The Italian government is preparing a set of major reforms to the tax system by 2027, and the first changes set to come in to force over the next two years were announced on ThursdayMarch 16th.
The existing tax system in Italy, which has been in place since 1971, is often criticised for being overly complex and for placing too high a tax burden on employees and businesses – one of the factors regularly blamed for Italy’s longstanding problem with sluggish economic growth.
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Economy Minister Giancarlo Giorgetti has said the planned reforms will reduce this tax burden “gradually” and make investment and commercial activity in Italy “more appealing”.
Few details of the reforms were immediately given on Thursday, but here’s a look at what we know so far about the initial changes coming in 2023 and how they could affect you.
‘Flat tax’ and income tax changes
The government has confirmed it is planning changes to the way the amount of personal income tax you have to pay is calculated, and that it will push ahead with longer-term plans to bring in a so-called flat tax, which was one of the flagship promises made by the coalition of right-wing parties which took power following September’s general elections.
The coming reforms will initially reduce the number of income tax (Irpef) brackets from four to three, with the ultimate goal of a single tax rate for everyone by 2027 – when the current government’s term in office is set to end.
income tax (Personal Income Tax) is the main income tax in Italy and applies to all employees, many self-employed workers (regular VAT number holders, but not those on the flat tax rate) and pensioners.
This tax is the cornerstone of Italy’s fiscal system. It injected just shy of 206 billion euros into state coffers in 2022, accounting for around 38 percent of the country’s total tax revenue last year (544.5 billion euros).
The first reforms came in 2021, when the number of income tax brackets was cut from five to four to create the current system:
Current tax brackets:
| Income (annual) | Personal income tax | |
| First bracket | Up to 15,000 euros | 23 percent (rate) |
| Second bracket | Between 15,000 and 28,000 euros | 25 percent |
| Third bracket | Between 28,000 and 50,000 euros | 35 percent |
| Fourth bracket | Over 50,000 euros | 43 percent |
The coming change will reduce the number of tax brackets down to three by merging the second and third tiers into a single one.
The reforms are expected to set the three bands at 23 percent, 33 percent and 43 percent initially, and government officials have said that a more costly option under consideration would lower the second band to 27 percent.
No further details were immediately given on Thursday, and the draft outline approved by Italy’s cabinet still needs the green light from parliament and then implementation by the finance ministry.
This change means people who are currently in the second bracket will see their Irpef payments increase by two or three percent, whereas those who are now in the third bracket will benefit from a seven- or eight-percent cut.
VAT cuts
The government has also said it is looking at cuts to VAT (known as IVA in Italian) on various products – and reports suggest it could scrap it altogether on at least some essential goods.
Italy applies a standard 22-percent VAT rate to most consumer goods, and lower rates to essential items (for instance, 4 percent on bread). This can be surprising to people from countries where VAT is usually zero-rated on basic foodstuffs.
With the new tax bill, the government plans to lower rates on all consumer goods which households purchase regularly: so-called shopping cart goods.
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The government is also reportedly considering scrapping VAT on at least some essential purchases, though this was not announced on Thursday and no further details have emerged yet.
Italian consumer group Codacons estimates that scrapping the tax on essential items would save the average household up to 300 euros a year.
Photo by ANDREAS SOLARO / AFP
Lower corporation tax
Meloni’s government said it plans to cut corporation tax from the current rate of 24 percent to 15 for companies that create jobs and make investments in “innovation” – a move that was initially welcomed by business groups, who said they’re waiting for more details to come.
Tax ‘bonus’ cuts
The changes have not been costed yet, but the plan to bring in a flat tax is expected to cost the treasury around 10 billion euros.
The government says plans to recoup this sum partly by curbing many of the financial incentives currently available to Italian taxpayers.
Italy has a mind-boggling array of tax rebates and other incentives in place – over 600 in total – which collectively cost the state 165 billion euros a year.
The 2023 tax reform is expected to cut the amounts available through these incentives, and will also mean fewer people are eligible to claim.
The government has already begun to curb some of Italy’s most popular – and costly – tax rebate schemes as of the beginning of this year; namely the building bonuses providing generous state-funded discounts on renovation work. This includes the so-called superbonus 110which was initially cut back in January before being made almost completely unavailable in February.
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Ministers have not yet released any details as to which other incentives may be affected by planned cuts.
Property taxes simplified
The taxes paid when buying property in Italy are notoriously hefty, with experts often advising buyers to budget around an additional ten percent of the purchase price in order to pay the various taxes and charges involved.
While there’s no sign that these costs will be lowered anytime soon, some of them are set to be streamlined: the upcoming bill will merge stamp duties (stamp duties) and cadastral taxes (cadastral taxes) into a single fixed-rate fee which ministers hope will somewhat simplify the process of buying a home.
The Local will report further details of the upcoming tax changes once they become available.