IRAP AND DOUBLE INTERNATIONAL TAXATION

Bad news on IRAP. It appears that the previous agreement between the Italian Inland Revenue and that of the United States to recognise the tax credit for the Irap paid in Italy by the US companies may be forsaken.

The agreement provides for a specific calculation see (TAB A.) , on whose basis the proportion of the IRAP that is deductible for US tax purposes is determined.

The problem is that this arrangement is only temporary, as it is only valid for the fiscal year 1998. The possibility of an extension exists, but only on the condition that by 31 December of the current year the two countries reach a preliminary concurrence on the re-negotiation of the tax treaty between Italy and the United States.

However, after the first few meetings the possibility to come to an early revision of the bilateral convention has vanished as the United States have always insisted on a subject close to their hearts: a reduction of the taxes withheld by the Italian authorities on royalties from the mass export of US technological innovations, patents and movies and on dividends to US companies. The US government has been demanding this for some time.

It is for the above that the US Internal Revenue Service has rejected an attempt by the Italian government to pass IRAP as a tax very similar to the now abolished ILOR (a tax which was included in the extant Convention against double taxation). The US administration has specified in its circular Int. 98-6 that the agreement reached re Irap is absolutely temporary and that the US does not consider this tax to be similar to ILOR.

It is therefore very improbable that the United States will withdraw from the ultimatum given to the Italian government, and it also appears unlikely that the United States will continue to concede the tax credit for IRAP paid should an agreement not be reached on the most important points of the new Convention.

Added to this uncertainity, is another: what will the other countries decide about IRAP? Should the pressure inflicted by the United States have the required effect and result in a rapid revision of the international agreements, Italy will find itself facing the same problems with other countries with which it has underwritten a Convention against double taxation.