By 30 November of each year, Italian taxpayers must make payment of the second payment on account. The first payment was due earlier in the year at the same time as the tax due on income reported in your latest annual tax return. The amount to be paid by way of first and second account payments is primarily based on the tax due as shown in the tax return for the previous year. Payment can be made by authorising your tax preparer to mandate the Tax Agency to take the money from your account or by payment via the form F24 at any Italian bank or by home/online banking (if you have an Italian bank account). The payment forms split the payment between the various taxes – each tax having its own payment codes on the form.The payment on account concerns, as regards individuals, mainly:
- IRPEF – personal income tax and additional comune tax
- Substitute tax due by taxpayers on the 5% flat rate tax regime for the self employed (regime forfettario)
- The “Cedolare Secca” flat tax on Italian source rental income
- IVIE and IVAFE ownership taxes on foreign real estate, financial assets and bank accounts
- Social security contributions for traders and professionals.
No tax is due if the amount of tax due is less than Euro 51.65. No payment need be made in June (and so the whole payment falls due in November) if the total amount due is less than Euro 257.52.
Pensioners who are on the 7% flat tax regime for pensioners in the South of Italy do not need to make the payment on account
The Historical Method
Generally the calculation of the payment on account is done simply on the basis of prior year tax: “the historical method”.
Under this method taxpayers pay 40% of last year’s tax liability in June, and 60% of last year’s tax by the end of November. For most traders and professionals the split has been changed, effective 2020, to 50% in June and 50% in November.Traders and professional are required to make two account payments of 50% each of the prior year tax liability on their business/income, using the “historical method”.
The Forecast Method
As an alternative to the historical method it is possible to use the forecast method.
The forecast method can be used when the taxpayer expects to realise income or profits in the current year which are lower than for previous years.
The choice between historical method and forecast method can be made for each individual tax. It is not necessary to apply one method to all taxes due.
In order to calculate the payment on account, using the forecast method, it is necessary to determine the presumed tax that will fall due for the relevant year, taking into consideration all the factors that go into calculating the tax liability – forecast total income, withholding taxes at source, tax credits (both domestic credits and foreign tax credits) and tax deductible items.
This means effecting a simulation of the current year tax return and calculating the tax due on the basis of the simulation.
It is obviously difficult in mid November to come up with a 100% accurate simulation of the current year liability. Any underpayment, to the extent that the simulation is lower than the actual tax for the year, will be treated as generating a late payment penalty. The Tax Agency has the power to apply an administrative penalty of 30% of the extra higher. However this can be reduced by immediate payment in case of assessment. Alternatively a taxpayer can automatically top-up the amount of tax underpaid, subject to a penalty under the “ravvedimento” rules. The penalty will depend on when payment of tax is actually made. Note however that the reduced penalties under the ravvedimento scheme only apply where the Tax Agency has not yet started taking proceedings.