Prepared by Energy Team
On June 27, the decree regulating the tax coordination of the IRES and IRAP tax bases was published, in reference to the provisions of accounting principle OIC34 as well as the amendments to OIC16 and OIC31 related to dismantling and restoration funds. The decree (the “Decree”) and the explanatory report (the “Report”) are available at the following link.
Particularly interesting to the energy sector are rules the MEF establishes regarding the taxation of restoration funds recognized in relation to the assumption of a liability to dismantle the asset and/or restore the site where it is located.
In this regard, we briefly recall that following the recent amendments to OIC 16 and OIC 31, entities applying Italian principles also capitalize the costs of dismantling, removal, or restoration as an increase to the asset to which they relate.
Updates to the estimates of dismantling and/or restoration costs are reflected as an increase or decrease in the asset, while any updates to the estimates of the fund related to the passage of time are charged to the income statement.
The cost relevant for tax purposes
In this scenario, the Decree (art. 6) establishes that capitalized costs are included in the fiscal cost of the asset pursuant to article 110 of the Italian Tax Code, and therefore the subsequent depreciation is deductible according to the rules of the Italian Tax Code (arts. 102 and 103).
The Report emphasizes how the general approach outlined above is consistent with the indications contained in the report to the Decree April 1, 2009, no. 48 for the same case in the IAS/IFRS context. Accordingly, the Report also states, “These costs will also be taken into account for determining the base for calculating deductible ordinary maintenance expenses, pursuant to article 102, paragraph 6, of the TUIR, within the limit of 5% of the total cost of depreciable assets existing at the beginning of the fiscal year.”
The same relevance applies to updates of estimates of capitalized dismantling and restoration costs pursuant to the second sentence of paragraph 19A of OIC 31. In this regard, the Report also specifies that “any changes resulting from estimates that reduce the costs in question contribute to the formation of the income for the period to the extent that they eliminate depreciation deducted in previous tax periods”.
It is noteworthy what the Decree provides regarding the updates of estimates of the provisions for risks and charges related to the passage of time as per paragraph 34 of OIC 31, or the adjustment of the discount rate, charged to the income statement pursuant to the third sentence of paragraph 19A of OIC 31: “the classification of ‘provision’ remains unchanged for IRES and IRAP purposes, in accordance with the provisions of paragraph 3 of article 9 of DM June 8, 2011 (see paragraph 4 of article 6).”
Consequently, in partial derogation of the principle of enhanced derivation, such charges cannot be immediately deducted in the financial year in which they are accounted in the profit and loss accounts but they will be recognized for tax purposes in the financial year in which the existence becomes certain and the related amount can be objectively determined.
According to the Report, this conclusion would stem from the predominance of the classification in the Balance Sheet over that in the Income Statement, and therefore the discounting charges have the same nature as the provision against which they are accounted for.
In the event that the financial statement preparer chooses to exercise the option not to take into account the financial effect (as provided by the principle in cases of immaterial differences between the nominal value and the current value of the obligation), the Decree instead statues for the determination of the financial component of the obligation on a flat-rate basis, equal to 5% of the restoration costs, which is not tax-relevant “in order to ensure equal tax treatment among entities representing the same phenomenon in different ways.”
Therefore, during the accounting depreciation period, the deductible portion of the dismantling costs must be calculated, net of the flat-rate non-deductible portion related to the passage of time.
Extension to IAS/IFRS entities
Lastly, and not least, the Decree states that the provisions applicable to OIC adopters also apply to companies that prepare their financial statements in accordance with the international accounting standards set out in Regulation (EC) No. 1606/2002 of the European Parliament and of the Council, of July 19, 2002 (IAS/IFRS adopters).
Effective Date
The tax provisions related to the changes in OIC principles apply starting from the tax period corresponding to the first period of adoption of these principles (2024 for “calendar” entities).
The application of the dismantling cost regulations to IAS/IFRS entities will take effect from the period following that in progress on December 31, 2023, namely the 2024 financial year for “calendar” entities.
For these entities, the Decree also regulates all cases in which, due to the interpretative uncertainty that has characterized the accounting classification of the aforementioned expenses, taxpayers have acted inconsistently with the provisions of the new decree: “In this regard, in particular, inconsistent behaviors are preserved, however, only for the expenses recorded in the periods prior to those relating to the first adoption of the implementations to the OIC, published in March 2024.
Therefore, with reference to the income components recorded from the aforementioned tax period, a tax treatment in line with the provisions of Article 6 of this decree must be applied in any case.“
Let’s Talk
For a more in-depth discussion, please contact: