How Italian Tax Policy Provides Incentives for Investment in Developing, Emerging, or Low-Income Countries
Italy has designed its international tax system to avoid distortion of investment decisions of its residents. This prevents the use of tax incentives to encourage investment in developing or low-tax countries. Italy has, instead, chosen to employ non-tax
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How Italian Tax Policy Provides Incentives for Investment in Developing, Emerging, or Low-Income Countries Claudio Sacchetto Abstract Italy has designed its international tax system to avoid distortion of investment decisions of its residents. This prevents the use of tax incentives to encourage investment in developing or low-tax countries. Italy has, instead, chosen to employ non-tax strategies to assist these nations in fighting poverty and to otherwise to develop viable economies. Although Italy once included tax sparing clauses in treaties with developing countries, it has in recent years not allowed them, hoping to direct investment into poor regions in Italy rather than those abroad. In lieu of tax sparing, Italy has entered into many agreements with developing countries to promote and protect investment. It has also provided relief in the area of customs duties through the Cotonou Agreement. In addition, a special regime for non-profit organizations dedicated to the pursuit of certain social goals may be used to assist low- income countries by providing tax benefits for donors. Synopsis Having adopted the tax policy principle of neutrality, Italy has designed its international tax system so as not to distort the investment decisions of its constituents. This translates into a decision not to encourage investment in developing countries through the use of Italian tax incentives. Instead, Italy has employed nontax strategies believed to assist these nations to fight poverty and to otherwise thrive. Italian residents, both individuals and corporations, are taxed on their worldwide income. This represents a shift from the prior territorial regime which was eliminated in 1973. Double taxation of income under the worldwide taxation regime is alleviated by use of the foreign tax credit contained in Italian legislation or via a double taxation treaty. Adoption of the worldwide tax system may represent a prevailing view in Italy that the territorial system may not advantageous to poor countries that sacrifice revenue needed for development by engaging in tax competition. Use of the worldwide system with a foreign tax credit disrupts the ability of developing countries to attract foreign investment by offering lower tax rates.
C. Sacchetto (*) University of Turin, Turin, Italy e-mail: [email protected] © Springer International Publishing Switzerland 2017 K.B. Brown (ed.), Taxation and Development - A Comparative Study, Ius Comparatum - Global Studies in Comparative Law 21, DOI 10.1007/978-3-319-42157-5_10
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Italy has a participation exemption that applies to dividends received from foreign subsidiaries as well as to capital gains resulting from the sale of shares held in these companies. If requirements are met, 95 % of the dividend received is exempt from corporate income tax. Capital gain on the sale of shares is also exempted from tax. The exemption is not allowed if the subsidiary is a “black-listed” company. Controlled foreign corporation (CFC) rules treat the profits of a controlled
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