.

	3. By issuing the legislative decrees as of Article 1, the Government ensures the introduction
	of new law provisions through the amendment or supplement of consolidation acts and the
	organic provisions regulating the relevant subjects and the express repeal of incompatible
	legislation.

	4. Within the same term as of Article 1, the Government is delegated to adopt one or more
	legislative decrees concerning the provisions possibly necessary for the formal and
	material coordination of the legislative decrees issued pursuant to this law with the other
	national laws and for the repeal of incompatible legislation.

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	Article 17


	( _Financial burdens_ )

	1. No new or higher burdens for public finances, also in terms of revenue losses, shall ensue
	from the legislative decrees implementing this delegated power.

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	References

	Brett, Craig, and Michael Keen, 2000, “Political Uncertainty and the Earmarking of

	Environmental Taxes,” _Journal of Public Economics_, Vol. 75, pp. 315–40.


	Cingano, Frederico, and Ivan Faiella, 2011, “L’Italia e gli obiettivi europei del pacchetto

	clima- energia: l’analisi di una carbon tax sui trasporti,” mimeo, Banca d’Italia.

	Clotfelter, Charles, 2005, “Gambling Taxes,” in Sijbren Cnossen, _Theory and Practice of_

	_Excise Taxation: Smoking, Drinking, Gambling, Polluting, and Driving_ (Oxford:
	Oxford University Press), pp. 84–119.

	Cnossen, Sijbren, David Forrest, and Stephen Smith, 2009, “Taxation and Regulation of

	Smoking, Drinking, and Gambling in the European Union,” CPB Netherlands Bureau
	for Economic Policy Analysis, February.


	Commission of the European Communities, 2009, Communication from the Commission to

	the Council and the European Parliament on the VAT group option provided for in
	Article 11 of Council Directive 2006/112/EC on the common system of value-added
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