Italy’s new tax law misses TFR mark
The new taxation of Italian pension funds has just been approved by the government. It will become effective from January 2001. But in order to change employees’ pension plans, it’s still missing the other important long awaited reform: that affecting TFR (trattamento di fine rapporto), the lump sum that Italian employees get when they leave a company and/or retire and that now must guarantee a yield of 150 basis points higher than 75% of the inflation rate.
First, the new taxes. Pension funds’ annual returns and TFR’s annual
yield will be taxed like mutual funds’ returns, with an annual witholding tax. Pension funds are supposed to be incentivised, because they will pay
an annual 11% capital-gain tax, which is just a bit lower than 12.5% rate
paid by mutual funds and other financial investments, including government bonds.
The new TFR taxation is heavier than the old one. From the point of view of individuals, contributions to pension funds will be tax exempt up to 12% of annual income, with a maximum of L10m pa (E5,000). That’s about double the previous limit.
Instead, employees can take advantage from the new exemption, only if they put in the pension fund also a portion of their TFR equivalent to 50% of their voluntary contributions.
The new rules raise at least three issues. One is that the new limits benefit medium-high salary employees. In fact the annual TFR’s flow is 6.9% of the salary. In order to contribute E5,000 tax-free, an employee must earn E36,000 pa, which corresponds to a E2,500 TFR pa.
The second problem is that there are no new governmental plans to change the lack of free choice in the Italian pension funds’ system. According to the government, employees must enter only the pension scheme set up by their trade union: usually a huge national industry sector pension fund, which currently is heavily invested in bonds (70% of the assets) and gives the same return to all members.
Third, currently TFR is kept by companies, which have to pay the lump sum to the quitting employees, but until they quit, companies are free to put annual TFR in special reserves or use it as a cheap way to finance themselves. Many recent trade union agreements oblige companies to put a small percentage of annual TFR – one or two percentage points out of 6.9 – in pension funds. Apart from that, companies are not willing to lose their power on TFR.
That’s why the TFR reform is crucial. The government plans to get TFR away from each company and leave employees free to choice between alternatives: either to invest the annual TFR in their pension fund or to get the guaranteed TFR yield.
In the second case, the annual TFR will be put in a national special fund – under the supervision of the Treasury Department – and this money will finance selected companies, through bond issues or other special instruments.