This article originally appeared in
No. 83
Monday, May 1, 2006   
                                                                      Page G-1
ISSN 1522-8800
    Tax, Budget & Accounting

International Taxes
New Italian Prime Minister
Outlines Business Tax Plans

    ROME--Incoming Italian Prime Minister Romano Prodi said in an April 27 interview with BNA that he wants to
    spark economic growth by lowering taxes paid on permanent employees, and that the controversial IRAP
    corporate income tax will evolve into a new tax that would meet European Union regulations.

    Prodi also said that, although he has no plans to change property tax levels, he believes that property taxes
    would provide additional revenue after the formula for determining the value of a property is updated.

    Prodi spoke with BNA in a one-on-one interview, one of his first since his coalition defeated the group led by
    former prime minister Silvio Berlusconi in national elections held April 9-10.

    One of the centerpieces of Prodi's economic strategy will be to lower the cost of labor by reducing taxes on
    permanent workers and raising taxes on temporary staff. Prodi said that, when all taxes are combined, a
    permanent employee's labor costs the employer an additional 32.5 percent in taxes, while temporary workers
    cost just 19 percent.

    "This creates an incentive that doesn't make any sense," Prodi said. "Why would a company hire a permanent
    worker? It creates a hire-fire-hire-fire cycle that is bad for the worker and bad for the company's efficiency."

    While he said taxes on temporary workers should remain lower than those for permanent workers--due to
    costs for health care and vacation time and similar benefits--that the gulf should not be so large. He envisions
    reducing the total tax cost for permanent workers to 27.5 percent, while increasing that for temporary employees
    to 22 percent.

    "I hope such a change will create an incentive for companies to hire more permanent staff, which is something
    that will only help efficiency," Prodi said.

    IRAP Phase-Out

    Italy announced plans last year to phase out the Imposta Regionale sulle Attivita Produttive, or IRAP, over three
    years (129 DTR G-5, 7/7/05), in part because the tax ran afoul of EU laws prohibiting a tax on corporate revenue,
    something which could make Italy liable for massive refunds.
    Prodi, a former European Commission president, said the five-year-old tax needs to be adjusted to conform to
    EU rules, but he scoffed at the idea that Italy could be required to refund some of the revenue it collected from
    the IRAP in the past.

    "The IRAP was a tax created by combining seven older taxes and it was not in any way illegal when it was
    drafted," Prodi said. "During its existence, the EU rules changed, and so the IRAP must be changed as well. It's
    as simple as that."

    But he cautioned that the total cost to corporations will remain flat, even as the tax is being changed. The tax,
    which provides 33 billion euros ($40.26 billion) per year in revenue, is a 4.25 percent tax on a company's net
    profit, plus labor costs, and interest expenses.

    On property taxes, Prodi vowed to leave tax levels unchanged, but he said he would work to eliminate loopholes
    that allow some properties to be undervalued.

    "It's not fair that two identical properties are valued differently because the loopholes allow it," he said.

    By Eric J. Lyman
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    ISSN 1522-8800
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