Circular no. 1/E of Italian Tax Authority “Agenzia delle Entrate”
Payment of withholding taxes and contributions in the context of contracts for the supply of works or services
Circular n.1/E of Italian Tax Authority “Agenzia delle Entrate” dated 12 February 2020
With Circular no. 1/E of 12 February 2020, the Italian Tax Authority “Agenzia delle Entrate” intervenes to provide the first important clarifications regarding the new provisions of Law-Decree 26 October 2019 n.124, converted by Law 19 December 2019 n. 157, which introduced a new Article 17- bis of Legislative Decree n. 241/97, referred to in our previous newsletter no. 2, which introduces a particular control mechanism on the payment of withholding taxes and social security and welfare contributions, limiting the offsetting of debts relating to withholding taxes to be paid on employee income paid to personnel employed in contract contracts or assignment of works.
Application of the norm and its exclusion
As already illustrated, the new provisions apply if the works or services entrusted exceed € 200,000 against a company and on condition that the interventions are characterized:
– by prevalent use of labor;
– at the client’s business premises;
– with the use of capital goods of the client himself.
Paragraph 5 of Article 17-bis excludes the application of the provisions if the contractors or subcontractors notify the client, attaching the certification issued by Italian Tax Authority “Agenzia delle Entrate” (Single Document of Fiscal Regularity – DURF), that they meet the following requirements:
a) are in business for at least three years ( it is believed three years after the constitution) ;
b) comply with the declaratory obligations;
c) during the tax periods to which the tax returns submitted in the last three years have made a total of payments recorded in the tax account for an amount not less than 10% of the amount of revenues or fees resulting from the tax returns ;
d) do not have registrations for the role or executive assessments or debit notices entrusted to the collection agents relating to income tax, regional tax on production activities, withholding taxes and social security contributions for amounts exceeding € 50,000, for which the payment terms have expired and payments are still due or no suspension measures are in place. The provisions referred to in the previous period do not apply to the sums subject to the installment plans for which lapse has not occurred.
The concept of prevalent use of labor
The two most awaited clarifications concern the concept of prevalent use of labor and the use of the client’s assets.
Regarding the concept of the predominant use of manpower, the Italian Tax Authority “Agenzia delle Entrate” ( the par inability to write 3.2.3) specifies that both concerning cases of exclusive reliance of works that in the case of mixed contracts custody of works and services to the limit prevalence must be calculated by reference to the relationship between gross earnings related to recipients of employee income and assimilated and the total value of the work and of the service; only when this ratio is greater than 50% will it fall within the scope of the regulatory provision.
A further important clarification includes not only manual but also intellectual work in the concept of labor, suggesting that the cost of employees/managers also falls within the basis of calculation. The Circular, however, does not clarify how the remuneration of those “intellectual” workers who perform their activity indirectly in the execution of the contracted works/services must be calculated.
The concept of using the client’s assets
The most relevant clarification regards the concept of ” use of capital goods owned by the client or attributable to him in any form ” considering that the standard does not provide any reference to the concept of prevalence. On this matter, the Italian Tax Authority “Agenzia delle Entrate”, in par. 3.2.5, that it will ordinarily be “machinery and equipment that allows workers to provide their services” and states that the occasional use of capital goods attributable to the client or the use of capital goods of this subject, if not essential for the execution of the work or service, does not entail the occurrence of the condition envisaged by the Law with the consequent non-application of the legal provision.
If the workers use the capital goods attributable to the contractors, subcontractors, contractors or other subjects who have contractual relations however called necessary for the execution of the specific work or service commissioned, the occasional use of capital goods attributable to the customer or the use of instrumental goods of the client, which are not essential for the execution of the work or service, does not entail the occurrence of the condition of applicability in question.
The calculation of the limit of 200,000 euros
The Circular, at paragraph. 3.2.1, specifies that the same must be assessed, first of all, on the first link in the chain, i.e. in the relationship between the client and the contractor but, in substance, at each level of the chain (for example that between the contractor and subcontractor) must the figure of the client must be identified from a substantial point of view. However, to avoid circumvention of the € 200,000 threshold, by dividing the award of works or services of an amount greater than the threshold into several sub-contracts of lower amounts, the aforementioned threshold will be verified only in the relationship between the original client, even if not falling within the scope of paragraph 1 of art. 17- bis, and custodian.
If in the relationship between the original client and custodial occurs the aforesaid assumption, the to the tri applicability of assumptions concerning the prevalent use of labor at the client’s premises and with the use of capital goods attributable to it will be verified by each customer (purchaser original, contractor, consortium, etc.). Again concerning the limit of 200,000 euros, the Agency specifies that the reference must be made to the calendar year (therefore in the period from 1/1 to 31/12) and in the case of contracts covering several years, it will be necessary to apply the pro rata temporis criterion.
Furthermore, in the presence of contracts that do not have a predetermined price or deadline (for example, framework contracts), a cash flow criterion will be followed. In this case, the obligations set out in article 17- bis will start in relation to the earnings of employee and assimilated work to be disbursed after exceeding the threshold of 200,000 euros on an annual basis of payments made by the client to the assignee and will end when the contracts expire.
In this regard, the Circular offers an example. Consider the case in which client A enters into a contract with company B on March 1, 2020 expiring on February 28, 2022 which does not provide for a predetermined price. In this case, the requirements under Article 17- bis shall be effective concerning the compensation of employees and assimilated to be paid after the viol en to payments from A to B the threshold of 200,000 euro and will cease February 28, 2022.
Prohibition of compensation
Article 17- bis, paragraph 1, last sentence states that the contractor or the contractors and subcontractors are required to offset withholding taxes withheld from them to directly employed in the execution of the work and of the services, with distinct powers for each client, without the possibility of compensation. At the 4.1 Circular clarifies that it is without prejudice to the claims offsetting tax stoppages resulting from advances to the Exchequer as, for example, claims that the withholding accrued for anticipated sums of money to employees for the State, such as reimbursements paid following tax assistance, year-end adjustment or for termination of the employment relationship or credits deriving from surplus payment of withholding taxes.
These receivables can be used by tax substitutes only in compensation through the F24 form, within the limits of the withholding taxes to be paid.
The prohibition of offsetting is not applicable for credits accrued by the company as a substitute tax.
The sanctioning profile
In paragraph 5, the Circular is without prejudice to the different behaviors held by the contractor until 30 April 2020, specifying that if the contractor has correctly determined and made the payment of the withholding tax without the use of separate proxies for each client, they will not notify the violations provided for by art. 17-bis paragraph 4 (” In the event of non-compliance with the obligations set out in paragraphs 1 and 3, the client is obliged to pay a sum equal to the sanction imposed on the contractor or subcontractor for violating the obligations of correct determination of the withholdings and correct execution of the same, as well as timely payment, without the possibility of compensation “), except for the prohibition of compensation referred to in article 17- bis, paragraph 1, last period, provided that it is provided to the client by 30 April 2020, the documentation referred to in paragraph 4.2 of the Circular. This documentation consists of:
- the list of names of all workers employed in the previous month directly in the execution of works or services entrusted by the client (in the case of payment of wages made the month following the reference month of the ” paycheck “, it will be necessary to refer to the second month previous one);
- details of the hours worked by each perceived entity in the execution of the work or service entrusted ;
- details of the tax withholdings made in the previous month with respect to that worker, with a separate indication of those relating to the service entrusted to the client.
Details of withholdings operate in the previous month in respect of that employee, with a separate indication of the regarding the service entrusted to the customer.
LDP TAX & LAW office remains at your disposal for any further or more thorough information regarding the matters described above.
Dott.ssa Marta Martino
LL.M. Dottore Commercialista – CPA