R&D Tax Credit: Unresolved Issues and Opportunities

The biggest problems of the old R&D tax credit

A report from the Court of Auditors last month helps us to understand the main criticalities that emerged in the application of the R&D tax credit within the previous regulatory context (tax periods 2015-2019).

These criticalities are the cause of the limited effectiveness of the measure recorded so far and provide useful information to improve a tool that remains very important for the competitiveness of our companies and for the relaunch of the Italian economy, as recently also confirmed by Francesco De Santis, vice president of Confindustria, in an interview with Il Sole 24 Ore and as demonstrated by the existence of effective tax credit in the main European manufacturing countries that are our competitors (France and Spain above all).

The major problems of the old R&D tax credit can be summarized in four points:

the rule (already very complex also due to the incremental calculation mechanism) has undergone repeated changes which, in a first phase (indicatively between January 2015 and December 2017) have progressively extended the subjective and objective scope of the intervention, vice versa, starting from the beginning of 2018, a series of other measures, combined with interventions of an interpretative nature issued by the Ministry of Economic Development, then implemented and validated by the Revenue Agency, have tended to restrict the objective scope of the measure, creating many uncertainties to interpretative and applicative level to companies;

the lack of suitable tools for controlling the evolution of expenditure has led to a "draft" deriving from the use of the tax credit that is much higher than the appropriations for financial coverage provided for in the state budget;

the lack of suitable indicators of the effectiveness of the measure revealed a limited increase in the overall R&D expenditure of companies very late compared to the strong increase in public expenditure recorded to support the measure itself;

given the automatic incentive procedure, the Revenue Agency checks unfortunately resulted in widespread situations of abuse of the law .

The setting of the new tax credit

The setting of the new tax credit for "investments in research, technological innovation and other innovative activities for the competitiveness of companies", in force starting from 2020, above all thanks to the precious indications provided by the ministerial decree of 26.05.2020, outlines the objective scope of the measure in a more precise way than in the past . This is a good starting point, especially if the new facilitating discipline will be developed consistently with the original provisions of the law and the ministerial practice will remain stable over time.

There are still some points to be resolved 

1 # criticality: defining in a certain way the new knowledge for the reference sector in which the company operates

Certainly there are still some aspects to be perfected, especially with regard to the lack of objective elements useful to characterize in a certain way the new knowledge for the reference sector in which the company operates.

On this point, it would be desirable to provide some simple indicators capable of integrating the novelty requirement with reasonable certainty , in the presence of which companies could benefit from the maximum rate provided for by the law (editor's note: the TRIX platform of Warrant Hub is able to identify the novelty requirement, even in the absence of the aforementioned indicators, which it is hoped that they will soon be identified by the legislator).

Speaking of rates, another problem to be resolved immediately concerns the uncertainty about the period from which the new rates introduced by the latest Budget Law start . According to Italia Oggi , the Revenue Agency would be oriented to apply retroactively also to investments in research, development, innovation and design activities supported in 2020.

Regardless of the press rumors, the uncertainty originates from the lack of clarity of the text of the 2021 Budget Law, which lacks the deadline for the application of the new rates.

On this point we point out the position taken by Dr. Marco CalabrĂ², manager of Mi.SE, who, in a recent interview with Fasi.biz , reiterated that, in his opinion, the new increased rates apply only to investments made starting from 2021, because in the technical report of the Budget Law the relative financial coverage is missing.

It is hoped that this uncertainty can be resolved in the current month with the arrival of the decree containing the corrections to the Transition Plan 4.0, long awaited, in the meantime, for companies that are starting to benefit from the 2020 investment tax credit. , for reasons of prudence, we believe it is preferable to apply the previous rates introduced by the 2020 Budget Law.

 In any case, in order to regain business confidence and not risk jeopardizing the effectiveness of such an important measure in the near future , it would be appropriate to rapidly introduce a penalty protection measure which should provide for the non-application of the more serious penalties envisaged for non-existent loans. if, in the course of accesses, inspections, verifications or other preliminary activities, the company delivers the appropriate documentation (complete, truthful and correct) required by the facilitating regulations for the purposes of controls to the Financial Administration.

Again in order to pursue the same purposes set out above, it would be far-sighted, but also necessary in order to protect the taxpayer's rights enshrined in our legal system, to extend the aforementioned protection measure to all companies that in the past have invested and benefited from the previous R&D tax credit by relying on the rules and practices in force at the time of the first phase of application of the measure, but which today risk being treated in the same way as those subjects who have deliberately adopted fraudulent behavior.

In a nutshell, in order not to repeat the mistakes that brought out the first criticality that characterized the previous facilitating discipline, three ingredients are needed: certainty, speed and stability .

2 # criticality: the lack of suitable tools for controlling the evolution of expenditure

The second criticality, related to the operational mechanism of the tax credit, based on the compensation in the tax return, entails that the checks are naturally subsequent to the use of the credit, without the use of ex ante protection tools for public finances.

This problem could be addressed by means of some measures, some of which have already been appropriately provided for in the most recent legislation:

maintenance of the limits of use provided for by the law according to the type of admissible activity;

introduction of a specific communication to Mi.SE aimed at acquiring the information necessary to evaluate the progress, dissemination and effectiveness of the subsidy measure;

strengthening of documentary burdens and strict contrast to the abuses of the law.

3 # criticality: the lack of suitable indicators of the effectiveness of the measure

The third critical issue could be addressed by introducing a set of parameters for verifying the effectiveness of the tax incentive , essential in order to increase the ratio between the overall R&D expenditure of the companies and the cost of the measure as well as to improve the results deriving from investments in research. development, innovation and design.

Some parameters could, for example, be linked to: patents filed, measurement of the improvement of environmental performance, measurement of the intensity of digitization of business processes using 4.0 technologies, registered designs and models, etc.

Finally, to improve the fight against abuses of the facility, it would be appropriate to clearly distinguish between uncertainties or errors in the application of the incentive and fraudulent behavior .

The first category of abuses could be effectively limited thanks to a stable discipline over time, the introduction of objective elements useful to characterize in a certain way the new knowledge for the reference sector in which the company operates and the performance of controls on the based on specific documentation, precisely defined by the standard which should be promptly and systematically compiled by the company.

In essence, it is a question of minimizing the complexity and margins of error in the application of the incentive and, at the same time, reducing the discretion of the auditors during the control phase which, at present, can be based on their own independent assessments. techniques, despite not having the necessary skills.

This approach would undoubtedly save time, allowing the supervisory bodies to focus their efforts on combating fraudulent behavior with a consequent advantage for the whole system.

In conclusion

In conclusion, among the unresolved issues, we also note that of the expenses incurred for research and development activities carried out by commission agents resident in Italy, on the basis of contract contracts with foreign parties .

In reality, the answer to question no. 187 of 17 March 2021, resolved the matter in the negative, clarifying that these activities cannot take advantage of the new tax credit.

It is undoubtedly a stance that arouses very strong perplexity, because instead of attracting foreign investments in R&D in our country we discourage them. The numbers in this sense are quite clear, the Italian research centers, which employ around 50,000 employees ( Il Sole 24 Ore , 1 December 2020), risk being seriously penalized, as it could become cheaper for large foreign companies. commissioning R&D activities in countries such as France, Spain, Belgium, Germany, as well as the United Kingdom and the United States which have cleverly introduced regulations that permanently facilitate R&D for all .

In addition to the direct damage to our own research centers, the collateral damage for related activities and the loss of know-how, skills and opportunities for our researchers should also be considered, precisely at a time when it is crucial to attract the best resources to the country. human resources to compete internationally in the technological challenges of tomorrow.