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Taxes Emerging in Europe to Pay the Cost of COVID

Jul 27, 2021 | Podcasts

“Taxes Emerging in Europe to Pay the Costs of COVID,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Doug Stanley, ACTEC Fellow from St. Louis, Missouri. During the COVID pandemic in many jurisdictions in Europe, there had been a debate regarding whether to increase wealth and inheritance taxes to pay for the costs of COVID. To update us in Europe and other developments is ACTEC Fellow Nicola Saccardo from Milan, Italy. Welcome, Nicola.

Thank you very much, Doug. In this podcast, I will address briefly the very recent OECD report of the 14th of April 2021, Inheritance Taxation in OECD Countries, which is an extensive report, not binding obviously, but that may very well affect the domestic tax policies of OECD countries, including the many European jurisdictions. And then I will touch upon the current debate in Italy on the potential introduction of a wealth tax and increase in inheritance tax.

Inheritance Tax in OECD Countries Report

Starting with the OECD report, the OECD report Inheritance Taxation in OECD Countries set out generally a very favorable view. These are the inheritance taxes. It stresses the important role of inheritance taxes in the current context, both from the point of view of raising revenues to fund the COVID costs, but also to reduce the increased wealth inequality and to enhance the quality of opportunity. The OECD compares inheritance tax with the wealth tax and finds that inheritance tax has the benefit of lower costs than annual wealth taxes and also triggers limited immigration response compared to wealth taxes.

The OECD further highlights, from a general policy standpoint, that the case for inheritance tax is stronger if income is taxed at a lower rate and if there is limited or no taxation of wealth in the country. The OECD highlights that the legislation in OECD member states about inheritance tax varies greatly. There are very significant differences. And what is most important in this context sets out a number of policy recommendations, which are worth focusing on.

In terms of policy recommendations, indeed, the OECD recommends the use of progressive tax rates rather than a fixed tax rate and expresses a preference for a recipient-based inheritance tax, i.e., a tax that is focused on what the single heir receives rather than the estate of the deceased. So that rate, for instance, an exempt amount should apply to the inheritance received by the single heir rather than to the estate of the deceased.

The OECD further recommends the taxable values that should be the extent of possible debate on fair market values rather than being the values of notional values and recommends taxing the wealth transfer on a lifetime time abated. So, transfer during life should be taxed as well as transfer upon death. And in principle, the heir should be subject to the same amount of tax as based on the amount received whether that amount was received on the death of the transferor or during the life of the transferor.

The OECD then moves on and focuses on exemptions and relief for specific assets and highlights these exemptions and relief needed to have the strong rationale given the risk of progressivity, i.e., these exemptions and relief may affect the progressivity of the tax.

In relation to life insurance policies, which are exempt in several jurisdictions, including Italy, the OECD finds that the exemption is a limited justification when the life insurance policy is just a tax efficient investment vehicle to all the financial assets. The OECD deals also with exemptions for family businesses, which are indeed very common in European jurisdictions given the fact that they were recommended by the European Commissioner years ago and Italy, indeed, as an exemption to family businesses.

The OECD highlights that these exemptions should be subject to very strict requirements and conditionality; but particularly the OECD makes the example of the claw back of these exemptions or reliefs if the heirs do not continue the business which has been inherited. And what is very important to stress is the OECD seems to suggest that these exemptions for family businesses are meant to small or medium sized businesses and suggests the potential introduction of a cap for the value of the business which benefits from the exemption.

Just a couple of last policy recommendations of the OECD:  The OECD recommends the state to provide for the unlimited liability for some years if the individual immigrates from the jurisdiction, so unlimited liability to inheritance tax after the transfer of residence abroad. And highlight the need to prevent tax avoidance through trusts, through their ownership [inaudible], or similar structures. And finally recommends reconsidering the step up in the tax basis of the assets, particularly where inheritance tax is not levied.

So, this is as far as the very extensive OECD report, which as I mentioned was issued recently. And although not binding, it is undoubtedly a very interesting document setting out the position of the OECD inheritance tax, and a document that may provide some insight on potential changes in many jurisdictions.

Italy’s Wealth Tax Debate

Moving now to Italy. In 2020, after the beginning of the pandemic, a debate about wealth taxes started. Italy currently has wealth taxes on certain specific assets, mainly financial products and real estate. These taxes are levied also at very low rates. The debate during 2020, actually, there was a proposal by a single member of parliament for the introduction of a comprehensive wealth tax on all assets levied at progressive tax rates. The proposal faced very strong criticism by pretty much all the political parties and has not been brought forward.

What is most interesting these days is a proposal for an increase of inheritance tax in Italy. Italy currently has inheritance and gift tax – they are pretty much the same tax so there is a coordination between the two – levied at rates ranging from four percent to eight percent, with the four percent rate being applicable to transfers to spouse and direct descendants. And actually, the OECD report highlights the very limited inheritance taxation in Italy given the fact that the OECD average of the [ratio] of inheritance tax over total tax revenue is 0.5 percent, while in Italy the same percentage is 0.1, so one fifth.

So, these very low rates have been the object of a statement of the leader of the main left-wing party a few days ago when the leader of the main left-wing party proposed a 20 percent tax rate rather than the four percent rate for the value of the estate in excess of 5 million euro.

The proposal was criticized by the Prime Minister and by right wing parties. But I believe no one can fairly say that it is possible that not in the short term but in the medium term, the very low Italian inheritance tax rate might be increased. This type of proposal that happened in the past never found political support, but things may be different, not in the short term, but certainly in the medium or long term. As a matter of fact, like every time, there is a concern for a potential increase in inheritance tax rates, clients are very keen on considering strategies to mitigate these potential tax changes in law using trusts, gifts, or gifts of their ownership with reservation, which is very common in Italy.

Thank you very much for your attention.

Thank you, Nicola, for educating us on this interesting tax topic arising from the COVID pandemic.

This podcast was produced by The American College of Trust and Estate Counsel, ACTEC. Listeners, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel. The material in this podcast is for information purposes only and is not intended to and should not be treated as legal advice or tax advice. The views expressed are those of speakers as of the date noted and not necessarily those of ACTEC or any speaker’s employer or firm. The information, opinions, and recommendations presented in this Podcast are for general information only and any reliance on the information provided in this Podcast is done at your own risk. The entire contents and design of this Podcast, are the property of ACTEC, or used by ACTEC with permission, and are protected under U.S. and international copyright and trademark laws. Except as otherwise provided herein, users of this Podcast may save and use information contained in the Podcast only for personal or other non-commercial, educational purposes. No other use, including, without limitation, reproduction, retransmission or editing, of this Podcast may be made without the prior written permission of The American College of Trust and Estate Counsel.

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