The Italian government has approved a €55 billion stimulus package that includes tax extensions and the partial cancellation of a regional corporate tax for the year to offset the economic impact of the COVID-19 pandemic.
Italy, which experienced the first major outbreak of COVID-19 in Europe, has been one of the continent’s hardest-hit countries. On May 14 the government issued a decree exempting companies with annual sales below €250 million from the regional corporation tax (IRAP) for 2020. The government had previously extended the due date for some tax payments to June 30, but the new decree moves the payment date back to September 16.
To encourage tourism — a key sector of the Italian economy — the decree authorizes a “holiday bonus” of up to €500 for families with annual household incomes of up to €40,000 to offset the cost of in-country vacations. The measure requires hotels to provide 80 percent of the bonus by reducing their normal prices for eligible guests. The hotels can recover those reductions by claiming credits on their tax returns. Eligible guests can take deductions for the remaining 20 percent of the bonus on their tax returns.
The decree also allows hotels and other providers of vacation accommodations a partial exemption from municipal property tax for the year.
Taxes that were scheduled to go into effect this year on disposable plastic and beverages with added sugar have been put off until the beginning of 2021.
The relief package also allocates €25.6 billion for additional unemployment benefits and provides "emergency income" of up to €800 a month for up to two months to families with low incomes.
Maria Grazia Pazienza, a professor of finance at the University of Florence, said Parliament has 60 days to accept, reject, or amend the decree. “This is possible only for urgent measures, and this is the case,” she said.
Andrea Carinci, a professor of tax law at the University of Bologna, said parliamentary approval is a near certainty. “Of course, otherwise there will be a crisis,” he said.
The government said the combination of the stimulus measures and an expected reduction of tax revenues because of the slowdown in business activity will result in a 2020 budget deficit equal to 10.4 percent of GDP, with public debt ballooning to almost 155 percent of GDP, up from around 135 percent.
The budget package approved in December 2019 anticipated a deficit equal to 2.2 percent of GDP. Analysts said at the time that the budget would likely be seen by the European Commission as an indication that the government was on track to meet its deficit reduction commitments. In 2011 Italy told the EU that it would automatically increase VAT rates in stages from 2019 through 2021 if it couldn’t come up with additional budget resources equal to 1.1 percent of its GDP in 2018 and 2019. The safeguard measures, which were later incorporated into Italian law, required a VAT rate increase from 22 percent to 24.2 percent in 2020 if the government fails to meet its budget commitments. In its stimulus decree, the government scrapped the safeguard increase.
Pazienza said part of the cost of the stimulus measures would be covered by EU funds. “The discussion within the EU is very [lively] at the moment, but they have substantially suspended the fiscal coordination rules,” she said.
On March 20 the commission proposed the activation of the general escape clause of the Stability and Growth Pact as part of a strategy to respond to the pandemic quickly, forcefully, and in a coordinated manner. “Once endorsed by the [EU] Council, it will allow member states to undertake measures to deal adequately with the crisis while departing from the budgetary requirements that would normally apply under the European fiscal framework,” the commission said. The EU Council endorsed the proposal March 23.
On March 15 Italy’s Council of Ministers approved a €25 billion relief package, including allowances of €600 to freelancers who were registered for VAT as of February 23 for the month of March, and the suspension of withholding taxes, VAT, and other tax payments until May 31.