Prepared by Vitalba Passarelli, Giovanni Marra and Vanessa Zichichi
With the signature of the Minister of Economic Development (“MISE”) of 27 May and the publication in the Official Gazette of 21 July, finally enters in force the expected implementation decree containing the application provisions of the new discipline of tax credits for research activities and development, technological innovation and design and aesthetic ideation activities (hereinafter abbreviated as “RSID”), referred to in article 1, paragraphs 198-207, of the law of 27 December 2019, no. 160 (Stability Law for 2020). We had already written about it in our previous publication of January 28, 2020, to which reference is made.
The decree clarifies a series of important points, relating to the application of new tax credits and the qualification of the eligible activities, especially about technological innovation and design. The decree, unfortunately, does not clarify the issue, which is rather relevant in the contexts of multinational groups, of the eligibility of expenses incurred by Italian companies that carry out RSID activities on commission from subjects based abroad, in most of cases holding or related companies. This possibility, initially not provided for in the R&D credit discipline in force until 2019, was then introduced with the budget law for 2017.
The doubts about the new regulation, applicable for all companies since 2020 (or the tax period following the one in course on December 31, 2019), derive from the fact that, although the law does not explicit this aspect, the accompanying technical report (in the explanatory notes), states the exclusion from access to the tax credits for activities commissioned from abroad, the so-called “Inward BERD”. On this point, therefore, a timely clarification from the Tax Authorities would be necessary.
R&D activities
There are no specific changes regarding the definitions of fundamental research, industrial research and experimental development in the scientific or technological field, for which reference is always made to letters m), q) and j) of point 15, paragraph 1.3 of the EU Commission communication 2014/198 of 27 June 2014, which must be classified according to the general principles and criteria contained in the OECD Frascati Manual (2015).
In this context, however, the decree provided important clarifications and specified that:
- the result of fundamental research is usually represented “by means of explanatory diagrams or diagrams or by means of interpretative theories of information and facts emerging from experimental or theoretical works”;
- usually the result of industrial research is represented “by a test model that allows to experimentally verify the starting hypotheses and to demonstrate the possibility or not of going to the next stage of experimental development, without the aim of representing the product or process in its final state”;
- the field of experimental development is normally represented “by prototypes or pilot plants: prototype means an original model that possesses the essential technical qualities and functional characteristics of the product or process subject to the experimental development activities and which allows to carry out tests to make the necessary changes and to fix the final characteristics of the product or process; while pilot plant means a set of machinery, devices, equipment or other elements that allows to test a product or process on a scale or in an environment close to industrial or reality”.
Furthermore, it is clarified that:
- the progress or advancement of general knowledge or skills in the scientific or technological field must have an absolute connotation with respect to the market, and not with respect to the capabilities of the individual company only. This aspect, which perhaps in previous years had been somewhat overlooked by some interpreters, must be treated very carefully by the companies;
- the condition of pursuing a progress or an advancement of general knowledge and skills is considered fulfilled also in the case of adaptation to a “new” field of science or technology, in relation to which such adaptation is not easily deducible or feasible;
- in compliance with the requirement of uncertainty set by the Frascati Manual, activities in which the scientific or technological advancement sought is not achieved, or is not fully achieved, are considered eligible for tax credit;
- the activities carried out by a company are considered eligible in the event that scientific or technological progress has already been achieved or attempted by other subjects, but information on the process or method or product is not available and accessible to the company at the beginning of R&D, provided that the other subjects do not belong to the same group.
Technological innovation
This credit was introduced specifically to facilitate businesses investing in innovation – especially in the so called “Process innovation” – that before were unable to access the tax credit for R&D activities, as the latter has different and generally more selective criteria respect to the “pure innovation”.
As already stated in the primary law, it is now confirmed that the classification of the technological innovation activities, eligible for the tax credit, is carried out on the basis of general principles and criteria contained in the Oslo Manual prepared by OECD (2018).
In this context, the main clarifications concern the fact that:
- new or significantly improved products means “goods or services that differ from those already made by the company in terms of technical characteristics, components, materials, embedded software, ease of use, simplification of the use procedure, greater flexibility or other elements concerning performance and functionality”;
- new or significantly improved processes, compared to those already applied by the company, means “processes or methods of production and distribution and logistics of goods or services that entail significant changes in technologies, plants, machinery and equipment, in the software, in the efficiency of the resources used, in the reliability and safety for internal or external subjects involved in the corporate processes”;
- activities eligible for the tax credit include “exclusively the work carried out in the precompetitive phases related to the design, implementation and introduction of technological innovations up to the works concerning the test and evaluation phases of the prototypes or pilot installations”, therefore investments and activities carried out in the in the subsequent stages are not eligible;
- in line with the R&D regulation, the following technological innovation activities are not eligible:
- works carried out to make changes or minor improvements to products and processes already implemented or applied;
- works carried out to solve technical problems related to the normal functioning of the company’s production processes or to eliminate manufacturing defects of the products;
- works carried out to adapt or customize the products or processes at the specific request of a customer;
- works performed for the quality control of products or processes and for the standardization of the same and in general the work required for the adaptation of processes and products to specific obligations provided for by laws and regulation on safety, health and hygiene at work or in environmental matters, generally defined as “compliance activities”.
Given the limit of 1.5 million euros provided for the overall tax credit due for technological innovation activities, the decree clarifies the main areas in which investments in digital 4.0 innovation and environmental transition allow companies to benefit from the increased 10% benefit rate instead of the general rate, equal to 6% of the eligible expenses.
To benefit from the increased rate, the decree requires that specific information on the digital innovation 4.0 and / or ecological transition objectives be provided in the technical report prepared by the company, with a description in particular of the initial state of art and the elements necessary for the definition and understanding of the innovation project, the future situation that will be determined through the development of the project activities and the qualitative / quantitative criteria relevant for the evaluation of the concrete achievement of the expected innovation goals.
A. Works aimed at digital technological innovation 4.0
These works must relate to the transformation of business processes through the integration and interconnection of factors, internal and external to the company, relevant for the creation of value. By way of example, the implementing decree clarifies that the goals of the digital innovation 4.0 are the followings:
- introduction of solutions that allow a common integration of the various components, modules and systems of a company architecture (so-called digital service backbone), capable of guaranteeing, through the implementation of a common data model and the support of different protocols and interfaces, the transparent, safe and reliable interconnection of the various hardware devices (such as, for example, robotic cells and Programmable Logic Controllers) and software applications (such as, for example, MES and SCADA);
- introduction of solutions that allow the improvement of the operational management of production through optimal assignment of jobs to the machines, sequencing of activities, management of the workforce, combination and timed preparation of tools and equipment, in order, for example, to: improve the use machines, reduce production lead times, minimize costs and improve delivery performance;
- integration, through the application of digital technologies, between IT system (IT) and the phases of the production process of goods or services (Operations);
- introduction of solutions that allow the planning and simulation of production processes, helping to define the process trajectories and the optimal processing parameters, starting from the characteristics of the machines available and the products to be created in order to improve performance, quality and / or reduce costs;
- introduction of solutions for the systematic definition and generation of key indicators of corporate objectives (so-called KPI’s), through the production and automatic collection of process data;
- introduction of suitable solutions to generate analysis reports relating to the functioning of the technological, material and personal resources involved in the production processes of goods or services (such as, for example, descriptive, diagnostic, predictive, prescriptive analysis);
- introduction of solutions that allow IT systems / platforms and applications to obtain suggestions on corrective actions based on the functioning of the resources involved in the process, allowing for example to send feedback / alerts on any drift in the functioning of the process or to implement adaptive processes and systems;
- digitalization of processes and products in the various areas and areas of value creation (predictive maintenance of CNC machine tools, process / product traceability, logistics / warehouse / handling, quality control, automatic tracing of product quality specifications, of materials raw, etc.);
- digitalization of interactions between the various operators in the production chains, the development of information sharing models, the development of protocols and methods for tracing products within the supply chain in order to improve cooperation and resilience of extended supply chains;
- introduction of solutions that involve the possibility of remote real-time functions of remote diagnosis, remote assistance, remote maintenance, remote installation, monitoring, with functions accessible on demand (at any time) and from any interconnectable place, as well as solutions to facilitate the performance of remote working services (smart working);
- redesign of the functions, architecture, modules and connectivity of capital goods with a view to digitization to allow the introduction of pay per use solutions for machines and production systems;
- the introduction of specific blockchain, cybersecurity, edge and cloud computing solutions, to enhance and enrich and to guarantee the security of the solutions described in the previous points.
Being an exemplary list, it is assumed that there may be further applications of the 4.0 digital innovation goals admissible for accessing the tax credit, for which an in-depth technical evaluation is recommended.
B. Works aimed at the ecological transition
Based on the decree, the projects relating to the transformation of business processes according to the principles of the circular economy (i.e. the creation of closed-loop value chains in the production and use of components and materials) as defined in the Communication of the EC (COM 2020) 98 of 11 March 2020, fall within this area provided that whose goals exceed the already mandatory environmental standards.
Even in this case, the list reported by the decree constitutes a mere exemplification, so there could be further cases to be considered, in addition to those listed below:
- design of sustainable products that last longer and are designed to be reused, repaired or updated for the recovery of their functions or subjected to high quality recycling processes, for the recovery of materials, so as to reduce the impact environmental products along their life cycle (so-called eco-design);
- creation of closed-loop value chains in the production and use of components and materials, also by exploiting cross-sector reuse and recycling opportunities;
- introduction of synergy models between industrial systems within a specific territorial economic area (so-called industrial symbiosis), characterized by relationships of functional interdependence in relation to material and energy resources (e.g. by-products, waste, thermal energy waste, integrated water cycle);
- introduction of technological solutions for the recovery aimed to obtaining high quality secondary raw materials from post-use products, in accordance with the specifications of use in the same application or in different sectors;
- introduction of intelligent disassembly and/or remanufacturing technologies and processes to regenerate and update functions from post-use components, in order to extend the component’s use cycle with solutions allowing a reduced environmental impact;
- adoption of solutions and technologies to monitor the product life cycle and allow the assessment of the state of the post-use product in order to facilitate its collection for the recovery of materials and functions;
- introduction of “product-as-a-service” business models to promote circular value chains of consumer and instrumental goods.
Design activity and aesthetic ideation
Along with technological innovation, this credit represents a novelty in the national context, although for the textile and fashion companies the possibility of accessing the tax credit for R&D activities was already peaceful, as communicated by MISE and then confirmed in the circular 5/E of 2016 (annex I) of the Revenue Agency.
However, the decree did not clarify the main point opened by the primary law (paragraph 202 of the 2020 Stability law) relating to enterprises that can access this incentive. The text of the law had in fact provided that this tax credit is for the benefit of “enterprises operating in the textile and fashion, footwear, eyewear, goldsmith, furniture and furnishing and ceramic sectors”, adding that MISE implementing decree would have provided the criteria for the correct application of credit also in relation to the same activities carried out in sectors other than those indicated above.
Art. 4 first paragraph considers eligible design and aesthetic design works, different than those carried out in the field of R&S and technological innovation commented before, provided that they are aimed at significantly innovating the company’s products in terms of form and other non-technical or functional elements, including in particular: the characteristics of the lines, of the outlines, of the colors, of the surface structure, of the ornaments. With this purpose it is specified that product means “any industrial or handicraft object, including components of complex products, packaging, presentations, graphic symbols and typographic characters”.
Since no further indications have been provided, it could be assumed that this credit is for the benefit of the generality of enterprises that invest in the improvement of design and aesthetic appearance of their products, but on this point a clarification of the MISE or of the Revenue Agency would be desirable.
The second paragraph of art. 4 states that the benefit – which is available for all enterprises operating in the clothing sector and in other sectors where renewal of the products is requested at regular intervals – considers eligible works related to the conception and creation of new collections or samples that present new elements compared to previous collections and samples, with regard to “the fabrics or materials used, their combination, designs and shapes, colors or other relevant elements”, excluding works aimed at minimal changes only, such as in particular: “works aimed at the simple adaptation of an existing collection or sample through the addition of a single product or the modification of only one characteristic of the existing products, such as the modification of the colors only, or of a detail element”.
A coordinated reading of the primary law and the decree let presume that this second paragraph is addressed, in addition to enterprise operating in the clothing sector, also in those mentioned in paragraph 202 of the Stability Law (footwear, eyewear, goldsmith, furniture and furnishings and ceramics), however this issue also remains to be clarified by MISE rather than the Revenue Agency, together with the compatibility of this measure with the credits for R&D and for technological innovation activities.
The important aspect to underline, however, lies in the fact that the eligible activities concern only the pre-competitive phase, which ends with the creation of samples not intended for sale. Therefore, all subsequent industrial and commercial phases are excluded from the access to the tax credit.
Calculation criteria and documentary burdens
The categories of eligible expenses for the various project areas, which have been already commented in our publication of last January 28 and to which reference is made, must respect the general rules of effectiveness, relevance and congruity and must refer to the tax period following the one in course at December 31, 2019.
By clarifying an open point of the previous R&D credit legislation, it is specified that, for the sole purpose of identifying the tax period from which it is possible to use the tax credit as compensation, the expenses for the certification of the documentation (eligible up to a maximum amount of 5,000 euros per year) incurred by companies not subject to mandatory auditing of the financial statements, are attributed to the same tax period in which the eligible activities are carried out and the relevant eligible costs incurred.
As regards the calculation criteria, the decree also provides that:
- depreciations of movable tangible assets and software used for eligible projects are recognized up to the extent of the tax-deductible amount, proportionally reduced in case of use of the assets also in other ineligible activities;
- in case of financial lease, the principal portions of the rents are recognized within the limit of the amount deductible for tax purposes;
- depreciation allowances relating to the purchase from third parties, also under license of use, of industrial property rights relating to an industrial or biotechnological invention, to a topography of semiconductor product or to a new plant variety, are recognized for the purposes of the concession up to a maximum of 1 million euro and provided that they are used directly and exclusively for the development of the activities relating to the R&D projects eligible for the tax credit. These expenses, moreover, are eligible only on condition that they derive from contracts stipulated with tax resident subjects, based in other Member States of the European Union or in States party to the agreement on the EEA or in States included in the list of the MEF decree dated 4 September 1996. For anti-avoidance purposes, expenses for purchases of licenses from companies belonging to the same group as the purchasing company are in any case excluded from the tax credits;
- in any case, depreciations relating to software and other intangible assets whose cost was already included in the eligible expenses relating to the R&D tax credit discipline in force until 2019, are excluded from eligible expenses of the new tax credits, even if such amounts are tax-deductible in 2020 and onwards;
- for companies that determine income on a cadastral or flat-rate basis, it is provided that depreciations, finance lease payments and other eligible expenses will be assumed for the same amount “which would have been virtually deductible analytically in the period of tax benefit”;
- for personnel with a subordinate employment relationship, the remuneration expenses, gross of withholding and social security and welfare contributions, include the accruals of the TFR, the additional monthly payments, the holidays and permits, in relation to the hours or days in which employees are involved in eligible activities, including any travel allowances in the case of eligible activities performed off-site;
- for the purposes of 150% increase, further to the possession of the required qualifications and the exclusive destination of the employees to eligible activities, “subjects not older than 35 years at the first job” means the persons hired during the subsidized tax period with an open-ended contract, even part-time, which at the hiring date have not yet reached the age of 35 and have never been hired before, except for the case of apprenticeship contract;
- in the event of involvement of directors or shareholders in the eligible activities, the eligible expenses – excluding in any case variable remunerations or amounts attributed by way of profit sharing – cannot exceed 50% of the ordinary annual fixed remuneration and are conditional to the actual payment to the recipient, for the entire amount, during the subsidized tax period;
- the eligibility of the subsidized expenses of directors, family members of the entrepreneur and shareholders, is subject to the declaration by the legal representative, with the self-certification formula pursuant to Presidential Decree 445/2000, certifying the effective participation of these subjects in the eligible activities and the appropriateness of the amount of eligible remunerations considered the activity carried out, the technical skills possessed and the remuneration paid to the other subjects involved in the eligible activities;
- for personnel expenses, the accounting documentation subject to certification must also include the attendance sheets (so-called “timesheets”) showing for each day the hours spent by each employee in the eligible activities, signed by the legal representative of the company or by the responsible for the eligible activities;
- in line with the provisions of the R&D tax credit legislation in force until 2019, for depreciable tangible assets (furniture and software) used to carry out eligible activities, the accounting documentation must also include the declaration of the legal representative of the company or of the responsible for the eligible activities relating to the extent and period in which such assets were used for the activities.
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