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Watch out for your uber-rich neighbours

By Gareth Horsfall - Topics: Italy, Tax
This article is published on: 18th May 2019

18.05.19

As the rest of the world is starting to talk more frequently about closing in on the uber-rich and making them pay more tax, Italy has gone the other way.

2 years ago Italy introduced a new ‘flat tax’ regime designed to attract the super rich into the country. Anyone can register under this regime whereby they pay a one-off payment of €100,000 per annum to the tax authorities and become resident in Italy without the requirement to declare any of their other worldwide incomes, gains or assets.

Whilst the uptake for this tax regime was slow, Italy has now started to market it more aggressively overseas and they have seen a 30% increase of requests to register, year on year, mainly from the UK (che sorpresa! The super rich are leaving the country with the threat of Brexit) along with Americans, North Europeans and Russians. They now get to keep their money and live ‘La Dolce Vita’

Providing a way out for the uber-rich has never been more popular!

We need to talk about China…

By Gareth Horsfall - Topics: Investments, Italy
This article is published on: 17th May 2019

17.05.19
  • There are more Christians in China than Italy and the Vatican combined
  • By 2030, China will add more new city-dwellers than the entire U.S. population
  • By 2025, China will build enough skyscrapers to fill TEN New York-sized cities
  • America’s fastest “high speed” train goes less than half as fast as the new train between Shanghai and Beijing (150 mph vs. 302 mph)
  • China has more pigs than the next 43 pork producing countries combined
  • China’s economy grew 7 times faster than America’s over the past decade (316% vs. 43%)

If you hadn’t already guessed, this article is about the economic powerhouse: China. Listed above are some interesting facts just to whet your appetite. However, given the current market turmoil surrounding Donald Trump and his China tariffs, I thought it would be a good idea to clear up some of the myths surrounding China, with the help of our friends at Blackrock Asset Management.

5 Myths about China’s economy

Economic growth is unsustainable

There is still lots of room for growth
The Chinese economy has been growing quickly for more than 20 years, and hit a peak of 14% in 2007, according to the World Bank. But things have started to slow in the last few years. Growth cannot continue indefinitely and China does have a problem with high levels of personal, corporate and government debt. However, even at today’s slower pace of growth at approximately 6% per annum, China will continue to grow more than twice as fast as many developed economies. China has seen growth of 6-10% over the past 7 years. Even a basic level of growth is enough for the financial markets to grow and for domestic reforms to be pushed through.

High debt means that China is high risk

China is actually reducing debt at a good pace
Many Chinese companies hold a great deal of debt and Chinese corporate debt has reached 165% of GDP, according to an IMF report. (Ireland, Netherlands, Belgium and Sweden have higher corporate debt to GDP ratios!)

The Chinese government is serious about addressing the high levels of debt and has signalled that corporate debt restructuring is now high on the agenda. Whilst this is a positive move for the economy it causes investors to worry about whether the Chinese authorities will be able to engineer a soft landing. Policymakers have been practical in their approach to reducing debt by making structural changes on one front but also ensuring that there is sufficient liquidity to avoid any stress. It sounds like good financial planning to me. Pay down your debt but maintain a good cash level in case of emergencies.

China also has a very high level of personal (retail) investors in its financial markets, and with such a high percentage the Chinese government is more likely than most governments to intervene should there be any danger of sharp falls in equity markets. Economic hardship can trigger social unrest, and the Chinese authorities do not like civil unrest!

Increased protectionism in the US will hit China hard

Despite what Donald Trump would like to make us believe China is an increasingly important player in global trade
The US-China relationship and some kind of trade war seem inevitable especially under the Donald Trump regime. This will affect international markets, without a doubt. However, despite all the noise over tariffs, the ambitious Belt & Road initiative is still in progress. This is China’s way of boosting trade and stimulating economic growth across Asia by building a massive amount of infrastructure to connect it to other countries. In addition, the US has walked away from the Transatlantic Trade Partnership and this offers China the chance to play an even bigger role in terms of trade integration in the region. This basically means that whilst America is battening down the hatches, China is opening itself up, making more allies and expanding its global reach of power.

BlackRock believes that trade tensions between the US and China will continue for a further period but does not think it will escalate into a full-blown trade war, although it does remain a risk.

It is difficult to get accurate economic data about China

There are more ways than one to skin a cat, so are there more ways than one of digging for money
Investors worry about the accuracy of economic data that comes out of China. This is where technology can come to our aid in the guise of satellite imagery. It can provide an alternative source of up-to-date information. For example, it is possible to form a picture of the ‘metalness’ on the ground as a way to measure the number of new factories being built, or existing ones expanded. This information helps to verify the data from the Chinese government. It is also much faster than relying on quarterly valuations.

Surprisingly, this information is so detailed that the economic activity of individual companies can be compared. Big Brother is watching you!

China has a liquidity problem

The tide may be beginning to turn
The inclusion of China in the Emerging Markets financial Indices is already starting to see more funds flowing into China. Going forward, more Chinese shares are likely to be added to the indices, driving even more money into the region.

China already makes up 32.7% of the Emerging Markets Index and will continue to take a larger proportion as China continues to deregulate its capital markets and make them more accessible to foreigners. If China achieved full market inclusion in the Emerging Markets Index, it would account for 50% of the total index of ALL emerging markets and it could eventually account for 30% of the emerging markets bond indices.

The strength of the US dollar together with the extended period of quantitative easing has held money in the US, but that trend is now changing with funds starting to flow back into Asia from the second half of 2017.

There is also a forthcoming Stock Connect scheme, linking the Shanghai and London Stock Exchanges, which will also give foreign investors greater and easier access to the shares of companies listed in mainland China.

All these developments, together with the broader structural reforms being carried out within China, may increase liquidity and as these five myths are debunked, the Chinese stock market may start to get the increased international attention it deserves.

As a client of The Spectrum IFA Group, China and other emerging markets will make up a proportion of your portfolio. Whilst the financial markets are highly volatile, the growth of investment is higher than in other developed markets. Yet, it is not a question of whether you should invest in volatile financial markets or not, but more the question of how much you should allocate to them based on your own personal circumstances and attitude to risk.

The asset managers we work with take care of those decisions on your behalf, so you don’t have to.

The Spectrum IFA Group: A corporate partner, a generous friend

By Spectrum IFA - Topics: Belgium, corporate responsibility, France, Italy, spain, Spectrum-IFA Group, Switzerland
This article is published on: 16th May 2019

16.05.19

As a small NGO, Street Child EU is always on the lookout to build relationships with corporate partners as a means of strengthening our long-term fundraising ambitions. We are always grateful when, after approaching an organisation, they take the time to contemplate our vision and give consideration for the potential benefits of our projects. Yet, even with our proven track-record, this is a competitive industry, and securing regular funding is a painstaking and uncertain process. Thankfully, every so often, we encounter a corporate organisation that immediately identifies with our philosophy and subsequently demonstrates an admirable commitment to transforming our ambitions into reality – The Spectrum IFA Group is one such case.

Over the years, this Financial Services Organisation, has shown an unwavering dedication to providing hope to some of the world’s most marginalised groups and disadvantaged children, their donations to Street Child thus far reached 14,000 € . Street Child’s relationship with The Spectrum IFA Group stretches back to 2016, when they provided us with a generous donation for our Girls Speak Out programme. This project was set in the difficult context of post-ebola Sierra Leone and Liberia. Our mission aimed to support at least 20,000 girls to access and sustainably remain in quality education. When The Spectrum IFA Group provided us with 3,750 € we could immediately family business grants for the Street Child team in the capital of Sierra Leone, central Freetown. This meant that 65 individual caregivers were given the means to protect and nurture the vulnerable children in their care. The grant also enabled an extra 65 girls and 65 of their siblings to attend school – totalling 130 children for whom education had previously been out of reach. Moreover, the donation has had a wider impact of providing an additional 195 family members with access to an increased income. Overall, this has been a great source of optimism in the community, wedging open a door of opportunity for future generations of children in Freetown.

In 2017, The Spectrum IFA Group once again willingly answered Street Child’s call to action by providing support for our Breaking the Bonds Project in Nepal. Street Child was implementing an ambitious plan to reverse the effects that decades of discrimination have inflicted upon the Musahar community. With a donation of 5,000 € we made great strides in our efforts to free Musahars from bonded labour and disrupt this cycle of poverty. The donation has enabled 27 Musahar girls to complete our livelihoods support program which, through a careful combination of business skills training and life skills workshops, has given these Musuhars the resources and skills needed to propel them towards economic independence. In 2018, The Spectrum IFA Group reiterated their support for the Musahar community by donating an extra 3,000 € to the cause.

This organisation has always been interested in receiving project updates from the field, and we have always happy to oblige with photographs and case studies. They have kindly used these materials to show off during presentations at company events, encouraging even more donations by The Spectrum IFA Group’s staff. It is important for us that our corporate partners show off the projects they have funded with this kind of pride. It is important that corporate organisations engage with NGOs out of a genuine interest in social progress and The Spectrum IFA Group clearly does so.

All to often corporate partnerships cannot stand the test of time, but the relationship between The Spectrum IFA Group and Street Child is strong and looks set to stay. We have already shared positive initial conversations in relation to our new project in Afghanistan and furthermore, an extra 2000 € donation already indicated for a new Musahar project. We are tremendously grateful for the trust and support The Spectrum IFA Group has continuously offered us. Our experience with The Spectrum IFA Group is a testament to the fact that the NGOs and Corporate organisations can positively bridge the gap between these differing industries in order to pursue a common goal.

1

Soti, a Musahar in Nepal has benefitted from business skills training to establish a steady income for herself and her children.

2

In Central Freetown, Sierra Leone, Aminata been supported through the Girls Speak Out programme. She can now attend School regularly and has aspirations to one day become a teacher

*Note: The names of individuals have been changed to protect their privacy and identity

New Tax Laws in Italy

By Gareth Horsfall - Topics: Italy, Tax, tax advice
This article is published on: 14th March 2019

14.03.19

If you have been reading my previous articles, you may have read about tax breaks that are in the pipeline for Italian residents.

They have been proposed by Matteo Salvini and his party La Lega. The proposals that are the most interesting from my point of view are the following:

FLAT TAX OF 7% FOR RETIREES MOVING TO ITALY

This was introduced into the ‘Legge di Bilancio 2019’. In short, anyone who moves to Italy and is in receipt of a pension income from abroad, can benefit from a flat tax of 7% on their income for a period of 5 years after becoming resident, based on the criteria that:

a) you must establish residency in one of the following regions, Sicilia, Calabria, Sardegna, Campania, Basilicata, Abruzzo, Molise e Puglia,

b) the town/village must have less than 20,000 registered inhabitants.

c) you must NOT have been resident in Italy in the last 5 full tax years prior to taking the offer.

d) you can opt out of the regime if you feel it does not fit your circumstances.

The idea is to re-populate the southern regions of Italy which have been decimated over the last 20 years due to lack of employment opportunities and mass migration to the large Italian cities and Northern Europe. The aim is to try and draw in foreign money and also Italians abroad who may wish to move to Italy in retirement.

CHANGES TO THE INCOME TAX BANDS

From calendar year 2020 there are proposals afoot to reduce and simplify the current income tax bands. Currently there are 5 tax bands in Italy:

On the first $15000 23%
€15001 – €28000 27%
€50,000 – €75,000 41%
+75,000% 43€

The initial proposal was to reduce the rate of taxation to 15% on the first €65000 of income and then 20% above. Whilst that has been introduced in 2019 for self employed people on a partitia IVA, the proposal on personal income has been scaled back somewhat since the initial proposals, mainly due to concerns over balancing the books. The latest proposal doing the rounds is to reduce the number of income tax bands, but the rates do not move much:

On the first €28,000 23%
€28,000 – €75,000 33%
€75,000 43%

An income of €28000 per annum gross would amount to an annual saving of €520pa.
An income of €50000 per annum gross would amount to €1620pa

These are not figures that are going to change many people’s lives in a big way, but something is better than nothing. However, all this is hypothetical at the moment as we wait to see the final proposals and implementation of the law. It is unlikely that we will know more at this point since Salvini is quite likely to force another general election this year in lieu of his gaining popularity and the demise of M5S. Since the flat tax was his proposal, if he becomes PM, then further changes could be in the pipeline. Watch this space!

So, all in all I don’t see any great game changers for you or me, but who knows. At least we have the sun, sea, mountains, food and ‘la dolce vita’.

Taxes affecting residents in Italy

By Gareth Horsfall - Topics: Italy, Tax
This article is published on: 13th March 2019

13.03.19

Well, before I start this article I thought I should let you know that I am now a citizen of Italy. My citizenship journey is almost over. I received confirmation that my application for cittadinanza has been approved and in their words, ‘ definitivo’.

All I can tell you is that it was all a bit of an anti-climax at the prefettura. I was hoping for a band, a hug from the chap who had administered my application and a bowl of pasta con sugo di pomodoro e basilico….nothing!

In fact, all I got was the door slammed in my face after being handed a brown envelope to take to the comune. To be fair to him I have to now book an appointment with the comune to go and do the ‘giuramento’, which means changing my carta d’identita into one for an Italian citizen, and to swear on the Italian constitution. I assume it will be a little more pomp and circumstance than the prefettura office, but I shall keep you informed. However, it is official!

I had never dreamed of getting ‘cittadinanza’ in Italy until the big ‘B’ word arrived in my life. Without wishing to get hung up on that particular subject, it has changed my life and I know many of your lives have changed as well. One of those is, of course, taxation. For many it has meant deciding between the UK and Italy for residency purposes. That has implications and I have been a long time advocate of planning your financial life before making the leap of residency into another country. Italy is a higher tax country but the burden can be reduced, or ways can be found to make sure you can enjoy ‘la dolce vita’ without getting hung up on tax matters.

What is most important is understanding, and so every year I like to run a summary of the tax laws which mainly affect us and any proposed changes. There will also be some changes for UK home owners, post Brexit, which I will touch on and the proposed changes to the existing tax rates and the potential tax incentives.

A summary of the taxes which affect most residents in Italy

The first thing you need to remember, as a fiscally** resident individual of Italy is that you are subject to taxation on your worldwide earned and non-earned income, capital gains and assets (including property). It is your job to make sure that you report these to your commercialista each year to complete your tax return. But before you do it for the first time, a financial planning exercise can come in useful.

** Fiscal residency generally means being registered as a resident at your local comune/municipio.

TAX ON INCOMES

EMPLOYMENT
If you are employed or self employed then there are multiple options available, from partita iva, partita iva regime forfettario, rientro di cervello, amongst others. I won’t go into detail here as these really need to be looked at on a case by case basis, but needless to say that there are financial planning opportunities if you are working, or intending to work in Italy. If you have any questions in this area you can contact me on gareth.horsfall@spectrum-ifa.com

PENSIONS
Most of my clients are in, or close to retirement and so understanding how your pension will be taxed as a resident in Italy is of paramount importance.

PRIVATE PENSIONS AND OCCUPATIONAL PENSIONS
If you are in receipt of a pension income and it is being paid from a private pension provider overseas / occupational pension provider or you are in receipt of a state pension / social security, then that income has to be declared on your Italian tax return. If you have paid tax already on that income then a tax credit will be given for the tax paid in the country of origin (assuming that the country has a double taxation agreement with Italy), but any difference between the tax rates in the country of origin and Italy will have to be paid.

I often hear stories of people who are told by their commercialista that their state pension / social security pension is not taxable in Italy. This is absolutely NOT the case. The UK state pension, as an example, is 100% taxable in Italy as is US social security. It is not excluded from the double taxation treaties and therefore must be declared in Italy. Failure to declare could mean fines and penalties.

GOVERNMENT DERIVED PENSIONS
It is a good idea to define what is meant by government paid pensions. The definition according to the Italy/UK double taxation convention1988 is, paid from:

” a political or an administrative subdivision or a local authority”

This generally means civil servants of any kind and foreign office employees but would also include teachers, NHS workers, military personnel, police men and women, fire service etc. In these cases, the pension awarded is taxable only in the state in which it originates, and tax is generally deducted at source in that country of origin.

But there are some tax idiosyncrasies to look out for here. On the positive side, this income is not taken into account when calculating the tax on your other income sources in Italy, e.g. rental income, and it is not declared on your tax declaration in Italy.

On the negative side, for those of you who are thinking of becoming citizens of Italy, these pensions are only taxed in the state of origin UNLESS you become a citizen of Italy and then they are taxable in Italy as well. So for anyone thinking about cittadinanza, plan before you leap!

INVESTMENT INCOME AND CAPITAL GAINS
As of 1st January 2017, interest from savings, income from investments in the form of dividends and other non-earned income payments stands unchanged at a flat tax rate of 26%. Realised capital gains are also taxed at the same rate of 26%.

(Interest from Italian Government Bonds and Government Bonds from ‘white list’ countries are still taxed at 12.5% rather than 26%, as detailed above. This is another quirk of Italian tax law as this means that you pay less tax as a holder of Government Bonds in Pakistan or Kazakhstan, than a holder of Corporate Bonds from Italian giants ENI or FIAT).

PROPERTY OVERSEAS
Property which is located overseas is taxed in 2 ways. Firstly, there is the tax on the income and, secondly, a tax on the value of the property itself.

1. The income from property overseas.

Overseas net property income (after allowable expenses in the country in which is located) is added to your other income for the year and taxed at your highest marginal rate of income tax.

Where many properties are generating all your income, this can prove to be a tax INEFFICIENT income-stream for residents in Italy. It is better to have a diversified income stream, pensions, investments and property, to maximise tax planning opportunities and allow you to redirect income from the most tax efficient source at any one time. Relying solely on one type of asset for income in retirement is generally not a good idea.

2. The other tax is on the value of the property itself, which is 0.76% of the value. (IVIE)

A) Value must be defined in this instance. For properties based in the EU, the value is the Italian cadastral equivalent. In the UK that would be the council tax value NOT the market value. You will find that the market value will, in most cases, be significantly more than the cadastral equivalent value.

B) In properties located outside the EU the value for tax purposes is defined as the purchase price or value at time of ownership, where this can be evidenced, otherwise the value of the property is defined as the current market value.

** BREXIT TAX CHANGE** Once the UK leaves the EU the definition of value of the property will change as per the explanations above. This will affect any UK national living in Italy, who owns property in the UK post Brexit, and depending on your circumstances you could find yourself paying more or less in taxation on the property.

DISPOSAL OF UK PROPERTY
If you are thinking about moving to Italy and are looking to dispose of second properties in the UK before the move, then you may be entitled to take advantage of a tax break. If you have owned the UK property for more than 5 full tax years then it is no longer deemed a speculative transaction and you will not be capital gains tax liable, as a resident in Italy, on the disposal.

However, you may also qualify for a tax break in the UK as well, because although non-UK residents are liable to taxation on the disposal of UK property, the purchase price of the property is taken at the point at which the legislation was introduced: 6th April 2015 or later, if applicable. So if you have owned the property for a long time and seen some large capital gains, you could dispose of the property and benefit from a largely reduced tax rate as a result of this cross border financial planning loophole.

TAXES ON ASSETS
1. Banks accounts and deposits
A very simple to understand and acceptable €34.20 per annum is applied to each current account you own. This includes fixed deposits, short term cash deposits, CD’s etc. The charge is the equivalent of the ‘imposta da bollo’ which is applied to all Italian deposit accounts each year.

2. Other financial assets
Lastly, we have the charge on other foreign-owned assets (IVAFE). This covers shares, bonds, funds, portfolio assets, gold holdings, art, classic cars etc or most other types of assets that you may hold. The tax on these is 0.2% per annum based on the valuation as of 31st December each year.

Also, remember that if you have a portfolio of managed assets that are NOT held in a suitably compliant Italian investment bond, then all the separate funds/shares/assets are considered “individual” and MUST be reported individually on your tax return each year. That also includes reconciling any income payments that have been made and also any capital gains that have been realised. A reference to the Banca D’Italia EUR/GBP or USD exchange must be made for each transaction on the correct date.

All this talk of a flat tax

By Gareth Horsfall - Topics: Income Tax, Italy, Retirement, Tax, tax advice, Tax Relief
This article is published on: 8th June 2018

08.06.18

The current political environment in Italy is one which I find very interesting, notably in how it is perceived in foreign media and presented to us through the usual media outlets. In particular, I reference the constant use of the word ‘Populism’ and ‘Populist Government’. I confess that I had to have a quick look at the definition of populism before writing this Ezine and was interested in finding out that the exact defintion, according to Wikipedia, is:

‘Populism is a political philosophy supporting the rights and power of the people in their struggle against a privileged elite’

I have a confession to make that if I can pick and choose only this broad defintion of Populism then I think I can fit myself into a part of the populist ideal. (Clearly it is more complicated than this but I am merely trying to make my point, and as a regular reader of my E-zine’s you will understand my usual approach!)

However, I think it is worth exploring the idea that the Lega and M5S coalition have put together of a flat tax. Although a flat tax for eveyone, no matter how rich or poor is completely obscene in my opinion the ‘flat tax’, proposals, which will launch at 20% for businesses as of July 1st 2018 and 15% – 20% on 1st Jan 2019 for individuals, assuming the Government holds together, actually make a lot of sense to me.

A radical reform of the Italian income tax system is about to take place, and one which is long overdue in my opinion. Not for any populist reasons, but for more practical reasons which I will expand on below.

The proposed flat tax regime
If you want to have a look at the Contratto per il Governo di Cambiamento, then you can do so HERE. It makes interesting reading, if not full of more blurb than actual facts at this stage. However, its a start.

So, going back to the issue of the flat tax. The proposal, soon to be put into force, is to reform the tax regime into 2 flat tax rates, namely 15% and 20%. This sounds very new and certainly will win a lot of those populist votes. But first let’s take a look at how income is currently spread in Italy and the following chart shows just who it would affect:

It’s quite interesting to note from this chart that 80% of the tax paying population of Italy earn up to €29000. The median declared income is €19000pa. Those may sound strange numbers but when you consider the current Italian tax rates (see chart below), you can start to form an idea that there is probably a little bit of fiddling of the figures. After €28000pa in reddito complessivo the tax rate jumps from 27% to 38%. With this in mind, the proposal of a flat tax could potentially bring in alot of, currently, undisclosed (let’s call it what it really is: ‘in nero’) money to the Government coffers.

A QUICK REMINDER OF ITALIAN INCOME TAX RATES
(IRPEF – Imposte sul reddito delle persona)

€0 – €15000  = 23%
€15000- €28000  = 27% (€3450 + 27% on the part over €15000)
€28000 – €55000  = 38% (€6960 + 38% on the part over €28000)
€55000 – €75000  = 41% (€17220 + 41% on the part over €55000)
over €75000  = 43% (€25420 + 43% on the over €75000)

How might it work in practice?
The new proposal is to have a flat tax of 15% on a combined ‘reddito famigliare’ of upto €80,000pa. If your ‘reddito famigliare’ is above €80,000pa then the flat tax rises to 20%.
A proposed maximum tax of €3000 would apply for every member of the family where they have a individual ‘redditto complessivo’ of no more than €35000pa. This would be limited to families where the ‘redditto famigliare’ is between €35,000- €50,000 pa.

In short, the most generous tax deductions are for those who have a ‘redditto famigliare’ between €40000 and €60000pa.

A straniero example……
This all sounds very exciting and some what overly generous for a country which has historically taxed its citizens up to the eyeballs. However, let’s use an average straniero example to see what difference it would make.

Let’s assume that we have a retired couple, with state pensions (€8000pa each) and private pensions of €18000 and €3000 respectively. They also own a property in their home country which generates a UK income of €8000pa (jointly owned). They have investments and savings, but for the purposes of this example they are not relevant as the proposed measures are for income tax only.

Under the current regime the income of each individual would be subject to taxation.

Spouse 1: €8000 + €3000 + €4000= Total €15000pa The tax rate applicable would be 23% therefore the tax would be €3450

For the purposes of this example I am not including any benefits, or credits that might be avaiable to any one individual or another

Spouse 2: €8000 + €18000 + €4000 = €30000pa Spouse 2 exceeds both band 1 and 2 and will enter the higher rate tax bracket creating a taxable liability of €7720

THE TOTAL INCOME TAX BILL WOULD BE: € 11170 per annum

Under the new proposals both spouse 1 and spouse 2 would pay a flat tax of 15% on their combined income , meaning a total tax bill of €6750

A SAVING OF €4420pa

Let’s take a breath and calm down for a moment
So, before we all start getting very excited we all know the Italian Government is not the most coherent at the best of times and we are in an unprecedented era. It may be that this proposal is watered down yet and we get a half way house offer, but I expect that simplification and lower tax rates are on the cards. In the end the country still has to balance the books and attract foreign investment. If they don’t have enough money coming into the Government coffers to keep the system running smoothly (for lack of a better word :0)) then the money will soon dry up and punitive tax rates will have to be imposed to reap that which has been lost.

My soap box moment
And so I move onto my favouritie part of this E-zine. My soap box moment. You see, I have been wanting to write this formally for a long time but never really had the opportunity to do so. I would go on record as saying that I am actually in favour of this radical overhaul of the Italian tax system and whilst I see this proposed flat tax regime as being a little unequally distributed, I do think its necessary and despite what the bankers, economists and bureaucrats tell us, I actually think it would be a good thing for Italy.

The entrepreneurial zone
I have always waxed lyrical that, what I like to call the entrepreneurial zone, in Italy, is completely dead. Any good economics book will tell you that 80% of employment and growth in a society comes from small to medium sized businesses. That is the shop that opens and gets so many customers that they need to employ a young person to manage the business in the mornings, or a new online business which grows rapidly and needs to employ 5 new people to manage operations. It’s worth repeating that 80% of growth in an economy and job growth comes from this area. Not the Vodafone’s of this world or the multitude of other multinational businesses that pop up on the high street. It’s the small businesses and one man bands that grow into medium sized firms that cumulatively turn over billions in revenue each year. This is real growth. And this is what Conte ( the new Prime Minister) talked about in his first address to Parliament when he said that he wanted Italy to grow its way out of debt and not have to impose more austerity. He is absolutely right. The economics speak for themselves.

Which brings me back to the entrepreneurial zone. This is the area which I think is the most important. To take a business from nothing: an idea, a start up, to revenue of €50,000 each year and onto €250,000 each year you need incentive. It is in the Governments’ interest to incentivize you because you are going to employ the people and pay the taxes that will contribute towards 80% of the running of that country. And from there you may have the skills to turn that business in a multi million euro revenue business employing hundreds of people and contributing back even more into the running of the society. The problem with Italy is that after €28000pa in revenue they effectively chop you off at the knees (the tax rates rise astronomically + there is the dreaded social security contributions to pay. INPS) and let you see if you can hobble along and survive whilst they come running after you to chop off your arms, and then take the rest. It’s like being chased by a mad axe man without your legs and seeing if you can hobble faster than he can catch up with you before he hacks the rest off. It just doesn’t work. In my opinion, this is one of the main problems in Italy and why I think both Di Maio and Salvini have got the right idea when it comes to taxation. (The rest of their policies are open to debate, although some of those also have a lot of merit!)).

I am reminded of the conversations I regularly have with clients who recount stories of their children who set up businesses in Italy and either struggle on barely being able to keep the businesses afloat and or eventually closing down. A young business needs all the revenue it can get in that ‘ entrepreneurial zone’, that area between €0 and €100,000 pa. If a business is going well most of that income is going to be re-invested anyway and used to employ people or purchase goods and services. Europe has to support Italy at this time and allow that zone to flourish and provide opportunities to young and old entrepreneurs alike.

So who is responsible for change
There is always a counter argument for every case and clearly in this case, given the cultural back drop to Italy’s tax collection issues there will be economists who will argue that if income tax revenue were to drop drastically by lowering rates so much then how will Italy, ‘The State’, balance its books, after all there is nothing to say that people will suddenly start declaring all their income because the tax rate is more favourable. That is why the proposed tax regime has to be followed by some hardline clampdowns on tax evasion. Otherwise, it just won’t work.

I am going to follow these proposals closely, and feed back to you, to keep you abreast of any legislation changes. (Watch out for the summer months as they like to slip new laws in whilst everyone is on holiday). I am completely in favour of a total overhaul of the Italian tax system and dispute what the media, economists, and supposed experts say (I sound like a Brexiteer). I think drastically cutting tax rates in Italy, whilst having a short term impact on Government revenue would attract foreign investment in droves ( I mean if you had the chance to set up a factory in Huddersfield or one in Umbria, which would you choose?), it could increase investment rapidly, create jobs, create subsidiary businesses servicing the bigger ones, incentivize larger business to relocate because of the tax rates and could create a new economic boom for Italy. That being said, if it isn’t put into place with some heavy Governmental supervision then it could all fall apart and Italy’s days in Europe would be numbered. And therein seems to be the folly of the whole idea. Europe, whilst I love the European project dearly, has not treated countries like Italy favourably and should it continue on its current path without allowing any kind of change and only implementing austerity, then the likelihood is that Italy would eventually decide to Italexit.

Government has to lead
Italy, like any government around the world has to take the lead in forcing through sensible change. The young business people I know who are barely making ends meet are never going to fully declare every euro they earn when they have families to feed, medical treatments to take care of and childrens schooling costs to pay. And given the choice of making a ‘few’ euros ‘in nero’ and being able to look after the family versus paying into a corrupt state which merely extracts the money from you by osmosis for its own nefarious means, the choice is simple. Most families, if not all, will take that risk. They just have to. Or they move abroad!

So I am in favour of Di Maio and Salvini’s tax plans. I hope they manage to find a solution that will help everyone, mainly the poor and the entrepreneurs who want to prosper but don’t have the ability to do so because of draconian tax measures which should have been ditched long ago. It won’t be an easy ride, but I hope it’s a success. And in the end, should it pay off it may just keep Europe together. Can you imagine Di Maio and Salvini going down in the history books as the saviours of Europe!

(You don’t need to write to tell me that my artistic licence has been abused in this article, just enjoy and let’s see what happens. I, for one, am moderately positive about the future if they can bring about positive change in the tax system in the way in which they are proposing to do).

Given the proposed changes in taxes in Italy, it will be an important time to take a look at your own tax and financial planning arrangements and make sure that they are as tax efficient as possible.

Common Reporting Standard – Italy

By Gareth Horsfall - Topics: common reporting standards, Italy, Tax
This article is published on: 2nd May 2018

02.05.18

You will be aware that since January 2016 the Common Reporting Standard has now been in effect. This is an OECD agreed standard for most nations around the world to automatically report tax and financial information of individuals, to one another, on a regular basis. This circumvents the historical need for the individual to accurately report their financial information on a tax return to ensure that the relevant level of tax revenue is collected. Now, this information is reported directly to the tax authorities and the information declared in your tax return needs to ‘tally’ with that which the authorities, theoretically, already know.

So, were you one of the 30,000 at the start of 2018? I was !
You may wonder what this relates to? In January 2018 it is reported that the Agenzia delle Entrate sent out up to 30,000 letters to people whom they knew had money held overseas, to ask them to report accurately the money they held outside Italy and to ensure a ‘ dichiarazione integrativa’ was completed before the next tax filing date in order to correct any discrepancies. I was the lucky recipient of one of those letters.

In regola
Thankfully my overseas financial affairs have always been ‘in regola’ with the Italian authorities. However, the letter prompted me to take a closer look to ensure I had not missed anything. Indeed, it turned out that I had missed a grand total of £500 from my last Italian tax return.

However, this does beg the question whether the Agenzia delle Entrate knew about this or whether it just sent a generic letter ( all the letters were the same and generic in nature) to put the cat amongst the pigeons, to coin a phrase. I am of the mind that it is the latter, but am I willing to take the risk? Absolutely not.

Are you paying more than you need to be?
My experience over the years has been, that in most cases, you may be paying more than you need to. There are a number of financial planning opportunities, to protect, reduce, and avoid certain taxes in Italy, that few take advantage of unless you undertake a closer look at your full financial affairs whilst living in Italy.

If you have any questions about the content in this E-zine or others then you can contact me on gareth.horsfall@spectrum-ifa.com or on cell: +39 333 649 2356

Are taxes in Italy really ‘that’ complicated?

By Gareth Horsfall - Topics: Income Tax, Italy, Tax, taxation of rental property, Wealth Tax
This article is published on: 30th April 2018

30.04.18

As I walk my son to school in the morning we have the opportunity to walk through the palazzo of an ‘Archivio di Stato’ in the centre of Rome. It is a real piece of classical architecture with cloister like columned walkways surrounding a central open space with a tower adorned with various statues at one end. However, it is not this amazing building which captures my attention each morning, but a plaque on the wall as we walk through the columned part. The plaque reads: Alluvione di 1870. The marker on the wall must be approximately 1 metre 50cm high. To think that the water reached that level is quite unimaginable. And thinking about this each day naturally leads me to the subject of floods. My personal flood is the annual flood of emails into my inbox, at this time of year, asking for clarification on taxes in Italy.

So this article is also about laying down some of the details of those pesky taxes that we all have to pay in Italy. Remember that the submission of your tax information should be formalised by the end of May. If you use a commercialista, even earlier, to allow them time to go through your information, ask questions and report it correctly. The first payment for the year is due on June 16th.

So, where do we start?
As a fiscally resident individual in Italy you are subject to taxation on your worldwide assets and income (with some exceptions), and realised capital gains. This means you are required to declare your assets and income and realised capital gains, wherever they might be located, or generated in the world.

Fiscal residency is going to become very important post BREXIT for Britons who reside in Italy. Questions have arisen as to what fiscal residency means. For a defintion you can read my post HERE

Tax on income
If you are in receipt of a pension income and it is being paid from a ‘private’ pension or occupational pension provider overseas or you are in receipt of an overseas state pension then that income has to be declared on your Italian tax return. If you have paid tax already on that income then a tax credit will be given for the tax paid in the country of origin (assuming that country has a double taxation agreement with Italy), but any difference between the tax rates in the country of origin and Italy will have to be paid.

** Government service, civil service and local government pensions of any kind (eg. Teachers, Nurses etc.) are only taxed in the state in which they originate, and tax is deducted at source in the country of origin. They are not taxed in Italy unless you become an Italian citizen **

It is a similar picture for income generated from employment. This is a slightly more complicated issue that depends on multiple factors. If you have any questions in this area you can contact me on gareth.horsfall@spectrum-ifa.com

Investment income and capital gains
As of 1st January 2018, interest from savings, income from investments in the form of dividends and other non-earned income payments stands unchanged and are taxed at a flat 26%. Realised capital gains are also taxed at the same rate of 26%.

(Interest from Italian Government Bonds and Government Bonds from ‘white list’ countries are still taxed at 12.5% rather than 26%, as detailed above. This is another quirk of Italian tax law as this means that you pay less tax as a holder of Government Bonds in Pakistan or Kazakhstan, than a holder of Corporate Bonds from Italian giants ENI or FIAT).

Property Overseas
Property which is located overseas is taxed in 2 ways. Firstly, there is the tax on the income and, secondly, a tax on the value of the property itself.

The income from property overseas.
Overseas NET property income (after allowable expenses in the country in which the property is located and taxed) is added to your other income for the year and taxed at your highest rate of income tax.

I would like to clarify what I mean by ‘net property income’. If we take the UK as an example, this means that you MUST make a tax declaration in the UK first. The UK property is a fixed asset in the UK and therefore must be treated to UK tax law before any declaration in Italy. After you have deducted allowable expenses in the UK and paid any tax liable in the UK, the NET property income figure must be submitted in your UK tax return.

Where many properties are generating all of your income this can prove to be a tax INEFFICIENT income-stream for residents in Italy. It is better to have a diversified income stream to maximise tax planning opportunities.

I will also add some comments here in that I often hear from people who are told by their commercialista that no expenses can be deducted in Italy. This is correct. What they mean (or what I am interpreting that they mean) is that you cannot deduct the UK allowable expenses directly through the Italian tax return. This has to be done first in the UK tax return, in this example. This is correct process. However, it does not mean that the expenses cannot be deducted per se. It just means they have to deducted in the revelant tax return first before reporting the NET result in Italy.

** Tax credits will be given for any tax paid in another country in order to avoid double taxation, where a double taxation treaty exists with Italy.

2. The other tax is on the value of the property itself, which is 0.76% of the value. (IVIE)
Value must be defined in this instance. For EU based properties, the value is the Italian cadastral equivalent. In the UK that would be the council tax value NOT the market value. This value is always expressed asa range of values rather than a specific one. You will find that the market value will, in most cases, be more than the cadastral equivalent value.

For properties located in other European countries, for example France, you will find that they may have a similar ‘cadastral’ value. Where this value is calculated in the same way as Italy, a tax credit is offered against any IVIE tax payable in Italy. The tax credit is not applicable to UK properties as the tax is due on the occupant of the property and not the owner.

In properties located outside the EU, the value for tax purposes is defined as the market value of the property ONLY where evidence cannot be provided of the purchase value of the property, in which case this would be used instead.

** BREXIT FINANCIAL PLANNING OPPORTUNITY**
After the UK exit from the EU, the cadastral equivalent value of a property in the UK will revert to the original purchase price, where evidence can be provided. Given that UK councils are likely to review their council tax bands in the comings years to fund shortfalls in their accounts, this could mean less tax to pay in Italy.

Taxes on Assets

1. Banks accounts and deposits
A very simple to understand and acceptable €34.20 per annum is applied to each current account you own. This includes fixed deposits, short term cash deposits, CD’s etc. The charge is the equivalent of the ‘imposta da bollo’ which is applied to all Italian deposit accounts each year.

The rules regarding whether you need to declare the account can be found on my blog post ‘IF IN DOUBT, DECLARE THE ACCOUNT

I am of the view that if you have a bank account in the UK with more than €5000 in it and/or a regular income being credited to it, then you should declare the bank account in Italy regardless of the tax reporting requirements. For the sake of the tax of €34.20, it is not worth taking the risk.

2. Other financial assets
The charge, IVAFE, is levied on other foreign-owned assets which covers shares, bonds, funds, portfolio assets, cryptocurrency, gold deposits, art work or most other types of assets that you may hold. The tax on these is 0.2% per annum based on the valuation as of 31st December each year.

Also remember that if you have a portfolio of managed assets that are NOT held in an a suitably compliant Italian Investment bond, then all the separate funds/shares/assets are considered “individual” and MUST be reported individually on your tax return each year. That also includes reconciling any income/dividend/distribution payments that have been made and also any capital gains that have been realised. A reference to the Banca D’Italia exchange must be made for each transaction on the correct date.

3. Pensions
It is worth noting here that for any UK style private pension or occupational pension arrangements, where the pension structure is an irrevocable trust, then the tax treatment is 2 fold.

a) any income that you draw from the pension each year is taxable at your highest rate of income tax in Italy.

b) the fund itself needs to be reported under ‘monitoraggio’ of trusts section of the Quadro RW. Failure to do so could result in fines. Although highly unlikely, you never can be sure.

This is a concise list of the taxes that affect most of you.

New QROPS tax charge for 2017 – Will this change after BREXIT?

By Spectrum IFA - Topics: Belgium, BREXIT, France, Italy, Luxembourg, Netherlands, pension transfer, Pensions, Portugal, QROPS, Retirement, spain, Switzerland, United Kingdom
This article is published on: 20th April 2018

20.04.18

In the Spring 2017 Budget, the UK government announced its intention to introduce a new 25% Overseas Transfer Charge (OTC) on QROPS transfers taking place on or after 9th March 2017. The HMRC Guidance indicates that the OTC will not be applied in the following situations:

  • the QROPS is in the European Union (EU) or EEA and the member is also resident in an EU or EEA country (not necessarily the same EU or EEA country);
  • the QROPS and the member is in the same country; or
  • the QROPS is an employer sponsored occupational pension scheme, overseas public service pension scheme or a pension scheme established by an International Organisation (for example, the United Nations, the EU, i.e. not just a multinational company), and the member is an employee of the entity to which the benefits are transferred to its pension scheme.

It is also intended that the above provisions will apply to transfers from one QROPS (or former QROPS) to another, if this is within five full tax years from the date of the original transfer of benefits from the UK pension scheme to the first QROPS arrangement.

Nevertheless, it is clear that taking professional regulated advice is essential. This includes if you have already transferred benefits to a QROPS and you are planning to move to another country of residence.

It is important to explore your options now while you still have the chance as who knows what changes will come with BREXIT. Contact you’re local adviser for a FREE consultation and to discuss your personal options

Preparing ‘THE’ folder

By Gareth Horsfall - Topics: Estate Planning, Inheritance Tax, Italy, Wills
This article is published on: 10th April 2018

10.04.18

Living in a foreign country is never easy, but have you thought how complicated it would be for your family if you die suddenly?

I am writing this E-zine after my weekly food trip to the Mercato Trionfale in Rome.  I believe it to be the largest indoor market in Rome.  It certainly has a massive choice of fruit, veg, meats, fish and much more.  For any foodies out there, it is well worth a visit.  However, my motivations for going this particular morning were not necessarily the food, but to go and have a natter with the people on the ‘bancarelle’.  As is the norm at markets you tend to have your favourite stalls and you get to know the people and whilst buying the groceries you can stop and put the world to rights, talk about the weather etc.   I love it because it is a break from the everyday routine and it provides me with that connection with people outside work.

So, when I got a call from a lawyer recently to tell me that one of my clients had died, (after a tragic and prolonged illness) I felt I had to go and have a dose of that life infusion once again.

This E-zine is never an easy one to write but I like to throw it out there once a year because I think its important.  Ensuring that your papers are in order in the event of your sudden death is incredibly important when living in another country.  It will provide you with peace of mind that your loved ones will not have too much difficulty in administering your estate, and your family  will be thankful that you did it for them.

The big problem is that as ‘stranieri’ we often have documents spread across multiple locations.  The office, a house in another country, with family members and in that old box that no-one dare look in.

The purpose of this Ezine is to outline a proven way of organizing your affairs to reduce stress in the event of your death.

So what is THE folder?

It is a single file (digital or physical) where you keep all of your important personal and financial information together. It allows easy access to these documents in the event that you’re no longer around to help. It is really important to have it in place where one family member takes the lead on the family finances (as I do in our household). That includes paying bills, managing accounts and storing documents.

Is it worth the effort?

Well, I think it is worth the effort. A time of loss can be stressful enough without having to try and piece together the deceased’s financial affairs. This can be a really difficult time for family members.

However, preparing THE folder is much more than avoiding stress; if you leave behind a administrative nightmare you could delay access to inheritors’ access to funds and potentially cost a small fortune in legal fees.

To give you an example of this, the UK Department of Work and Pensions estimate that there is currently more than £400 million sitting in unclaimed pensions pots in the UK.

Which is best…..physical or digital?

This comes down to personal preference. It can be done by either creating an electronic file that survivors can access in the event of death. This file can then be stored on your main computer, in the cloud or on an external hard drive. Alternatively you can use a physical folder to keep all of the important information together.

For what it’s worth, I decided to do both when building mine because my wife prefers paper and so is happier with hard copies of everything. I prefer digital. I have also shared the digital folder with some trusted family members.

Birth, marriage and divorce

  • Personal birth certificate
  • Marriage licence
  • Divorce papers
  • Birth certificate/adoption papers for minor children

Life insurance and retirement

  • Life insurance policy documents (including beneficiary nomination forms)
  • Details of any employer death in service benefits
  • Personal pension documents
  • Employer pension details
  • Annuity documents
  • Details of any entitlement to state pensions

Bank accounts

  • List of bank accounts with account numbers, login details, passwords etc
  • Details of any credit cards
  • Details of safe deposit boxes

Assets

  • Property, land and cemetery deeds
  • Timeshare ownership
  • Proof of loans made
  • Vehicle ownership documents
  • Stock certificates, brokerage accounts, investment platform details, online investment account details
  • Details of holdings of premium bonds, government bonds, investment bonds
  • Partnership and corporate operating/ownership agreements (including offshore companies)

Liabilities

  • Mortgage details
  • Proof of debts owed

Details of gifts

  • Dates and amounts/values (potentially helpful when calculating any inheritance tax liability)

Income sources

  • Make a listing of all your sources of income, especially ones that your family might not know too much about
  • Employer details
  • A copy of your most recent tax return or accounts

Monthly expenses

(so they can be maintained if necessary or cancelled if not. Essentially list the fixed costs which would need to continue after death)

  • Utilities
  • Insurance
  • Rent/mortgage
  • Loans
  • Subscriptions/memberships

Email and social media account details

  • Facebook
  • LinkedIn
  • Twitter,etc……..

Essentials

  • Will/testament + details of the legal firm that helped create it, if applicable
  • Instruction letter
  • Trust documents
  • Burial/cremation wishes

Contact details

  • List of names and contact numbers for: Financial adviser, doctor, lawyer/solicitor, accountant, insurance broker,

How often should ‘THE’ folder be reviewed?

Firstly, it is sensible to note the date that it was last reviewed so that anyone using it has an idea of how up-to-date the details are.

Going forward, reviewing the file on an annual basis should be sufficient.

Online passwords

If you are not comfortable keeping these in your folder, consider using a password management program. A password manager allows you to save all account usernames and passwords in one place. They are then protected using one master key. There a number of them available. I personally use LastPass – www.lastpass.com

This might be a step too far for you given the data breaches that seem to be happening almost daily, notably Facebook. I appreciate that and if you are not comfortable in using such an app then its important to have a physical record some where that can be accessed in the event of your death.

And finally…

Be sure to tell someone about it. There is little point going to the effort of creating such a folder if know one knows of its existence/where to find it…..