Italy: Performance-related pay tax break
The Italian government has agreed to favourable taxation of performance-related pay in companies that have signed decentralised collective agreements. The favourable rates will apply to up to €3,000 gross of performance-related pay for employees in the private sector, provided their 2013 income did not exceed €40,000, and has been extended for a further year.
On 21 November 2012 the social partners signed an interconfederal agreement on ‘programmatic guidelines for the growth of productivity and competitiveness in Italy’ (the ‘Interconfederal Agreement’).
The Interconfederal Agreement was signed by the most representative unions (with the exception of the Italian General Confederation of Labour, CGIL) and employers’ organisation. Its aim is to reduce unemployment, and increase the productivity and competitiveness of Italian companies. Its provisions state that:
- national collective bargaining agreements shall regulate workers’ common economic and regulatory treatment;
- decentralised collective bargaining agreements shall regulate all working conditions such as working time flexibility and pay that can improve the productivity of companies.
Under the agreement, the social partners asked the government and the parliament to confirm the measures already provided by Law no. 247 of 2007. This covers tax relief on that portion of salary classified as ‘performance-related pay’, taxing it at a rate of 10% rather than applying the higher personal income tax rate (the so-called IRPEF) and the municipal taxes (the so-called Addizionali Regionali).
The government agreed to the social partners’ request. Law no. 228 of 2012 (section 1, paragraphs 481 and 482), and the mechanism of the annual renewal by means of Decree of 22 January 2013 and Decree of 19 February 2014, provide tax relief on performance-related pay in 2013 and 2014, although there is a limit on how much has been allocated by the government to cover the tax shortfall – €950 million in 2013 and €400 million in 2014.
Definition of performance-related pay
The tax relief applies to private sector employees only, and the amounts classified as ‘performance-related pay’ have to be paid by the employers a part of a decentralised collective bargaining agreement entered into at company and local level.
According to the Ministry of Labour guidelines issued on Ruling no. 8/2013, to fall within the scope of the relief, the decentralised collective agreements have to be entered into by employees’ organisations that are most representative on national level. Where agreement is reached at company level (accordo aziendale), the individual employer is entitled to enter into the agreement with the representative employees’ organisation(s).
For companies that do not have works councils, the employer can enter into a decentralised collective bargaining agreement with one or more employees’ trade union organisations at local level provided they are representative. For a collective agreement at local level, employers’ organisations must also be representative on a national level (Ministry of Labour Ruling no. 8/2013).
The Decree of 22 January 2013 specifies that tax and social security contributions relief can apply to two different categories of performance-related pay:
- the portion of salary that remunerates the employee’s performance to improve (a) productivity (payment consisting of a premium for the employee’s presence at work and/or for their availability to work on Sunday or during public holidays), (b) earnings (payment linked to certain development measures, such as turnover, volume of production, or growth measures, such as those relating to the use of manpower), (c) quality (payment linked to measures such as customer satisfaction, observance of production deadlines, improvements in the working process or to the working environment), (d) efficiency (payment linked to the number of production hours) and (e) innovations (payment linked to measures to reduce production costs due to the use of new technologies or the implementation of new shifts);
- the portion of salary paid to the employee upon the implementation of one measure in at least three of the following areas: (a) definition of the working time and its distribution (for example flexible work shifts, staggered working times, flexitime, compressed hours); (b) flexible planning of holidays; (c) implementation of measures aimed at introducing new technologies; (d) implementation of measures concerning the interchangeability of employees’ duties and integration of capabilities aimed at introducing processes of technological innovation (allowances paid to employees classified under new professional profile not provided in the collective bargaining agreement).
The decentralised collective agreement can provide performance-related pay through a combination of both these categories.
Employers have to file the collective agreement with the local labour office (Direzione Territoriale del Lavoro, DTL) within 30 days of signing it. The employer also has to file a statement declaring that the collective agreement complies with the Decree of 22 January 2013.
The tax relief
The Decree of 19 February 2014 extended the rules for the implementation of the tax benefit set out in the Decree of 22 January 2013.
The part of a salary classified as performance-related pay, up to a maximum of €2,500 gross in 2013 and €3,000 gross in 2014, will be taxed at 10% rather than the higher personal income tax rate (IRPEF) and is exempt from local taxes.
To benefit from the 2014 tax relief, the employee’s income in 2013 must not have exceeded €40,000 gross, including any performance-related income which was taxed at the lower rate of 10%.
This tax relief only applies to employees in the private sector and to performance-related pay paid as part of a decentralised collective bargaining agreement entered into at company or local level, and falling into one of the two categories described.
Social security contribution relief
Law no. 228/2012 and the Decree of 14 February 2014 specifies that companies which have signed decentralised collective bargaining agreements can also benefit from social security contribution relief.
Law no. 247/2007 and Law no. 92/2012 regulate the social contribution relief on performance-related pay set out by the decentralised collective bargaining agreements. Decree 14 February 2014 sets out the detail of how companies can benefit from the social security contribution relief and also sets aside €607 million to fund social security contribution reductions for companies that signed decentralised collective contracts during 2013.
The social security contribution relief applies to performance-related pay and any other sums established by the decentralised collective bargaining agreement at firm and local level, and it is granted to either the employers or the employees. Employers are entitled to 25% relief on their normal contributions, and employees to 100% relief on contributions that would normally be due on performance-related pay, up to a maximum of 2.25% of their contractual salary.
The €607 million set aside by the government to cover the contribution relief is divided between decentralised agreements concluded at company level (62.5%, €379 million) and decentralised collective agreements at local level (37.5%, €228 million).
The ceiling of 2.25% can be recalculated in relation to the monitoring of applications and financial resources committed, taking into account that its maximum value cannot exceed 5% as established by the Law no. 247/2007.
To access social security contribution relief, decentralised collective bargaining agreements must have the following characteristics:
- be signed by the employer and filed with the DTL by 30 June 2014;
- they should link pay to increased productivity, quality, profitability, innovation and organisational efficiency, and to economic trends, to the profits of the company or to any other relevant factor in the improvement of company competitiveness.
The application for the social security contribution relief has to be addressed to the National Institute of Social Security (Istituto Nazionale di Previdenza Sociale, INPS).
Social partners’ response
Most representative unions and employers’ organisations welcomed the social security contribution and tax relief approved annually by the government to encourage improved productivity in Italian companies.
The availability of these measures has encouraged the social partners to enter into decentralised collective bargaining agreements to do their part in increasing national productivity.
Unfortunately tax and social security contribution relief are not permanent measures. This means that that every year the measure may be different and the rules enabling workers to benefit from such relief could be changed and adjusted.
However, the pressure exerted by the social partners through the decentralised collective bargaining agreement should encourage the government to renew the measures each year.