"NEWS April 19, 2016-PATENT BOX and credit for TAXES paid abroad"
In determining the limit of deduction of tax paid abroad a matter to be addressed is that of the possible effects of the application of the patent box.
The issue is particularly important especially for companies (and businesses in General) which license out to foreign entities be subsidized intangibles (patents, software, trademarks, know-how, etc.), to portray the fees (usually royalties) subject to taxation in the country of the subject.
It is recalled that, in accordance with article 165, paragraph 1, of the tax code, taxes paid abroad outright are allowed in net tax deduction (due in Italy) “to the extent the tax quota corresponding to the ratio of the foreign income and total income net of losses of previous tax periods accepted in decline”.
The first aspect concerns the determination of two incomes to be placed in the numerator (foreign income, hereinafter also referred to as KING) and the denominator (total income, hereafter also RCN) the report.
For example, you face the limiting case of a company that in 2015 has matured, which only revenues, royalties from a single foreign entity (for a total of euro 1000) and has a total income, gross of “patent box” share, 600 euros, part of which, 500 euros, resulting from research activities be subsidized.
Assume that the company has a permanent establishment in the foreign country and I have paid in that country imposed for euro 100 (equal to 10% of the royalties).
For 2015 the company will exclude from income the 30% of income “patent box” and therefore its taxable profit will amount to euro 450 for Ires due to 124 euros.
The first question to ask yourself is if the numerator of the ratio (RE) go the whole amount of royalties (before costs) or if this amount go reduced costs to it related, and if, in the latter case, the gross or net foreign income goes back to the “patent box” share.
In circular No. 9/E/2015, the Inland Revenue has stated that, in the absence of a permanent establishment, “foreign income, as restated in accordance with Italian tax, should be taken before costs incurred for its production, due to objective difficulties in determining and controlling costs actually attributable to individual items of income and expenses”; without prejudice to the possibility of a Union on eventual elusiveness of operations aimed at an undue “monetization” of the tax credit.
As explained in circular callback would seem so to say that where there is no elusive intentions, foreign income go hired before costs.
If so, in our example the numerator (KING) should be reported for the full amount of the royalties ($ 1,000).
So, regardless of whether the denominator goes reported the total income ante or post “patent box”, the result of the relationship will always be greater than 1, and therefore will be assumed the value 1, as they cannot have values greater than unity (as defined in the circular 9/E/2015 and in statements to the tax return).
Therefore, in our example, the limit on deductibility of taxes paid abroad will be equal to the full amount of taxes owed in Italy and, given that taxes paid abroad (100) are less than the taxes owed in Italy (124), the company may deduct the entire amount of tax paid abroad.
However, if the foreign income should be taken less costs and the “patent box”, considering that in our example the entire income is produced abroad, the numerator (KING) should be reported in the amount of € 450. The effect on the tax credit should not change because it is considered that even in the denominator (RCN) go the same amount, with the result that the result of the report will amount to 1.
Everything except that, as you say below, should apply the reduction referred to in paragraph 10 of article 165 of the tax code.
The effects may be different when only a portion of the income is produced abroad, particularly where the patent box should cover only income produced in Italy.
Continuing with the previous example, assume that the foreign royalties euros 1000 for the requirements to be eligible under the patent box and that the company has accrued revenues even in Italy to euro 2,000, all arising from research activities be subsidized.
Assume that the company has produced a total income of € 900, of which 600 and 300 abroad in Italy and that the share of income Italian aid must amount to euro 540.
For 2015 the company will exclude from income the 30% of income “patent box” and therefore its taxable profit will amount to euro euro 203 738, ensuring a Ires due.
At this point, reporting to the numerator (RE) the total amount of royalties abroad the ratio is still higher than 1 and then will be taken to deduct the entire amount of tax paid abroad (100 euro).
If, on the other hand, in the numerator, you were to bring the foreign source income (net of all costs incurred) and the denominator the total income (net of decrease from “patent box”) the result of the report will be 0.41, which applied to give a deduction limit of euros due Ires 83, with the consequence that foreign taxes may be brought only deduction for this amount While over 17 euros will have to be postponed to later periods; the risk would be that you could never recover where, even in later times, we maintain the same position in terms of revenue and income (considered, moreover, rising to 40% by 2016 and 50% for the following years the share of non-taxable income and the reduction of 24% as from 2017 to Ires).
Another issue to be addressed is that of the possible applicability of the provisions of paragraph 10 of article 165 of the tax code, which provides that when foreign income contributes partially to the formation of the total income, the foreign tax must be reduced accordingly.
In that regard, it must be understood if the foreign income be subsidized with the patent box should be considered such as income that contribute partially to the formation of total income; If so, it will be necessary to reduce the foreign tax by that amount, with the additional burden of not being able to bring total deduction from income tax over and can’t otherwise retrieve in Italy (thus the circular No. 9/E/2015).
In the light of all the above issues must be considered that the patent box has which aims to encourage the placement and maintenance of intangible assets in Italy and to encourage investment in research and development.
To maximize the incentive effect, avoiding restrictive consequences on tax paid abroad, should therefore reassure businesses (in via rules or at least interpretive), both on the irrelevance of the patent box for the purposes of paragraph 10 of article 165 of the tax code, both on the possibility for the determination of RE/RCN, to bring in the numerator the foreign source income before costs incurred and facilitating effects of the patent box.