The Italian Inland Revenue was asked about the reimbursement of expenses paid to “smart working” employees. In answer to question no. 371 of 24 May 2021, clarifications were provided on the tax treatment of the sums paid by the employer to its employees as a reimbursement of internet connection costs.
The taxpayer’s question
In formulating the question, the employer informed the Inland Revenue of an intention to implement a smart working programme involving the reimbursement of the cost of connection using an “internet key” or a subscription to the domestic internet service.
The employer asked for clarifications on the relevance of the reimbursement of expenses for defining the:
According to the taxpayer’s interpretation, based on resolution no. 357/E of 7 December 2007 on the reimbursement of expenses under “teleworking.” The reimbursement of the internet connection cost paid to the employee, being instrumental to working performance, does not constitute employment income and is fully deductible from business income.
The Inland Revenue’s opinion
In formulating its opinion on the first question, concerning the IRPEF profiles, the Inland Revenue stated that employment income is governed by the all-inclusiveness principle, under Article 51, paragraph 1, of the Consolidated Income Tax Act, approved by Presidential Decree no. 917/1986 (TUIR).
Based on this principle, employment income is considered to be “all of the general sums and valuables, received for any reason during the tax period, including donations, related to employment.”
Apart from the exceptions provided for in the cases of travels and transfers (referred to in paragraphs 5 et seq. of Article 51), sums paid to the employee as reimbursement of expenses constitute employment income and are subject to taxation and social security.
Without prejudice to the general principles of the tax system outlined above, the Inland Revenue refers to the circular of 23 December 1997, no. 326, according to which certain reimbursements may be excluded from taxation. Reimbursements for expenses other than those incurred to produce income are exempt and are the employer’s responsibility but advanced by the employee for operational streamlining purposes. For example, expenses incurred to purchase capital goods of a nominal value (such as paper for a photocopy machine or printer, batteries for a calculator, etc.).
In the case presented by the taxpayer, the reimbursement granted by the employer does not relate to the cost attributable to the employer’s exclusive interest. The applicant would reimburse all the expenses incurred by the employee for the activation and subscription fees for the internet connection service, allowing them full and unlimited access to all the functions available and offered by the technology on the market.
The relationship between the internet use and the employer’s interest is doubtful since the data traffic contract is not chosen and entered into by the employer who reimburses the costs, and is external to the negotiated relationship established with the operator selected by the employee.
The Inland Revenue concluded that the reimbursement of internet costs incurred by the smart working employee, without objective and documented elements and parameters, cannot be excluded from defining the employment income and, will be fiscally relevant to the employee under Article 51, paragraph 1, of the TUIR.
For the IRES profiles, Article 95 of the TUIR provides that “The expenses for employee services deductible for defining the income include those incurred in cash or in-kind by way of donations in favour of employees, without prejudice to Article 100, paragraph 1.”
In this case, the reimbursement granted to the employee for the activation and subscription fees for the internet connection service meets an employee need and is linked to smart working, contributing to the payment of remuneration for the employee’s needs.
Reimbursements may be deductible for IRES purposes under Article 95, paragraph 1, of the TUIR, only to the extent that the activation of the internet connection is an implicit obligation of the agreed service, through the individual agreement under Law 81/2017, signed between employer and employee, as they are similar to “Expenses for work services.”
The severe repercussions for the economy and employment relationships caused by the Covid-19 epidemic emergency have made it necessary to introduce specific provisions on fixed-term contracts. These measures are mainly exceptions to the regulatory provisions under Decree-Law 87/2018 ( Dignity Decree) to encourage open-ended contracts, it has profoundly redefined fixed-term contracts by introducing specific reasons and reducing their maximum duration from 36 to 24 months.
Regulatory references and practice
The law converting Decree-Law 18/2020 (Cure Italy Decree), had introduced two important exceptions.
The possibility of entering fixed-term contracts as an exception to the prohibition on fixed-term contracts or temporary work contracts was introduced in production units with simultaneous recourse to social shock absorbers (art. 20, par. 1, letter C) and Art. 32, par. 1, letter c), Legislative Decree. no. 81/2015).
At the same time, the possibility to stipulate fixed-term contracts as an exception to the obligation to allow a suspension period to elapse between a fixed-term contract and its renewal with the same employer (stop&go, art. 21, par. 2 of Legislative Decree 81/2015) was introduced.
To further relax the emergency regulations on fixed-term contracts due to the essential need to safeguard employment relationships, the “Relaunch Decree” introduced an exemption from the obligation to provide reasons for renewal or extension of fixed-term contracts in progress as of 23 February 2020, by 30 August 2020.
The August Decree subsequently reformulated this exception, providing for the possibility to extend or renew fixed-term contracts without giving a reason for up to 12 months, only once and in compliance with an overall maximum of 24 months.
Contrary to the exception introduced by the Relaunch Decree, the renewed fixed-term contract did not need to be in place on 23 February, increasing the possibility to extend or renew contracts by 31 December 2020, for contracts expiring after that date.
The Support Decree extended the access window for extensions and renewals without reason until 31 March and, later, until 31 December 2021.
In the evolutionary sequence of the legislation providing the exception to the obligation to give reasons, the clarification contained in Art. 19bis Cure Italy Decree) clarified that fixed-term contracts could be extended or renewed even where social safety nets were in place.
The National Labour Inspectorate (INL), with its note no. 762 of 12 May 2021, specified that the exception concerns the emergency wage subsidies provided by the Covid-19 legislation, for “workers on the date of entry into force” of the Support Decree (see Art. 8 OF DECREE LAW 41/2021
According to current law, fixed-term contracts may be extended or renewed until 31 December 2021, without reason, only once and for up to 12 months provided that the overall duration did not exceed 24 months.
At the same time, there is no prohibition on stipulating fixed-term contracts in production units where there is the simultaneous use of the social shock absorbers provided for by the Covid-19 legislation (Art. 20, par. 1, letter C), Italian Legislative Decree 81/2015) and, finally, there is no stop&go obligation for renewals (Art. 21, par. 2 of Legislative Decree 81/2015).
The Labour Inspectorate note
Following a request for guidelines by the Genoa Local Labour Inspectorate (ITL), the INL, with note no. 804 of 19 May 2021, reconstructed the framework of the rules for the succession of fixed-term contracts.
INL pointed out that art. 19, paragraph 2 of Italian Legislative Decree no. 81/2015, limits the maximum succession of fixed-term contracts between the same parties to a total duration of 24 months, or a different limit provided by collective bargaining assuming that the contracts are for tasks of the same level.
Once this threshold has been reached, the parties may sign a further “assisted” exception at the ITL for a maximum of 12 months.
If the contracts signed concern classifications of legal level and category that do not coincide, different counters would be established for calculating the maximum of 12 months. Even if the maximum 24-month threshold was reached between contracts, there will be no need to proceed with the assisted exception at the ITL.
The INL pointed out that when there is a significant succession of contracts formally linked to different classifications, the ITL will check them by focusing on the classification’s effectiveness for the evolution of the tasks and related classification.
In several answers to questions, the Italian Inland Revenue has expressed its opinion on the tax treatment of sums paid as reimbursement of expenses to smart working employees.
Notably, there were three answers to the question at hand – i.e. no. 314/2021, no. 328/2021 and no. 371/2021. The tax authority reviewed the legislation that defines employment income and examined individual cases in these answers.
The answer to question no. 314/2021, covered the reimbursement of expenses paid by the employer to its smart working employees. This reimbursement corresponds to € 0.50 due to each employee for each day of remote work. This amount – quantified by comparing the daily savings of the company and the daily costs incurred by the workers – is, in the employer’s intentions, functional to “holding the employees harmless from the expenses they will incur for work reasons when they work from home.”
On this point, the Inland Revenue said how – considering art. 51, paragraph 1 of the TUIR, which enshrines the employment income all-inclusiveness principle – “as a general rule […] all amounts that the employer pays to the employee, including by way of reimbursement of expenses, constitute employment income.”
As an exception to the above principle, “reimbursements may be excluded from taxation if they relate to expenses, other than those incurred to produce income, which are the employer’s responsibility and are advanced by the employee. An example would be the purchase of capital goods of nominal value, such as paper for photocopies or printers, batteries for calculators, etc.” (AE Circular no. 326/1997). The tax authority pointed out that “expenses incurred by the employee and reimbursed on a flat-rate basis are excluded from the taxable base only if the legislature has provided a criterion for determining the portion which may be excluded from taxation because it refers to the use in the employer’s interest.”
In the absence of such a definition made by the legislature, it is clarified that costs incurred by the employee in the employer’s exclusive interest must be identified based on “objective” and “documentary evidence” criteria to benefit from the exemption.
In the case presented by the applicant, the Agency pointed out that the company used such criteria to determine the portion of reimbursement due to each employee. Therefore, the tax exemption regime typical of reimbursement of expenses may be applied to the daily flat rate of €0.50.
Answer to question no. 328/2021 deals with the case of a company wishing to agree with smart working employees on reimbursement of 30 per cent of the cost of domestic consumption incurred by them for Internet connection, electricity, air conditioning, heating, etc.
For the same reasons explained in the previous question, the Inland Revenue has denied its favourable opinion in applying the exemption to such reimbursements. A reimbursement generically identified as 30 per cent of the costs incurred by workers does not derive from applying those “objective and documentary evidence” criteria that must guide the employer in defining the reimbursements.
The Agency explained: “To avoid making the reimbursement of expenses part of employment income, it is necessary to adopt an analytical criterion that allows defining […] the share of costs saved by the company for each expenditure type, which have been incurred by the employee. This will lead to the same portion […] of costs reimbursed to employees being considered as referable to consumption incurred in the employer’s exclusive interest.”
Finally, in answer no. 371/2021 the tax authority examines the question submitted by a company wishing to reimburse each smart working employee the cost of the home internet connection, to facilitate the remote performance of work.
In this case, the Inland Revenue noted that “the reimbursement by the employer does not relate only to the cost attributable to the employer’s exclusive interest, since the applicant would reimburse the expenses incurred by the employee for the internet service activation and subscription fees.”
The relationship between the internet use and the employer’s interest is doubtful since the data traffic contract is not chosen and entered into by the employer who reimburses the costs, and is “external to the negotiated relationship established with the operator.” Nor does the case description reveal the precise cost which the employer would reimburse to the employees.
Even in the latter case, defining the reimbursement is flawed in terms of the objective and documental evidence parameters, which are helpful to allow the tax and social security exemption of such sums.
Based on the above, the Inland Revenue believes that “the data traffic costs the company intends to reimburse to the employee, not being supported by objective and documented elements and parameters, cannot be excluded from the calculation of employment income and, will be fiscally relevant to the employees under Article 51, paragraph 1, of the TUIR.”
The Inland Revenue, in its answer to question no. 270/2021, returned to express an opinion on the favourable tax regime reserved for the performance bonus (“PDR”) paid following a specific trade union agreement and consisting of applying a 10% rate, replacing IRPEF and the relevant regional and municipal surtaxes to the taxable amount of such bonus, under Art. 1, paragraphs 182 to 189, of Law 208/2015.
Behind the question was a concern about the possible tax relief of the performance bonus paid by the employer following the redetermination of the company objectives due to the COVID-19 pandemic.
The applicant company, which operates in the “legal games and betting” sector, signed a supplementary company agreement with the trade unions on 29 March 2019, with effect from 1 January 2019 to 31 December 2019, to establish an annual performance bonus.
The performance bonus was established on a variable basis and not determined beforehand. It was payable following an increase in EBITDA (or gross operating margin) for the year being monitored compared to the previous year.
Due to the healthcare emergency and consequent infection containment policies, resulting in the closure of many businesses, the contract underwent numerous postponements until reaching the final expiration established by the parties on 31 December 2020.
In addition to the extension, to compare the EBITDA of 2020 with that of 2019 consistently, the applicant company and the trade unions recalculated the 2019 EBITDA, reducing it in proportion to days of inactivity during the 2020 lockdown.
Considering the shorter period that the business was open, the parties agreed to a corresponding reduction of the performance bonus amount. Therefore, this maximum gross amount was fixed at € 2,000 instead of the previous € 2,800.
The applicant provided an interpretative doubt that applying the tax relief to the performance bonus despite the recalculation of the 2019 EBITDA led to an artificial redefinition of parameters useful to verify the company’s performance to make the 2019 EBITDA figure consistent with that of 2020.
The applicant company said that the comparison is made, using periods of forced business closure and, consequently, “is not made for the entire year, but a shorter period in which the activity was carried out (i.e. net of the days in which the shops were inactive).”
The Inland Revenue replying to the question, gave an overview of the sector’s legislation, stating that the payment of such bonuses, in the legislator’s intention, must be “linked to increased productivity, profitability, quality, efficiency and innovation that is measurable and verifiable” based on specific criteria.
Continue reading the full version published in Corriere delle Paghe of Il Sole 24 Ore.