MNI: US Subsidies Prompt Italy To Boost Tax Incentives-Sources

The Italian government plans to overhaul corporate tax incentives to further favour domestic manufacturing, prompted by big subsidies for American firms in the U.S. Inflation Reduction Act and by what Rome regards as a “weak response” from the European Commission, officials told MNI.

The incentives, which will be part of an overall drive to reduce the country’s tax burden, will particularly target the car industry and will be combined with other measures in a bid to lure manufacturers from elsewhere, officials said.

“We will increase the requirements of what is considered to be produced in Italy,” said a source from at the Ministry for Business and Made in Italy, adding that current incentive structures have an over-generous interpretation of what is manufactured in the country.

“We want to make Italy a place for foreign companies but also for local companies that have moved production elsewhere,” said a source at the Finance Ministry working on the tax changes.

RESPONSE TO IRA

The Italian government feels that its limited fiscal space, with public debt at around 140% of GDP, makes it harder for it to protect its industry from the consequences of the energy crisis and Washington’s IRA legislation than it is for other big EU countries such as Germany and France.

The failure of the push by Italy and like-minded countries to argue for the European Union to boost its own fiscal capacity to fund a European response to the IRA, in the face of opposition from Germany in particular, has prompted Prime Minister Giorgia Meloni to push ahead with her own industrial plan. (See MNI: EU Green Deal Seen Tapping Existing Funds, Leveraged)

“Germany has suffered more than we have from the energy crisis but has the fiscal room to cope,” said the Business Ministry source.

FEWER, BETTER INCENTIVES

A major goal of the reform will be to reduce the high number of incentives that companies can receive while making them bigger and more effective in order to better target strategic sectors, sources told. While the total amount available for deductions will remain the same for now, the government could seek to increase it if Brussels gives the green light.

Such incentives totalled around EUR15 billion a year before the Covid pandemic, but reached EUR25 billion in 2021.

While almost 85% of these resources are awarded by central government, 80% of the categories available for incentives are under the control of regional administrations. Meloni’s Brothers of Italy party would like to reduce this latter proportion, part of its general drive for more central control, but could face opposition from junior coalition partner the League, whose electoral base is in the country's north.

The League will wait to see the final proposal before deciding its position, according to sources in the party, which now wants to push for a more federal Italy.

Each new or modified incentive would need to be approved by an “implementation decree”, which League sources said would give them a chance to ensure what they regard as a fair regional distribution.

The government will give itself 24 months to pass the incentive decrees once the general principles of the law are approved, sources close to work on the legislation told MNI.