The Focus Paper (in Italian) seeks to analyse the main financial and economic effects of the revision of the taxation of business income provided for in the joint provisions of the 2019 Budget Act and Decree Law 34 of 30 April 2019 (the “Growth Decree”). In introducing urgent measures to boost economic growth, revive investment and resolve specific crisis situations, the latter legislation also envisages new changes in the corporate taxation system in addition to those already established, extended or repealed by the 2019 Budget Act.
While a number of measures already contained in the Budget Act are strengthened (the increase in depreciation rates – Superammortamento – and the deductibility from taxable business income of municipal property tax on property used in operations), other provisions modify the taxation of undistributed corporate profits, which had already been amended in the Budget Act. The Growth Decree repeals the tax relief on reinvested profits established with the Budget Act and introduces a new preferential rate on the share of profits allocated to reserves: a 1.5 percentage point reduction in 2019, 2.5 points in 2020, 3 points in 2021 and 3.5 points starting in 2022.
While the measures on the taxation of business income introduced with the Budget Act and the Growth Decree (excluding extraordinary measures for banks and other financial intermediaries) are expected to have a limited financial impact overall, the impact on the structure of the taxation of enterprises, on the distribution of the tax burden and on economic incentives is significant.
As for the structure of taxation, the changes ultimately make the system more fragmented. Taxation now differs not only on the basis of the legal nature of the taxpayer, but also on the basis of the size the companies, effectively creating three tax systems: 1) a progressive system (for sole proprietors using ordinary accounting and partnerships); 2) the IRES proportional system (for corporations); and 3) an additional proportional system offering considerable tax relief for individuals eligible for the forfettario single-rate system or the sostitutivo single-rate system in lieu of ordinary personal income tax (both for sole proprietors and self-employed workers). The latter covers almost all sole proprietorships and self-employed taxpayers and therefore can no longer be considered a special limited-scope regime such as the previous preferential tax scheme for certain categories of low-turnover workers (regime dei minimi). Furthermore, for the first two categories of taxpayer (under ordinary accounting), the tax treatment differs depending on whether they are non-financial companies (for which a reduced rate is applied to retained profits) or banks and other financial intermediaries (which are subject to a surtax on their IRES obligation in order to sterilise the relief measure for profits).
With regard to the redistribution of the tax burden, sole proprietors with annual revenue of more than €100,000 and partnerships, as well as companies in the financial sector appear to be the most severely penalised by the new tax structure: the former are affected by the abolition of the optional IRI regime and their exclusion from the forfettario and sostitutivo flat-tax schemes (only partly offset by the reduction of the tax rate on retained profits); the latter are impacted by the abolition of the allowance for corporate equity (ACE) and their exclusion from the new preferential regime for retained profits, in addition to the significant negative effects of the extraordinary measures.
The various subsidised mechanisms have different objectives: the ACE was intended to ensure that taxation was neutral with respect to funding choices, promoting the financial stability of companies; the tax relief on reinvested profits provided for in the Budget Act sought to encourage investment and employment; the scheme introduced with the Growth Decree more generically established a dual taxation system that gives preference to retained profits over distributed profits, delineating a system of tax incentives based on choices of funding sources and on the composition and amount of capital.
The objective of fiscal neutrality with respect to the choice of financing achieved with the ACE is abandoned for all companies operating under ordinary accounting rules and the tax advantage of debt over equity is re-established (albeit weakened by the limitations on deductibility introduced in recent years). Within the category of equity funding, the new system also discriminates in favour of self-financing (retained profits) over new capital, with a potential impact on policies for dividends/distribution of corporate profits. The exclusion of new capital from the preferential scheme reduces the scope of the incentives and over time, in the absence of adequate profitability, may affect the breakdown of capital between equity and debt. Moreover, capitalisation incentives become more complex due to the shift from an exemption for the return on the capital stock (in the ACE regime) to the application of a reduced rate on the annual flow of retained profits (with the new relief mechanism).
Considering the incentives for investment and growth, in the absence of a restriction on the destination of profits, the new preferential system makes the role of the mechanism as an incentive for new investments and employment less explicit compared with the tax reduction provided for in the Budget Act, although it continues to operate through the channel of the greater liquidity generated by the tax savings. However, the investment incentives are strengthened with the extension of the increase in depreciation rates.
In summary, with the Budget Act and the Growth Decree, the ACE and IRI mechanisms, which pursued the clear objective of ensuring the neutrality of taxation with respect to sources of funding and the legal nature of firms, have been replaced, with essentially no impact on revenue, by a set of mechanisms whose overall aims are difficult to discern.
Using the PBO’s MEDITA model for non-financial corporations, together with a tax simulation module for financial corporations, we conducted an analysis of the redistributive effects of the main measures adopted with the budget package: elimination of the ACE, introduction of the new reduced rate on retained profits, increase in the deductibility of municipal property tax (IMU) and extra depreciation (Superammortamento). For the entire sector of non-financial corporations, the combined effect of the measures reduces tax liabilities and the effective tax rates, while for financial corporations and banks (accounting for around 1.5 per cent of all corporations and 15 per cent of total IRES revenue) the effect is of opposite sign and especially significant. Smaller non-financial companies enjoy the greatest net benefit, thanks to the greater importance of the deduction of IMU, whose impact decreases as company size increases.
Examining the distribution of tax benefits by location of firms, the savings are more evenly distributed than those associated with the repealed ACE system, which on average favoured companies in the North and the Centre over those in the South. Altogether, the budget measures have had a more favourable impact in the South.
Finally, focusing exclusively on the preferential regime, compared with the ACE, with virtually no change in revenue, most of the tax savings from the new relief for retained profits benefit non-financial companies. Within this segment, companies that have accumulated the most capital over the last 9 years (the years in which the ACE system was in force) will see smaller tax savings than those achieved under the ACE. Conversely, other companies will enjoy equivalent or greater tax savings. The exclusion of new capital from the preferential system also seems to penalise smaller companies the most, as on average they tend to draw on this source of funds more than they do self-financing.