Country report Italy

Economic overview

Italian GDP is expected to continue growing both in 2022 (+ 2.8%) and in 2023 (+ 1.9%), albeit slowing down compared to 2021.

In the forecast two-year period, the increase in GDP will mainly be determined by the contribution of domestic demand net of inventories (respectively +3.2 and +1.9 percentage points) while net foreign demand would provide a negative contribution in 2022 (-0 , 4 percentage points) which would be followed by a zero contribution in 2023. Inventories would provide a zero contribution in both years.

The investments will ensure decisive support for growth with a more sustained intensity in the current year (+ 8.8%) than in 2023 (+ 4.2%). Consumption of resident households and ISPs will show a more contained improvement (+ 2.3% and + 1.6%).

The evolution of employment, measured in terms of AWU, will be in line with the improvement in economic activity with a more pronounced increase in 2022 (+ 2.5%) than in 2023 (+ 1.6%). The progressive increase in employment is also expected to be reflected in the unemployment rate which would drop significantly this year (8.4%) and, to a lesser extent, in 2023 (8.2%).

The growth in the prices of energy goods is expected to contribute to a sharp increase in the deflator of the spending of households resident in the current year (+ 5.8%), the effects of which are expected to diminish in 2023 (+ 2.6%).

The outlook for the next few months is characterized by high downside risks such as further increases in the price system, a decline in international trade and rising interest rates. The expectations of households and businesses could also experience a significant deterioration.

Main sectors of industry

The ASI Report (Industrial Sector Analysis), edited by Intesa Sanpaolo in collaboration with Prometeia, highlights that for 2021 the Italian manufacturing industry has managed to seize the opportunities offered by the domestic and international economic recovery, confirming the most lively growth rates in the European panorama.

In the final part of 2021, the pace of growth slowed down both due to the disappearance of the rebound effect from the recessive peak of 2020, and to the comparison with a second half of 2020 already of brilliant recovery.

The slowdown affected all sectors, in a more or less intense form, in line with the normalization phase of world growth.

Here are some highlights from the study:

In 2021 the production of Italian manufacturing was particularly dynamic (+ 13.5% trend in the January-November period), narrowing the gap to -1.2% compared to the corresponding period of 2019, which is decidedly lower than that of Germany (-6.6%), France (-6.5%) and Spain (-3.1%).

A decisive push came both from the domestic market and from the international markets where, once again, European competition was beaten: the Italian industry ranks on export values ​​higher than the pre-crisis (+ 5% in the period January-October compared to 2019, at current prices), together with Spain (+ 6%), ahead of Germany (+ 1.4%) and France (-5%).

The growth in turnover is even more dynamic (+ 23% trend in January-November 2021, at current values, + 9.6% compared to 2019), supported by the progressive increase in producer prices (+ 4.8% trend, again in January-November 2021), in the face of unprecedented flare-ups in international commodity prices.

All sectors have repositioned themselves on turnover levels higher than pre-Covid, with the exception of the Fashion System (-6% in the first eleven months of 2021, compared to 2019). The most intense recoveries were observed in the sectors upstream of the supply chains, the first to suffer the impact of the rise in the prices of raw materials, and in those related to the construction cycle. In fact, the top of the ranking includes Metallurgy (+ 33.7% in January-November 2021, compared to 2019), Household appliances (+ 23%), Chemical intermediates (+ 21.6%), Furniture (+ 14.9%), Construction products and materials (+ 14.2%) and Metal products (+ 14.1%).

The sectors producing investment goods showed a less intense recovery from pre-crisis levels, suffering more from the shortage of intermediate inputs, especially electronic ones. The phenomenon, albeit in a less intense form in Italy compared to EU competitors, concerned mechanics (+ 6.5%) but above all cars and motorcycles (+ 0.8%), which also suffer from more uncertain demand conditions.

Taxation for businesses in Italy

In Italy, the two main taxes that the state applies on income produced by companies are IRES and IRAP. The acronym of the first stands for “Company Income Tax” and is a tax with a fixed rate: all profits of the company are taxed at 24%. The IRAP, on the other hand, is the regional tax and is approximately 3.9%. On the profits divided between the shareholders of the company, on the other hand, the personal income tax is paid: it is a direct personal tax and which is called progressive, since the figure increases based on the figure declared by the entrepreneur.

The taxable persons are:

1) Joint stock and limited partnership companies, limited liability companies, cooperatives and mutual insurance companies;

2) Public and private entities other than companies;

3) Companies and other entities of any kind with or without legal personality not resident in the territory of the State.

A subsidized tax regime is reserved for cooperative companies, the main aspect of which is the exclusion of the application of IRES of a portion of the profits set aside in an indivisible reserve, differentiated in favor of cooperatives with prevalent mutuality and, within these, in favor of agricultural and small-scale fishing. 

The tax is proportional, and is levied at a rate of 27.5% From 2017 the rate is 24%. This decrease will not be enjoyed by credit and financial institutions, to which an additional 3.5% will be applied, thus leaving the level of the levy reserved for them the same. However, these entities will be facilitated, with the recognition of full deductibility of interest expense from both IRES and IRAP. This choice is motivated by the consideration that the lowering of the IRES rate would have entailed a significant capital loss for banks and financial institutions, as it would have resulted in a significant reduction in the tax credits recognized on bank bad debts, which they would have been valued at a lower rate. 

The tax base is given by the business income. If the calculation of taxable income highlights a loss, this can be deducted from the income of subsequent tax periods, without time limits, in measures exceeding 80% of the taxable income of each of them. Interest expense is deductible up to the amount of interest income. 

With regard to sole proprietorships and partners in partnerships, in ordinary accounting they can opt for a similar taxation to that reserved for joint-stock companies. It consists of a separate taxation of business income, defined according to the IRPEF regulations, at the same proportional rate of 27.5% reserved for IRES subjects. The option is valid as long as the business income is maintained. The taxation regime consists in the payment of a single substitute tax for income tax, additional regional and municipal Irap, in an amount equal to 15%.

Investing in Italy

In 2021, Italy had the largest increase in foreign direct investments in Europe. It is one of the most significant data of the EY Europe Attractiveness 2022 study.

The transformation of business models and the revision of supply chains triggered by the Covid-19 pandemic are leading to a revision of the criteria and methods of investment management by international operators who are focusing decisively on Italy. In fact, our country in 2021 registered a growing interest from foreign investors with 207 direct investment projects, a figure that corresponds to a growth of 83% compared to 2020. With these numbers, Italy is positioning itself for the first time in the top 10 among European countries in many years. While signaling a positive trend, there is still a lot to do to improve our country’s performance in terms of global attractiveness. In fact, Italy, with a share of 3.5% (up from 2% in 2020), is still far from the main attractors of foreign direct investments in Europe, namely: France (21%), United Kingdom (17 %) and Germany (14%).

These are some of the main findings that emerged from the EY Europe Attractiveness Survey 2022, an annual research that analyzes the trend of investments in Europe and which highlights the perceptions of international players, with the aim of investigating the level of attractiveness of each country and identifying the main future investment drivers.

Having acknowledged the decisive increase in the interest of foreign investors in the Italian market, which are the sectors that have attracted the most foreign capital? In first place the software and IT services sector with a share of 15%, followed by transport and logistics with 14% and B2B services with 12%. In terms of growth in the number of foreign direct investments compared to 2020, the best performances are recorded in the machinery and equipment sector (+ 233%), agri-food and consumer goods (+ 214%), automotive and means of transport (+ 171%) ). 

On the contrary, the attractiveness of the telecommunications (-57%) and electronics (-25%) sectors has declined in the last year. Going into the specifics of the breakdown of FDI by corporate functions, the analysis shows that 69% of foreign investments destined for our country are geared to strengthening the commercial strength and marketing functions and therefore aimed mostly at satisfying the local needs of consumption; while 31% of foreign investments focus on Italian know-how (mainly production processes and research and development) and are therefore destined for activities with greater added value.

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