The Italian government led by Premier Giuseppe Conte has released the first decree (Decreto Dignità, translating into “Dignity Decree”) after its formation, paving the way for the changes that will be introduced by the new government in relation to employment, taxation and operating procedures for businesses.
A Summary Of Decreto Dignità’s Salient Points
The most salient topics, described in more detail below, are the following:
1. The limitations imposed to definite employment contracts;
2. Fines to firms that receive aid from the state and then decide to relocate abroad;
3. A ban on advertisements by land-based and online gambling operators;
4. The obligation of implementing electronic invoicing for fuel purchases by the self-employed;
5. The reduction of VAT reimbursement issuance times; and
6. The abolition of the Redditometro, a system for assessing income previously implemented by the Italian Government.
Decreto Dignità’s Details
Decreto Dignità was presented to the Council of Ministers and discussed on the 27th and 28th of June, 2018. The document is made up of 11 articles and includes most of the topics addressed by the leader of the Five Star Movement, Luigi Di Maio, since the establishment of the Conte government and during his electoral campaign.
One of the main changes introduced relates to the measures limiting (or increasing, depending from the point of view) temporary unemployment, and amending the regulation of definite employment contracts brought into force by the Decreto Paoletti in 2014. The maximum duration limit of the contracts remain unchanged at 36 months, but this Decree will oblige employers not to extend such contracts for more than 4 times (rather than 5 as was hitherto the case under the Decreto Paoletti). Each contract renewal, starting from the second one and even for those lasting for less than 12 months, will be subject to an increase of 5% in the contributory cost. The Decree also intends to enact an increase of up to 270 days for the maximum timeframe within which one can contest the contract, as well as the introduction of causalities to justify the extension of the contract after 12 months. More specifically, the Decree allows for temporary and objective needs, external to the ordinary business activity, or needs linked to temporary, relevant and non-programmable increments. In this regard, it is worth noting that temping arrangements will be taken into account in computing definite employment where the existing limit of 20% will still apply. Moreover, no employer will be allowed to have more interim employees than employees with indefinite contracts.
The original intention of the decree is to avoid the workers’ exploitation. However, several Italian employers and embattled small business owners rightly argue that the new measure is actually exploiting them and that, instead of promoting economic growth through the reduction of unemployment, it discourages an employer who might potentially be considering posting new job openings from doing so, especially in those sectors where the nature of the economic activity is seasonal or sporadic and where it has to happen necessarily on Italian territory.
Inasmuch as company relocation is concerned, those firms who were recipients of aid from the state and decide to relocate their activities abroad before the elapse of 5 years from the conclusion of the intervention receiving the aid will be subject to financial sanctions amounting up to 2 or 4 times the financial aid received. Decreto Dignità also provides for the same aid to be revoked and where already granted reimbursed with interests up to 5% in the case where the activity is relocated outside the EU. Moreover, in case of relocation or transfer of the investments, the so-called hyper-amortisation will also need to be reimbursed to the Italian state. Finally, Decreto Dignità will direct that where the provision of state aid or incentives included employment as an impact evaluation criterion, the economic benefits should be totally or partially revoked for those employers reducing, without justification, the employment levels in the production unit or in the activity concerned by the state aid, in the 5 years following the end of the intervention.
Clearly, instead of mitigating the risk of entrepreneurship, such measures increase it together with the risk inherent in employing new workers. Moreover, it is not clear whether the decree violates any one or more of the four fundamental rights of the European Union, particularly the right of establishment in Member States other than the one of origin, insofar as the measure imposes a barrier to the free movement of capital and freedom of establishment. The measure could, in our view, therefore be contestable on the basis of Article 49 of the Treaty on the Functioning of the European Union.
The Dignity Decree also makes for a measure intended to eliminate the addiction to gambling. In fact, the decree contains a measure imposing a total ban on gambling advertisements. This ban will come into effect in 2019 and will cover ads, sponsorships and all forms of communication, including visual and acoustic ads, mere PR references, as well as the on-screen texts mentioning the name, logo and symbols of gambling operators. The fine for failing to comply with this prohibition can amount to up to 5% of the value of the sponsorship or of the same advertisement and will amount to a minimum of €50,000. The fines levied will go to a fund earmarked for the action against the addiction to gambling. The fines of €100,000 and €500,000 for anyone not respecting the ban during performances addressing children will remain into force.
Furthermore, as announced by Vice President Luigi Di Maio, the fiscal reform foresees the deferment to the 1st of January 2019 of the obligation of electronic invoicing for the procurement of fuel by self-employed persons who will be allowed to maintain their fuel card till end of the year. This measure should be valid only for the retail sales, and not for the entire supply chain, and covers an estimated fuel value ranging between 30 and 50 million euro.
Finally, with regards to fiscal simplification, the so-called ‘split payment mechanism’ is amended through the Decree with the introduction of corrective measures excluding self-employed people (of which there are about 35 million) while mandating an acceleration of the processes for VAT reimbursement. Additionally, given its very limited use, the decree aims to abolish the Redditometro (the system used by the Italian government) for assessing income and postpones the deadline for the submission of the documentation related to the Spesometro for the third quarter to the 31st of December 2018.
At a time when Italy in general, and Italian businesses in particular, need more operative leeway and a loosening of the tight noose that successive Italian governments have put round their necks, a legislative decree that is based on prohibitions and fines, rather than on socially-beneficial incentives to create new jobs and economic activity, cannot be the way forward to restart the country’s economic engine.
Matteo Salvini’s 15% flat tax proposal, for instance, would have gone some way in providing the right incentive framework for Italian businesses to start investing and contributing to economic growth again. However, that measure has been rolled back to next year and it is highly doubtful whether the Italian state will manage to find the liquidity to implement it without bankrupting the state.
When a new government comes out with a first decree that batters businesses that are already worn out from the damage they have already sustained at previous Italian governments’ hands, it is not difficult to see why this does not bode well for Italian businesses and for Italy as a country. Indeed, Italian businesses have seen increases in their cost structures and their tax burden in multiple successive rounds, and this has over time eroded competitiveness and resulted in a twin brain- and entrepreneurial- drain from Italy to other jurisdictions that are more business friendly. This than means that with a lower tax base and the same long-term commitments to meet, those businesses that do not relocate have to pay more until it no longer makes sense to operate.
The political context in which this decree takes place cannot be ignored if the decree and its spirit are to be fully understood. The Conte Government has formed following a protracted negotiating round involving several Italian parties, botched coalitions and a looming threat of another costly general election. The coalition that ultimately formed is made up of two very unlikely coalition partners with several highly-contrasting positions. It is made up of the Movimento Cinque Stelle (Five-Stars Movement) which got elected mostly on the strength of voters coming from the Southern part of Italy on the strength of its electoral promise of giving everyone a ‘reddito di cittadinanza’ (citizenship dividend) and the Lega (League) which got elected mainly from the Northern part on the two main promises of combating illegal immigration and of implementing a 15% flat tax regime.
Since the formation of the coalition, despite having the majority of the votes in the coalition, the Five-Stars Movement has been overshadowed by the League’s (particularly Matteo Salvini’s – the League’s boss) visibility in the media and unprecedented popularity levels. Indeed, several Italian political analysts have touted this decree as being a costly way for Luigi Di Maio, who is being accused by supporters of his own party of being continuously overshadowed by Matteo Salvini, to be able to countenance the League’s increasing visibility and soaring popularity, even if the decree was ill-conceived, at best half-baked and might ultimately backfire.
The situation unfolding in Italy is indeed not only a tragedy for Italy, but also a tragedy for the European Union where Italy is too big to fail and Italy’s immediate neighbours and trading partners.
If in the eyes of the Italian Government, the entrepreneur remains to be seen as some sort of enemy of the state and of the general public who can also act as a fall-back for any problems in the fisc, rather than a partner that can help bring down unemployment levels and generate tax revenues, nothing is going to change. In such a scenario, the best bet for Italy’s entrepreneurs will remain to outsource wherever possible to other jurisdictions with less Draconian labour laws or to pack up and leave for more business-friendly jurisdictions as they have done in great numbers over the past decade and continue doing to this very day. Indeed, it is no coincidence that Malta, an island of 426,000 native inhabitants, hosts more than 150,000 Italian nationals, and that Italians make up the eighth largest group of immigrants in Ireland.
The facts remain that nowhere has private sector employment or private sector-led economic growth been created through edict and if the new government wants to change the dangerous trajectory that Italy has taken over the past couple of decades, it needs to take on a very different approach to job creation and economic growth than it has taken with the enactment of Decreto Dignità.
Ultimately, no irony is lost in the fact that the Five-Star Movement is promoting a decree that has clearly not been drafted by the brightest of stars if the real objective is to provide relief to Italian businesses and the Italian economy.