A recent ruling by the Italian Revenue Agency (Agenzia delle Entrate) has provided guidance on the correct VAT regime to be applied on the payments owed by the grantor to the concessionaire on the availability payment based on concession agreements. The ruling affirms that the portion of availability payment inherent, and therefore connected, to the construction costs incurred by the concessionaire is subject to a VAT rate of 10 percent, instead of the ordinary 22 per cent rate.
By resolution 100/E of 3 November 2016, the Italian Revenue Agency has provided further clarity on certain tax issues affecting public-private partnerships (PPPs) in Italy.
In compliance with the EU directives and principles on contractual PPP procurement schemes, the Italian Code of Public Contracts allows the public sector the option of creating long-term relationships with the private sector through the awarding of concession agreements where the payment for the activities carried out by the concessionaire is represented by a stable income stream, usually defined as an “availability payment” (corrispettivo di disponibilità).
The overall amount of the availability payment and the mechanics of its disbursement are primarily influenced by several factors, including
- The investment costs
- The operating cost under “ordinary business conditions”
- The contractual term and the duration of the concession agreement
- Any additional economic benefits, such as public grants, contingent guarantees and termination payments.
Because of the apportionment of the risk between the public and private partners, the size of the availability payment is determined with the aim of ensuring economic and financial balance in the concession agreement. A modification to the tax regime affecting the cost of and/or income from the concession is customarily construed as a “change in law” event, enabling the affected party to trigger a procedure aimed at the financial rebalancing of the concession.
The Italian Revenue Agency Ruling
The AE ruling was requested by a Local Healthcare Authority (Azienda Sanitaria Territoriale) in connection with the project financing for the design, build, operation and maintenance of a new hospital facility. As is customary on the Italian market, the operation also encompasses the supply of certain non-core, i.e., non-medical related services, such as maintenance, energy management, cleaning, waste management and catering, etc., in addition to purely commercial services.
In its reasoning, the AE made express reference to the previous clearings provided under rulings 395/E/2002 and 21/E/2005, affirming that (only) the portion of the availability payment inherent to (and therefore connected with) the construction cost of the asset should be considered as subject to the 10 per cent VAT rate. Although not expressly stated in the ruling, it can be inferred that the remaining portion of the availability payment should be subject to the ordinary 22 per cent VAT rate.
The ruling further clarifies that the portion of the availability payment to be considered as inherent to the construction cost of the asset should be determined on a case-by-case basis, taking into account the contractual arrangements and the economic and financial plans of the investment.
While the ruling is legally binding on the tax authorities only with regard to this specific case, the position taken by the AE is potentially far-reaching and likely to be applied in outstanding and future financial rebalancing procedures affecting Italian concession agreements where a revision of the actual apportionment of the availability payment would be deemed appropriate.