As you may have heard, Italy is cracking down hard on tax evasion. Millions have been recouped so far, and plans to use something called a ‘redditometro‘, which, crudely translated into English is ‘income-o-meter’, are afoot. This new system is spooking some expats in Italy.
What is the ‘redditometro’, ‘income-o-meter’ thing? Well, it’s a system for working out whether everyone in Italy is paying his or her fair share of tax.
The redditometro will work, or so rumor has it, by comparing spending with declared income. Redditometro alarm bells will go off if someone spends more than 20% over declared income. If, therefore, you declare €100,000 but spend more than €120,000, you will attract attention. (information here corrected – spending not 20% of income, but income plus 20%. Sorry about that blunder which was pointed out by Steve.)
So Italians who declare incomes of €6,000 a year, but splash out on €80,000 BMWs or exotic vacations will have a little explaining to do.
In Italy, where jewellers and the like routinely declare paltry incomes, lots of people are going to have plenty of explaining to do – if the ‘redditometro’ actually works. The system is in a testing phase at present and may be fired up officially before the end of 2012.
Italians are reputed to evade as much as €250 billion every year, and a crack down on tax evasion was long overdue.
Expats in Italy, or so I have been led to believe via Twitter, are concerned that they too will be caught by Italy’s ‘income-o-meter’.
Should Ex-pats be Worried?
Yes and no. What some expats will fear is that they may be spending vast sums on doing up villas in Puglia, Le Marche, and other spots in Italy, but not declaring much, if any, income to Italy’s soon to be ‘income-o-meter’ armed taxman. Italy’s tax people may then want to know why someone who declared an income of zero in Italy managed to afford to restore a farmhouse.
However, the system is really aimed at bringing tax-shy Italians to heel. Initially, and to avoid diplomatic protests, expats in Italy may be ignored, although whether this will happen, I really have no idea.
According to the Intrage website, the redditometro will monitor spending in the following broad categories:
- Means of transport
- Sporting and recreational activities
- Personal care (not health care)
- Other significant expenses – vets bills, for example.
Each of the areas is broken down into further subcategories. For example, sporting activities is broken down into:
- Sporting activities in general
- Cultural associations
- Recreational associations
- On-line gaming
- Pay-tv subscriptions
- Event season tickets (For football matches etc.)
- Holiday tours
Expats in Italy who are concerned should go speak to an accountant. Accountants should be able to help worried expats prepare documentation, such as translated tax returns and the like, to present to Italy’s tax people should they breach the 20% threshold.
Preparing such documentation will probably cost something and may mean that Italy’s tax people will find out exactly how much cash you have.
What Will the Effects of the Redditometro Be?
One possible effect for is that someone considering buying property in Italy or moving here may decide not to. I’m sure some may put off property purchases in Italy until the redditometro is up and running to see how things shape up. This will not happen for at least six months, if not longer.
For Italy, redditometro worries may cause a flight of capital, or may simply depress consumer spending. Some Italians will take steps ensure their spending does not exceed declared income plus 20% threshold. Others might even declare more to Italy’s tax man – which is exactly what the system is designed to encourage them to do.
Those with very high incomes may still be able to work the system by ensuring their spending does not take them over declared income plus 20% limit. For example, if your declared income is €10 million, you would have to spend more than more than €12,000,000 (€10,000,000 + €2,000,000) in one tax year to set off the redditometro alarm. That is probably enough to live on.
It would be possible to earn €15 million, but declare only €10 million and monitor spending to keep the redditometro from sending nosy tax men round to ask probing questions, thus hiding €3,000,000. Will such a system be employed to avoid unwanted attention? I’m 100% certain it will be, along with many other much more sophisticated tricks to prevent redditometro alarm bells from sounding.
One trick which has already emerged is that some wealthy Italians are buying and registering luxury cars abroad, probably with offshore funds. These vehicles will be invisible to the redditometro, as will the cash used to acquire them.
2013 will be an interesting year for Italians. Consumer spending will probably fall until such time as certain people work out ways to avoid the attention of the dreaded redditometro. Italy’s tax people are helpfully providing a system which people can use to check whether or not they will attract the attention of the new anti-evasion system.
I, and others, would welcome comments from passing accountants or from concerned expats on the redditometro issue.
Article corrected at 19:00 Italian time, 18th October 2012.
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