The Italian government has been quite active at the OECD in helping to shape the anti-BEPS recommendations and plans to comply with the OECD’s BEPS proposals once they are finalized. Among measures made in anticipation of the OECD proposals, Italy has changed certain international tax rules, enacted a patent box regime in compliance with the modified nexus approach, and proposed to introduce a digital economy tax.
In September 2015, the Italian government enacted a legislative decree1 aimed at growth and internationalization of companies. Moreover, in August 2015, Italy approved a legislative decree2 concerning, among others, abuse of law and tax avoidance.
The decree on international tax matters introduces tax provisions that fall within the OECD BEPS Action Plan, such as the CFC rule, the black and white lists, and interest deductions. Rather than curbing BEPS, however, the decree is more aimed at other purposes, such as attracting foreign investment.
Even if the government does decide to adopt the OECD BEPS recommendations, some areas of Italian law will see little change. Italy already has stringent rules on interest deductibility, royalties, lease and other payments, anti-hybrid provisions, and anti-abuse rules concerning EU directives, each resembling OECD and/or EU recommendations. Nevertheless, the rules will be reviewed in light of the OECD’s final proposals.
Given the opportunity to compare systems across the OECD, the Italian government should note that its own law is often more aggressive than that of other jurisdictions; this aggressiveness is hurting business.
As CbyC reporting is not currently mandatory, regulations that require it would have significant consequences for Italian companies, depending on the complexity of their non-Italian operations. In addition to added time and costs, confidentiality is a concern.
Part of the impetus for the BEPS project lay in the fact that several internet companies were paying very low or no tax in jurisdictions where they seemed to make strong profits. Italian authorities have indicated that they will address this issue in a new law.
In fact, a proposal was released at the end of 2013 for a law to deal with internet-based sales of marketing and advertising services for which sales in Italy are recorded in another jurisdiction. Poorly written, the draft legislation proved ineffectual and contrary to EU law and was dropped. A new corporate income tax proposal to tax online transactions introduced in April 2015 is currently pending in the Italian Parliament. The Italian Prime Minister announced recently that such proposal should be approved soon. The proposed measures introduce, among others, a new definition of PE, including the new concept of ‘virtual’ PE, triggered when a non-resident has online activities continuously for 6 or more months that result in payments to the non-resident exceeding EUR5 million in a year. Italy also proposes to introduce a 25-percent withholding tax on the consideration paid by Italian residents for online purchases of goods and services from non-residents. The proposals would require banks to inform the tax authorities when payments reach or exceed the EUR5 million threshold and act as withholding tax agents.
In its 2015 budget, Italy’s government introduced an optional patent box regime based on schemes already adopted by other EU member states. Under Italy’s regime, companies can exclude part of the income attributable to the ‘use’ of qualifying intangible assets from the corporate income tax (IRES) and the regional business tax (IRAP) base.
In brief, under the new regime, 50 percent of income from the exploitation (i.e. royalties) or direct use of qualifying IP (i.e. software protected by copyright, patents, trademarks, designs, models, processes, secret formulas and industrial, commercial or scientific knowledge) is not taxable for IRES and IRAP purposes. The exemption is reduced to 30 percent for tax year 2015 and to 40 percent for tax year 2016. The election applies, irrevocably, for 5 years and is renewable.
When income is attributable to direct use of the IP, its amount will have to be agreed with the tax authorities through the international tax ruling procedure. The eligible portion of the tax base is computed as the ratio of the R&D costs incurred in maintaining and developing the IP to the total costs of producing IP.
Conforming to common international standards, the patent box aims to encourage companies to locate intangible assets in Italy and to invest in R&D in the country. The implementing decree, which clarifies how the proportion of income that benefits from the incentive is computed, makes the regime compliant with the ‘modified nexus approach’ endorsed by OECD.
The PE concept within Italian tax law largely coincides with the one provided by the OECD Model Tax Convention. For more than a decade, Italian tax authorities have aggressively challenged multinational enterprises, supported by case law such as that involving Philip Morris International, and sometimes deviating from the same OECD convention.
The International Standard Ruling procedure now includes questions related to whether or not a multinational has a PE in Italy.
As of 1 January 2015, a ‘voluntary disclosure’ procedure is available to taxpayers in Italy. Originally intended only for resident individuals in breach of tax reporting rules for financial assets and other investments held abroad, the procedure was extended to non-resident companies for non-compliance with income taxes (IRES, substitute taxes and IRAP) and value added tax on assets held both inside and outside of Italy. As a result, voluntary disclosure can be made, for example, by a non-resident company that failed to report income from a PE. The procedure allows for reduced administrative sanctions and, in most cases, avoidance of criminal penalties.
Tax authorities take a dim view of companies that use transactions to pay less than what is considered their fair share of tax. Armed with this admittedly vague principle, the authorities have been able to challenge such activities, often very forcefully and without distinguishing tax avoidance from legitimate tax planning. To give taxpayers more certainty and procedural guarantees, a legislative decree, approved on 5 August 2015, unifies the concepts of ‘abuse of law’ and ’tax avoidance’ and newly defines ’abuse of law’. At the same time, a former anti-avoidance provision, applicable only to a list of transactions, was repealed. The new provision is more general: it does not include any transaction list and it applies to all income and indirect taxes (except for custom duties).
The new law clarifies that no criminal penalties will be applied as a result of abuse of law/avoidance.
While Italian tax authorities remain unwilling to report on their progress at the OECD, Italian companies have little choice but to wait and see what recommendations are taken to parliament and enacted in legislation. In light of existing laws, anti-BEPS measures are unlikely to cause great upheaval, but companies also understand that certain tax-saving opportunities may disappear.
In general, the BEPS discussion and the firm rules that emerge will spur multinationals to strengthen their tax infrastructure and research areas of legitimate tax savings. Clear rules will also offer an opportunity to improve relationships between the corporate community and the Italian tax authorities. Mutual antagonism may be assuaged by consistent standards that are understood by all parties.