The Italian tax system is considered among the most complicated in the world. Since the late 1990's, the government has been using tax cuts to stimulate economic growth. On 1 January 1998 the government introduced the Dual Income Tax (DIT) system designed to encourage investment by taxing income deemed to be derived from the increase in equity capital in a company at a lower rate than the standard corporate income tax rate. In 2003, the corporate income tax rate (IRPEG), at 36% in 2002, was reduced to 34%, while the preferential DIT rate remained at 19%. Companies are also liable for a 4.25% regional tax on productive activities (IRAP). Capital gains realized by companies are taxable as business income under the IRPEG and IRAP, and capital losses are deductible. Dividends are taxed at 27% with complete withholding ("payment at the source" or PAYE). This rate may be reduced to either 15% if nonresidents can show that dividends are also taxed in their place of residence, or to rates as low as 0% depending on the terms of bilateral double tax avoidance agreements with the nonresidents' governments. The PAYE rate for dividends paid to branches of companies from other EU countries is 12.5%
The schedule of personal income tax rates was reformed in 2003 to reduce tax rates and to increase the amount covered by the lowest band (from 15 million lire to 20 million lire, or about €7,750 to €10,330.) The set of rates in 2002 (18.5%, 25.5%,33.5%, 39.5%, and 45.5%) was transformed into a reduced set: 18% (to €10,330); 24% (from €10,329 to €15,494); 32% (€15,494 to €30,987); 39% (from €30,987 to €69,722); and 45% beyond €69,722. On 25 October 2001 Italy's gift and inheritance taxes were abolished by the Parliament.
Italy's main indirect tax is its value-added tax (VAT) introduced on 1 January 1973 with a standard rate of 12%, replacing a turnover tax on goods and services. Since 10 January 1997 the standard rate has been 20% applicable to most goods and services. A reduced rate of 4% applies to basic foodstuffs, books, newspapers and periodicals, agricultural inputs, medical equipment, social housing and social services. Basic medical and dental services are exempt from VAT. A 0% rate is applied to supplies of unwrought gold and ferrous and non-ferrous metal scrap, and land not suitable for buildings. Other taxes on transactions include stamp taxes, and contract registration tax.