Daily Tax Report: International

INSIGHT: Italy—New Tax Incentives for Digitalization and Innovation

March 21, 2019, 9:59 AM

In the last few years, digital technology revolution has continued to open innovative concepts and methods that require attention by companies: current dynamics in research and technology underline how urgently we need modernization and new solutions.

In this regard, Italy has introduced new measures to support companies in their digital transformation: on December 29, 2018 the Italian Parliament approved the Budget Law for 2019, Law n. 145 of 2018 (“the Budget Law”), which includes some provisions for digital growth.

The main issues concern the public fund to develop blockchain, artificial intelligence (“AI”) and Internet of Things (“IoT”) services, a grant for companies investing in “innovation manager” training and consultancy services, and tax incentives for a cloud computing solution.

Blockchain, AI and IoT

The worldwide digital roadmap is continuously evolving on all levels of society, in business and everyday life; it implies permanent changes and new challenges that cannot be ignored by public and private entities.

For this reason, the Italian Budget Law set up a public fund of 45 million euros ($51 million) for the period 2019–21, with the aim of contributing towards finance research and studies in the emerging field of blockchain, AI and IoT, mainly focusing on small and medium enterprises (“SMEs”).

Projects potentially covered by the public fund are:

(a) research and innovation projects to be carried out in Italy by public and private investors, including foreign investors, in the strategic areas of development of AI, blockchain and the IoT, relevant to the country’s competitiveness;

(b) competitive challenges and new opportunities for the achievement of specific technological objectives and applications;

(c) operational and administrative support to activities referred to in (a) and (b), especially with regard to SMEs.

The fund is open and supervised by the Ministry of Economic Development, while it will be managed by a third-party entity to be identified by an implementing decree.

The fund will support, also through private voluntary contributions, innovative projects and start-ups on the following topics:

  • Blockchain: the new technology is able to create and manage digital ledger of data and information under a chain of “blocks,” storing data on varied range of information whereby each block is linked to the previous one, forming a chronological chain of data updated into the blockchain. Each item of digital information stored in the chain is immutable and available to a community of members.
  • Artificial Intelligence: this concerns a new generation of software based on a digital system of algorithms which, through a virtual world, can analyze input and data and give solutions/answers automatically. The automatic learning means the ability of a software/computer to learn from data, experience and to adapt itself to external circumstances replicating, to a certain extent, human skills or to perform low-valued and repetitive activities achieving important cost savings and improving efficiency in business operations.
  • Internet of Things: the invention and utilization of the internet has permanently defined the way we live and, in this respect, due to this digitalization transformation, all things, people, products, services can be interconnected by communication networks in and across private and public spaces. It allows things to share data and information with other things connected in the computer network, recognizing changes and events in order to react autonomously in an appropriate manner. The IoT builds communication between things (machines, buildings, cars, etc.) and represents a new age of digital connectivity and intelligence, being the main economic and social innovation and digital wave empowered by the internet.

Blockchain and AI—Future of Tax Compliance

Tax authorities are considering the new technologies of the digital transformation to improve traditional compliance and assessment procedures. Also, software houses are developing new AI products to manage filing of account data, tax returns, e-invoices, issuance and registration, managing tax litigation and assessments.

Significant opportunities and changes in the business operation are introduced applying blockchain technology and AI, that require investments and training for employees still operating in a non-digital environment.

Innovation Manager Voucher

The Budget Law (Article 1, paragraph 228) introduces a voucher granted for “Innovation Manager’s advisory services.” This is a grant aimed to incentivize companies’ digitalization. The incentive is mainly reserved to support SMEs for advisory and training services provided by qualified external consultants to develop and implement technological and digital transformation within their internal organization and through key “enabling technologies.”

The “enabling technologies” are those identified in the Enterprise 4.0 Plan, a national plan for modernization and digitalization of Italian enterprises (as detailed in the Budget Law No. 232/2016 for the year 2017 and following amendments), and can be summarized as follows: big data, cloud and fog computing, cybersecurity, advanced robotic, virtual reality, human machine interface, IoT.

The benefit consists of a non-repayable grant (voucher) fixed between 30 percent and 50 percent with such expenses paid to a consulting firm or consultants (which have to be registered in a specific list set up by a Decree of the Minister of Economic Development) for their advice on digital and technology topics; the annual maximum amount is fixed between 25,000 euros and 80,000 euros depending on the beneficiary business qualification.

In particular, the incentive is intended to apply to SMEs identified by the EU recommendation No. 2003/361/CE and divided into three groups:

  • small enterprises could benefit from a 50 percent voucher, with a maximum of 40,000 euros per year;
  • medium enterprises could benefit from a 30 percent voucher, with a maximum of 25,000 euros per year;
  • business networks could benefit from a 50 percent voucher, with a maximum of 80,000 euros per year.

The expenses on which the benefit should apply must be totally documented and duly stored in a register in order to be eventually audited by the competent authorities.

One of the mandatory conditions to be eligible for the voucher is to have a signed agreement between the beneficiary enterprises and one of the consulting firm or consultants as identified by the above-mentioned decree, to be published no later than 90 days from the date of when the Budget law enters into force.

Cloud Computing Solution

As a final and minor measure, according to the Budget Law, Article 1, paragraph 229, the tax amortization regime provided for the Budget Law for 2017 is applicable on expenses paid in relation to cloud computing royalties/service fees connected to intangible assets (as identified in Annex B of the Budget Law No. 232/2016 for 2017).

In particular, costs related to the intangible asset included in the above-mentioned Annex B could benefit from an increase of 40 percent of their tax depreciation cost and then can be deducted from a company’s income.

Planning Points

Italian SMEs and non-Italian companies, holding Italian branches or subsidiaries, may take advantage of tax relief and incentives provided by Budget Law for 2019 in favor of the digital economy, in particular they might:

  • claim a public contribution to finance Italian innovative digital investments and projects (i.e. research and implementation of projects on blockchain, AI and IoT);
  • claim a public grant (voucher) calculated on cost relating to consultancy services on digital and technology advice;
  • plan investments on tangible and intangible assets exploiting the special tax depreciation regime laid down in the Budget Law for 2017, also on costs related to cloud computing royalties and service fees.

On the other side, foreign suppliers of digital services and technological solutions should consider Italy as an interesting and growing potential marketplace to increase their commercial presence.

Francesco Bonichi is a Tax Partner and Elisa Cesetti is a Senior Tax Consultant at EY Italy

To read more articles log in. To learn more about a subscription click here.