January 31, 2023

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Internationalization and intangibles: R&D incentives and transfer pricing – Part I

with the present tense ContributionPublished in two parts, we would like to share some reflections on the implications of the processes Internationalization They can keep Research and development activities (R&D) carried out in Italy for the development of intangible assets related to business development.

More precisely, the following considerations refer to an Italian company engaged in the planning, development, design and construction (i.e., assembly) of machines with a high technical content. Important R&D activities This – in addition to the creation of corporate knowledge – led over time to the production of maps and the registration of formulas and patents.

The profile is similar to the profile of a Engineering Institute It is called – by industry – for a continuous commitment based on a constant pursuit of research and development activities, increasing its knowledge base and identifying new technological solutions applied to a specific sector or niche.

In light of this unique characteristic, the company was able to access the tax benefits granted by the Italian regulatory system and specifically the so-called regulation. Copyright BoxInitially introducedArticle 1, paragraph 37 – 45, Law 190/2014 (and subsequent amendments) was then substantially amended by the innovations introduced by DL 34/2019, before its radical change by DL 146/2021.

Since it is used directly Intangible properties (IP) to focus on its R&D activities, the company decided – in November 2020 – to hand over to the efficient regional directorate of the revenue agency. Application for admission to pre-contractual procedure Ex Article 31-ter Presidential Decree 600/1973 (CD, judgments) for purposes of joint definition Procedures for calculation of eligible income for the five-year period 2020-2024.

For purposes of the Patent Box Agreement, the relevant IPs are the Company’s know-how, designs, formulas and patents, all of which are incorporated. Complementary bondingBusiness activity (and the resulting profit) is the result of the joint and indivisible application of all of them.

In the meantime, while waiting for discussions with the revenue agent to begin, the company decides to take advantage of opportunities to develop its cross-border business, By setting up a subsidiary in Canada: It is expected to initially (e.g., 2023) carry out distribution activities related to the promotion and marketing of the Italian parent company’s machines in Canada and the United States; During this initial phase of the process, a manufacturing site will also be set up so that later (eg, tentatively from 2024) assembly operations can also be started in US territory.

With this in mind, it is necessary to discuss its features in more detail Supply chain management To characterize the activities of the newly established Canadian branch in its relations with the local market on the one hand and with the parent company on the other.

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Foreign Branch and Business Model (Phase 1): Distribution

Basic step selection will be later functional model The foreign branch is better able to face the challenges posed by the local market in which to compete: assessments cannot be theoretical or inspired by simple “pre-packaged” models, but must certainly be considered. Unique features of the product And this Types of customers targetI am Distribution channels By marketing the product itself, i Competitors and competitive dynamics of the same-store market in general, including policies Marketing And support for sales promotion, not forgetting pricing strategies.

Additionally, they should not be overlooked Legal aspects It can become a characteristic element of the distribution contracts signed between the Canadian branch and its customers: it includes features linked to the provision of compensation if any defects of the machines cause damage to the user and regulation of product warranty clauses. / Like prompting the client to advertiseLIABILITY ACTION AND COMPENSATION FOR DAMAGES not only against the distributor but also against the manufacturer (Product liability risk)

These considerations are accompanied by additional analyzes related to organization and governance Logistics: From the export of machinery and spare parts from Italy to Canada and USA, to their possible subsequent export Handling and Storage in US Territory (By which we mean Canada and the United States together).

For example, you will be asked to decide If the flow is a more continuous flow that sees goods exported from the parent company’s Italian factory A place designated by the customer of the Canadian branch must be identified either directly or – otherwise – at one or more depots located across the territory (Canada and USA) and managed by the local branch.

In all of the above, one must add caution Forecasting and management of financial flows and cash flows characterize the operating model implemented in the United States on the one hand and the nature of intragroup relationships between the aforementioned Canadian branch and parent company on the other.

Therefore, in light of the production times and the subsequent exports from Italy, some examples of machines expected to be subject to frequent requests and a minimum stock of spare parts (especially customized) and other consumables in a decidedly short time (i.e., to the detriment of the user) can demonstrate the need for “ready delivery”. to avoid prolonged engine downtime) should be delivered to their destination.

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Therefore, an implementation model may be required Less or more financial flexibility for the Canadian branchFor example, due to misalignments between billing times from customers and payment terms with the Italian parent company.

Similarly, timeliness will be equally important with respect to the financial viability of the foreign branch in question. Analysis of all risksStarting with the activity that has the greatest impact on the economic and financial stability of the subsidiary: in fact, the OECD guidelines on transfer pricing as a result of the BEPS project (ie, from the version published in July 2017) clearly highlight how. The actual bearing of a risk cannot be separated from the firm’s effective ability to deal with it. Primarily financially, at the same event (para. 1.71 et seq.).

Therefore, in the light of the above, it will be important to clearly identify the operational and risk profile (by so called). Operational Asset Risk AnalysisFAR analysis) of both the Canadian branch and the Italian parent company can clearly attribute to each the risks associated with the activities, assets used and each of the different types of intercompany transactions undertaken. Therefore, depending on the intensity of the asset-risk activities, an operational profile will be constructed for the Canadian subsidiary of increasing thickness (and therefore in terms of expected revenue). Marketing support service providersAgent, limited risk distributor or full risk distributor.

As mentioned, these different operational characteristics include different personnel structures and mechanisms, different methods of communication with clients and different operations in the region and – as a result – diversified tax risk profiles for the Canadian branch and the Italian parent company. only Transfer price But other cases are more closely related Tax residence (ie, late permanent establishment of an Italian company in the US or outsourcing of a Canadian branch in Italy).

Foreign Branch and Business Model (Phase 2): Manufacturing

The second phase of operations abroad will be characterized by the start of local production of machines designed to be marketed in the Canadian branch’s territory. As in Italy, the manufacturing carried out in Canada will consist of the assembly of components made by third-party suppliers following the technical specifications specified by the Group, along with other items in the general trade.

In this regard, since the inception of the overseas branch, the group has been a Careful definition of manufacturing strategy It wants to identify and put on site the minimum necessary resources, organizational methods and time to make plants fully operational.

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In particular, regarding the resources required to start manufacturing operations in Canada; intangiblesFirst, (i) the assembly – at least in an initial phase – will have as its object some series of machines already manufactured in the parent company’s plants in Italy, (ii) therefore available. The Canadian plant has developed all the know-how and experience gained over the years by the Italian workforce, (iii) it is essential Personalization Necessary procedures shall be initiated to obtain quality certificates from independent bodies and (iv) machinery conform to the technical specifications imposed by product regulations in force in Canada and the United States.

The most suitable methods should be identified, starting from the legal and financial nature, to allow the foreign branch to exploit all the knowledge (ie, know-how, drawings, formulas and patents). Developed by an Italian parent company.

Any kind of relationship between two entities should be regulated by regulation The principle of free competitionThe following options may of course be considered: (a) Granting the application to the Canadian branch of all required IPs through a special of the license agreement It provides for payment of (Profit Rights) term or (b) the Sale for consideration IP’s strictly required for specific manufacturing carried out in Canada.

In both cases, in light of the nature of the products, characterized by high technological content and constant R&D activity, a careful (and equally subtle) exercise Assessment of the aforementioned IP complex, precisely for the purpose of assessing in a fair and balanced way, their actual capacity to generate income determined by the highest technological evolution in the medium-term time horizon.

For this purpose, further consideration should be given Anticipated growth of the business In the American territory: for example, it is appropriate to consider whether (and when) the range of products assembled in the Canadian plant will be enriched with new models, which are the result of specific research and development activities carried out on site by a dedicated team. Engineers and specialized technicians (including joint projects with American universities and research institutes), and leading activities Creating new abstractions By the same Canadian branch.

Here, then, it is Business plans The industrial plan drawn up at the Canadian branch and group level will be the basic exercises to give substance to the development concepts.