Supply chain: principals are liable for the payment of withholding taxes
The Law Decree No. 124 of October 26th, 2019, which has be converted into Law by the Italian Parliament on December 18th, 2019, introduces a set of rules aimed at countering the omitted payments of withholding taxes and social security contributions to be paid by contractors in their quality of withholding agents. Of January 1st, 2020 the contracting company is required to pay the withholding taxes and the social security contributions on behalf of the contractor with regard to the employees involved in the performance of the services under the contract agreement.
Law Decree No. 124 of October 26th, 2019, (the “Decree”), which has be converted into Law by the Italian Parliament on December 18th, 2019, has introduced a set of provisions relating to the application of withholding taxes and set-off payments with reference to contract and sub-contract agreements.
The above-mentioned Decree provides that the contracting company is once again responsible for the payment of withholding taxes in the supply chain.
Such principle is not a novelty within the Italian regulatory framework since it had been firstly introduced by the Decree no. 223 of 2006. Such Decree required the contracting company to ensure that the contractor verified the payment to the tax authorities by the subcontractor of withholding taxes on income from employment. To this purpose, it was provided that the principal could pay the contractor the consideration for its services only if the latter had exhibited documentation proving that the withholding taxes had been duly paid to the tax authorities.
However, the regulation was canceled by the Legislative Decree no. 175 of 2014, and it has now been reintroduced in the context of a strengthened fight against tax evasion.
Article 4 of the Decree introduces a set of rules aimed at countering the omitted payments of withholding taxes and social security contributions (due on employment income) to be paid by contractors and subcontractors in their quality of withholding agents.
According to the new rules - which apply as of January 1st, 2020 - the contracting company is required to pay the withholding taxes and the social security contributions on behalf of the contractor- with regard to the employees involved in the performance of the services under the contract agreement.
The contractor is required to promptly provide the sums which are necessary to pay the withholding taxes within 5 working days prior to the due date of payment, while the contracting company is prevented from the use of its own tax credits as set-off payments. The contractor may also use credits toward the Client as partial or total set-off for withholding taxes and social security contribution to be made to the Client. All liabilities that may arise from an incorrect calculation of the withholding amounts remain in the hands of the contractor who is also responsible for the omitted payment.
Lastly, in case of failure to provide the necessary funds, the contracting company is required to hold the payments due according to the contract or subcontract agreements and is required to notify the failure to the National Tax Authority.
Should the contractors and subcontractors fail to comply with the procedure of fiscal solidarity, the principal is required to suspend the payment of the amounts accrued by the contractor and the latter is prevented from issuing an executive action to satisfy its credit.
Contractors and subcontractors are not subject to the new rules if they:
· have been active for at least 5 years or have made payments equal to more than Euro 2,000,000 over the previous two years;
· do not have any outstanding debt vis-à-vis the Italian tax or social security contribution authorities for an amount exceeding Euro 50,000.