An Economic Assessment of the Evolution of the Corporate Tax System in Italy

Abstract

This paper provides an assessment of the evolution of the Italian corporate tax system over the last decade through the computations of new and updated effective tax rates. The analysis takes into account the specificities of Italy's Allowance for Corporate Equity (ACE) and looks at the evolution of market interest rates to evaluate the effects. It relies on a new method to measure the effect of the limits to the deductibility of the cost of debt. Over the period 2010-2020, the legislative changes led to effective taxation becoming highly volatile. This dynamic was mostly driven by the evolution of the ACE regime. Since 2016, the temporary tax incentives for purchasing machinery greatly reduced the cost of capital. However, since 2019 the provision that phased out the incentives at higher-levels of investment may have lowered their effectiveness for larger firms. The analysis also shows that ACE has better economic properties than the Mini-Ires regime that replaced it temporarily in 2019, in terms of incentive to invest and to increase equity funding.

Temporary Super Depreciation Allowances for Green and Digital Investments

“…However, it was subsequently extended until 2020, albeit with a reduction in the super depreciation rate from 140% to 130%. The Italian 2020 Budget Law finally changed the structure of the super depreciation into a tax credit (see Zangari, 2020). Also notable is China's temporary super deduction earmarked for research and development (R&D) expenditures.…”