Italy has recently been very active in trying to introduce rules to tax digital companies. Initially, the 2018 Budget Law included a provision aimed at applying a web tax on digital transactions. However, no implementation rules were approved in order to start collecting the tax.
There may have been many reasons behind Italy’s decision to postpone implementation and collection of the web tax. The main one was certainly the desire to coordinate with the possible outcome of the discussions of the Organization for Economic Co-operation and Development (“OECD”) and the European Union (“EU”), which would hopefully have arrived at a common and harmonized solution.
In May 2018, the Italian Minister of Finance launched a public consultation on the topic.
The web tax returned with Budget Law 2019, which contains a new provision introducing a digital services tax (“DST”). The 2019 Budget Law was approved by the Italian Parliament on December 30, 2018 (Law December 30, 2018 n. 145).
The long confrontation between the Italian government and the EU regarding the 2019 Budget Law is certainly behind the approval of the DST, which its proponents assert would bring Italy expected additional revenues in the range of 600 million euros ($684 million), and has therefore been identified as a measure to reduce the public deficit. The expected revenues amount has however been criticized by consumers associations.
The provisions on the web tax approved with the 2018 Budget Law were, therefore, officially repealed and replaced by new DST regulations that mirror the European Commission’s digital services tax proposal released March 2018.
The main features of the DST are outlined below.
The DST will only come into force after the approval of a decree of the Minister of Economy and Finance. This decree has to be issued within four months (i.e., by April 30, 2019) following meetings with the Communication Regulatory Authority, the Authority for the Protection of Personal Data and the Digital Agency for Italy.
The DST will become effective two months after the decree is published in the Official Gazette. The director of the Revenue Agency will issue regulations providing additional implementation rules.
Subjects of the Tax
DST will apply only to entrepreneurs which, individually or as an affiliated group, meet the following conditions (both of which must be satisfied):
- total worldwide revenues equal to or greater than 750 million euros; and
- total revenues obtained from digital services in Italy equal to or greater than 5.5 million euros.
Both foreign and Italian entities will fall within the DST when the above parameters are met.
Definition of Revenues
The revenues that will be subject to DST are listed by the DST provision and the relevant revenue streams are in line with those included in the EU Proposal Directive of March 2018 (see above). In particular, revenues include those deriving from advertising services, intermediation and marketplace, and data transmission.
“Advertising” refers to the placing of an advertisement or advertisements on a digital interface, targeting the users of that interface; “intermediation and marketplace” refers to those platforms that offer a multilateral digital interface allowing users to contact and interact with each other and facilitating the direct supply of goods or services; “data transmission” refers to the transmission of data collected from users and generated by the use of a digital interface, although the scope of these transactions is not clear.
In contrast to the previous version of the web tax, DST also includes taxation of the transactions carried out in the marketplace, including the intermediation in the sales of goods. Transactions concluded directly with final consumers and pure e-commerce transactions seem to be still out of scope.
An important clarification that removes criticisms raised against the previous web tax version of the 2018 Budget Law refers to inter-company transactions. DST rules clearly state that the inter-company provision of digital services to a member of the same group is excluded from the scope of the tax.
Identification of Revenues
According to the new regulations, revenues that are subject to taxation are those which are mainly linked to the location of the users of the services. As a result, they are considered taxable if the user of a taxable service is located in Italy in a specific tax period. The notion of user is, however, not delineated, opening some doubt related to the identification of who is the user in the different types of digital transactions.
Identifying the user’s location is, also, not straightforward, and the rule for identifying when a user is counted for purposes of attracting taxable income to Italy depends on the different types of services.
In the case of advertising services, the new regulations mention that the relevant contact with Italy exists if the advertising in question appears on the user’s device when the device is used in Italy in that tax period to access a digital interface.
In the case of intermediation or marketplace services, according to the wording of the law, the localization of the user depends on whether the user uses a device in Italy in that tax period to access the digital interface and concludes a transaction on that interface during that tax period; if this is not the case, the user is considered located in Italy if he/she has an account for the whole or part of that tax period that allows him/her to access the digital interface and this account has been opened using a device in Italy.
In the case of data transmission, the localization depends on whether the data transmitted was generated by a user who used a device in Italy to access a digital interface during that current tax period or a previous tax period, which seems to suggest that in principle the taxpayer needs to track for all time from whom and where the data was collected.
The actual and practical application of the localization of the revenues will need to be addressed by the implementation rules.
DST will apply at a tax rate of 3 percent based on revenues generated in each quarter. The taxable base is not reduced by any “costs” but is net of value-added tax (“VAT”) and other indirect taxes. There is no indication of whether non-deductible costs include traffic acquisition costs, although it is clear that the taxation of the gross amount will increase the tax burden.
Enterprises that, individually or as a group, carry out the above-mentioned transactions and that are requested to pay DST have to comply within the month following each quarter and have to file an annual declaration of the amount of taxable services provided within four months after the end of the tax period. However, consolidated groups may nominate a single entity to fulfill the DST payment obligations.
Nonresident entities which do not have a permanent establishment in Italy or a VAT number, but in the course of a calendar year fulfill the conditions for the application of DST, must request an identification number for DST purposes from the Italian Revenue Agency. If a nonresident has an affiliate company in Italy, the affiliate is jointly responsible for compliance with the group’s DST obligations.
Nature of DST
DST rules do not specifically provide indications relating to the nature of DST. As previously, the new provision simply makes reference to the VAT legislation with respect to the assessment procedures, the penalty application and the collection of the tax.
Comments and Criticisms
Italy’s decision to introduce DST unilaterally is not without its critics and appears to be contrary to discussions and meetings still pending at the level of the European Commission and OECD, where there is an attempt to try to identify a common system of possible tax on digital services, which avoids duplication of taxes and breaches of EU and tax treaty principles.
Indeed, an Italian DST that is not harmonized with the EU legislation could be considered at variance with the main EU principles that were analyzed in the Proposal Directive of March 2018, with the aim of supporting a DST on a European basis. Moreover, on January 24, 2019, the OECD member states released a policy note stating that they are working to reach a long-term consensus based solution to be implemented in 2020, thus trying to prevent unilateral initiatives.
A new indirect tax imposed on gross income could be in disagreement with Article 113 of the Treaty on the Functioning of the European Union. This provision enables the Council to adopt provisions for the harmonization of member states’ legislation concerning other forms of indirect taxation only and exclusively to the extent that such harmonization is necessary to ensure the establishment and the functioning of the internal market. A measure that is introduced unilaterally and not harmonized appears to be in contrast with this provision.
In addition, enforcement of DST could conflict with tax treaty provisions signed by Italy, since the DST could be a “covered tax” as a tax on income and therefore precluded by tax treaty provisions. The tax also might conflict with World Trade Organization principles.
Moreover, being a tax applied on gross income and only with respect to transactions localized in Italy, it may give rise to distortion of competition from several angles. Indeed, DST would apply irrespective of the actual profitability of enterprises and, therefore, would not be in correlation with the actual final income that an enterprise may declare. Gross-based taxes do not differentiate between profit-making and loss-making companies.
Being applicable to Italian entities, it may reduce their competitiveness with respect to multinational groups located in other countries, causing distortion in the market.
A serious risk of double taxation for Italian enterprises may also materialize, since it appears that Italian enterprises will not be able to claim a credit against their regular income tax liability for DST paid to either Italy or other countries. Whether non-Italian taxpayers will be able to claim a credit against their home country tax liability will be based on their domestic legislation.
Consumers, particularly Italian consumers, may be affected by the new tax. Taxes applied on transactions are likely to be transferred to users, with a consequent increase of prices for the purchase of goods and services. For instance, small and medium-sized entrepreneurs which would like to advertise their activity online will see the prices of the services increased. This would be in contrast with the scope—set by the of Italian Digital Agency—to increase digitalization of enterprises in Italy, since access to goods and services will be more expensive.
Finally, the issue of administrability of the tax also has to be considered. In order to identify the revenues to which DST shall apply, enterprises will have to be able to constantly track the locations of users based on location information provided by IP addresses, and presumably store and provide this information in the case of an audit.
This intensive location tracking and storage of related data is not usual practice for companies with highly digitalized business models, and could generate inconsistency in the identification of the place where the revenue is generated, due to the fact that users could move. In addition, unlike the European Commission’s digital services tax proposal, the current regulations do not give any guidance as to the allocation keys, in case users are located in different states.
Imposing the requirement for companies to pursue intensive tracking and storage of user location data also appears to conflict with user privacy rights as enforced under the recently issued General Data Privacy Regulation.
Giuliana Polacco is a Counsel with Baker McKenzie Milan.
The author may be contacted at: email@example.com