Smart working and expenses reimbursement: the Inland Revenue’s opinion (Andrea Di Nino, Sintesi – Ordine dei Consulenti del Lavoro, June 2021)
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.”