How foreign investors can boost IRR of their investments in Italy

Under
condition some key rules are observed, Italy is a great Country to invest into.

In general,
foreign investors and groups are very much focused on nominal IRR (internal
rate of return), but with Italy this might prove to be a partial approach.

One of the
most though concepts that international observers understand is the complexity
of the Italy law system itself (which is based, since the ancient Rome, on
civil law), but in particular the unbelievable tax rules, that considerably
increase risks of tax burden, as well as the costs involved for compliance.

Italy is
not the only country having a stringent tax system, but it is by sure one of
the hardest to fully comply with.

Besides the
costs of tax compliance, the risk of tax audit generating heavy penalties and
additional taxes on income (and VAT tax) is material in any business area.

What shall
a foreign investor do under such a scenario to avoid undertaking unnecessary
risks?

Are there
any tips that might help to comply with the law, reduce costs and boost actual
IRR of investments in our Country?

The answers
is yes, there are some measures that help a lot.

Whereas
cross-border businessmen and managers are, in general, highly skilled in the
business practices, most of them fail to catch the hidden cost of managing the
legal risks under our system of law.

Of course,
every industry has its own fundamentals, with different issues also in respect
of the legal obligations, but at the end the proper management of the legal
risks plays a role of utmost importance.

A “Legal
Due Diligence” process can help to identify the main areas of the audit
process for the many sets of juridical relationships that a company needs to
manage.

The basic
concept is very close to the features of a good operating system software
configuration: to reduce risks, the first move is reducing the possible surface
of attack.

Like an
antivirus that controls streams of data to intercept threats, a good legal risk
management approach must identify the interactions of the company and prevent
risks by trying to implement agreements with proper clauses, that not only can
reduce the “surface of attack” under a legal perspective, but also
improve the rate of success in case of litigation, as well as ease and fasten
the enforcement of judicial decisions once they are released.

It might
seem plain theory, but it is not: good companies and investors try to actively
manage all manageable factors, and do their best to act on the root of
problems, not only on their effects.

Similarly
to the PDCA (plan-do-check-act) loop cycle used in the total quality concept,
legal risk management is crucial to define the perimeter of risk and to improve
results delivered to shareholders or, in general, to any stakeholders.

Specifically
in the tax compliance area, the difficult interpretation of law is a factor
that generates a two-phase risk: in the first phase, substantial risks of
non-compliance to the tax law, and later a second phase risk of wrong approach
to the tax litigation procedure rules.

 An
inefficient approach and management of these two phases may lead to a
catastrophic outcome, burning out the whole results even if the business was
run by very effective management.

Most of law
firms enter on stage once the problem is risen, but this is too late: the ideal
approach is based on a permanent matrix-team, including native speaking professionals
with strong skills in all areas of law of the Italian jurisdiction, and a
mindset focused to prevention of legal risks in such a way that does not
jeopardize the business.

Experts
that put aside formal contracts, but are instead able to “soften” the
text of any agreement, and converting it in something similar to a normal
communication that does not sound suspicious or risky to the external
counterparties (customers, suppliers, and so on).

What counts
for shareholders, at the end, is the actual IRR net of delayed burden,
especially in the current competitive arena: the world is more and more
interconnected, markets and logistics are liquid, and managers tend to focus on
the primary activities without attributing enough weight to support activities
(and those who know Michael Porter’s concept of “chain of value” know
what this means exactly).

Nowadays
there is not anymore room for rough management of support activities: they must
be handled effectively, and legal risk management is fully part of them.

In short,
even if this is a universal rule, as far as Italy is concerned it is mandatory:
to boost IRR, tax & legal risk must be managed proactively.