Client’s Obligation Of Control Over Payment Of Withholding Taxes In The Case Of Contracts With Prevalent Use Of Labour

The Law Decree n. 124/2014, as amended by the conversion Law n. 157/2019, aiming to contrast the unfortunately widespread phenomenon of use of illegal labour supply, has introduced significant innovations, effective from 1^st January 2020, with reference to contracts providing the prevalent use of labour.

In particular, such innovations affect obligations on Italian fiscal resident entities that, acting as withholding agents, assign works and/or service to another entity, for an overall annual value exceeding Euros 200.000,00, through contracts, subcontracts, contracts of assignment to members of a consortium or any other commercial relationships, characterized by the prevalent use of labour[1] at client’s place of business and with the use of goods and asset of the same assigning entities.

In such cases, the assignor must verify that the contractor, subcontractor or assignee pay regularly and properly withholding taxes on employment incomes or assimilated, and on regional and municipal surcharges, withheld from workers involved in the work or service, without the possibility of making compensations and with payment instructions separate for each single client. As set out by the Italian Revenue Agency in resolution n. 108/2019, the reform applies to withholding taxes deducted at source starting from 1^st January 2020, even if they concern contracts signed before. Therefore, the reform shall affect the payment of withholding taxes to be made from February 2020.

In compliance with this new obligation, the assignor must request a copy of payment instructions related to withholding taxes, which must be made available within five working days following the payment due date, with the list of the labour force employed on the work during the previous month, the number of hours worked by each single employee, the wage provided and the relative paid withholding taxes.

Should the contractor, subcontractor or assignee fail to provide the documents, or result not to have paid withholding taxes, the assignor must suspend payment of agreed consideration, within the limits of 20% of the total value of works, or for an amount equal to the unpaid withholding taxes, for so long as the failure to fulfil these obligations subsists, informing the Italian Revenue Agency within 90 days. The suspension of payment of agreed consideration cannot lead to an enforcement action taken by the contractor, subcontractor or assignee against assignor, as any enforcement action is barred by law.

The Legislator has also provided for a penalty payment obligation on the assignor that does not fulfill the auditing obligation and/or the obligation to suspend payments. For such an eventuality, indeed, the assignor could be forced to pay an amount equal to the penalty imposed on the contractor, subcontractor or assignee, for the breach of the obligation to establish correctly and/or to pay withholding taxes, without the possibility of making compensations.

The abovementioned obligations do not apply when the contractor, subcontractor or assignee provide for a compliance certification, issued by the Italian Revenue Agency under certain conditions and effective for four months from the issuing date.

Together with the remuneration and contribution obligations provided for by Legislative Decree n. 276/2003, for which the assignor and the contractor/employer are jointly and severally liable – the reform at issue provides for another obligation on client, namely the obligation to control over the contractors, subcontractors or assignees’ activities, with specific reference to payment of withholding taxes deducted at source. As a consequence of such rules, procedures burdens increase, resulting in a slowdown in business, not only of assignors, but also of in contractors, subcontractors or assignees. All of them, however, are mandatory required to promptly adapt comply with the new provisions, also with reference to pending agreements, identifying how the parties have to cooperate in order to precisely fulfill the obligations provided for by the Law Decree n. 124/2014.

[1] In the absence of more precise definitions and pending clarifications, it has been suggested to use the definition of “labour-intensive services” provided for by the Public Procurement Code, which defines these services as services with labour cost equal at least to the 50% of the total value of the contract.

Author: Avv. Anna Tarasco

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