In the past few years, the digital market has been one of the economic and social priorities of the European Commission. The aim of the EU within this market is to create and boost new digital business opportunities, by ensuring a stable common tax framework and by allowing all worldwide players to tap into this new field under fair and equal conditions.
On December 29, 2018, the Italian parliament approved the Budget Law for 2019, Law No. 145/2018 ("Budget Law") which had been published in the Official Gazette on December 31, 2018. The new provision replaces the existing tax rules, which had been introduced by the Italian Budget Law for 2018 and never entered into force.
Today’s Digital Market
The EU digital services tax proposal aims to address the digital revolution which requires a new approach to tax law principles, the current corporate income tax rules becoming inadequate to address the digital business.
Current corporate tax provisions are tailored to traditional business models and schemes, the traditional trading business is based on different mechanisms and commercial assumptions marginally present in the digital business (e.g. how profits are created, value of big data, place of service delivery, etc.). The inadequacy of the current rules implies a misalignment between the place where profits are sourced and generated and the place where such profits are subject to tax.
Looking for a stable and comprehensive solution, some EU states have faced the issue by introducing specific provisions, warning about their power to tax these incomes.
In this scenario Italy approved the first web tax measure in the Italian Budget Law for 2018; however, these rules never entered into force in the absence of the implementing decree.
The European Commission, on many occasions, pointed out the risk of tax fragmentation among member states and the risk of a negative impact on national revenues. Moreover, in the absence of a common solution, an uncontrolled competitive distortion in the digital market and between digital players might occur.
In order to provide a common approach to tackle the digital economy, as described above, the European Commission proposed a Council Directive COM (2018) 148 on March 21, 2018 on a common digital services tax.
Italy’s Digital Services Tax
In light of the EU proposal, in the Budget Law for 2019 Italy introduced the Italian Digital Services Tax (“IDST”) which replaced the previous tax provisions introduced last year.
IDST is mainly based on the European Commission proposal and in more detail provides the following.
Taxpayers of IDST are enterprises carrying out, individually or at the group level, business activities when the following thresholds are jointly met:
- the total amount of worldwide revenues for the latest financial year is equal to or exceeds 75 million euros ($85 million);
- the amount of taxable revenue, sourced in Italy from digital services is equal to or exceeds 5.5 million euros.
The taxable revenues are those derived from the following services:
(a) services consisting in the placing on a digital interface of advertising targeted to users of that interface;
(b) services consisting in making available a multi-sided digital interface for users to be in contact and interact with each other in order to facilitate a direct supply of services or goods;
(c) transmission of data collected about users of that interface and generated from such users’ activity on the digital interface.
The revenue deriving from digital services supplied to companies’ which are part of the same group is not subject to the IDST.
Comparing the text of the IDST with the EU directive proposal we notice some differences, in particular:
- With regard to services mentioned in (a) above, it seems that the EU directive proposal specifies that if the entity proving the advertising service is not the owner of digital interface, such entity (and not the interface owner) is considered as taxable enterprise, while the current text of the IDST does not seems to exempt the interface owner.
- In relation to services in (b) above, the current EU proposal exempts certain services and consequent revenue (“(I)the making available of digital interface where the sole or main purpose of making the interface available is for the entity making it available to supply digital content to users or to supply communication services to users or to supply payment services to users; (II) the supply by a trading venue or a systematic internaliser of any of the services referred to in points (1) to (9) of section A of Annex I to Directive 2014/65/EU; (III) the supply by a regulated crowdfunding service provider of any of the services referred to in points above”). These tax exemptions are not included in the IDST.
Finally, the EU proposal regarding services mentioned in (c) above, exempts from taxation “the transmission of data by a trading venue, systematic internaliser or regulated crowdfunding service provider,” these exemptions are also not present in the current text of the IDST.
Regarding the place of taxation—which is the core point in digital sector taxation—revenue obtained by an entity shall be treated as “taxable revenue” if the users of digital services can be considered as located in Italy in the relevant tax period. Users are deemed to be located in Italy if:
- In relation to services point (a), the advertising targeted to the interface’s users appears on the users’ device, when it is used—in Italy and in the relevant tax period—to access the digital interface;
- In relation to services point (b):
- if the services involve a digital interface which facilitate the supply of goods and services directly between users, the user uses a device in Italy in the relevant tax period to access the digital interface and conclude transactions on that interface;
- in case of services not covered point (a), the users have an account for all or part of the relevant tax period which allows them to access the interface and the account has been opened using a device in Italy;
- In relation to services point (c), if the service involves collection and transmission of data generated by use of the interface, the data generated from the users—which have used a device to access the interface during the tax period or any previous one—is transmitted in that tax period.
The taxable basis is calculated considering the gross revenue (costs are not deductible) net of value-added tax ("VAT") and other indirect taxes. The IDST rate is fixed at 3 percent of the total amount of revenue. Furthermore, IDST is due on a quarterly basis and shall be payable by the following month. Concerning compliance reporting, the taxpayer shall file the Italian tax return within four months by the end of the tax period.
Nonresident entities, without a permanent establishment in Italy, are required to register for the purposes of the IDST.
The Economic and Finance Italian Minister, in accordance with the Economic Development Minister and after hearing an independent authority, will approve—within four months from the date of entering into force of the Budget Law—an implementing decree and the IDST will apply as from the 60th day after its publication in the Official Gazette.
The IDST, as described above, is mainly in line with the EU directive proposal, even if there are several differences, it seems to have a wider scope of application tackling services and revenues generated by digital interface owners.
As a final remark, it should be noted that the IDST provides that Italian VAT rules shall apply with regard to penalties, litigation and tax assessment procedures where permitted. However, until the EU directive proposal is approved, the current EU VAT Directive does not allow member states to introduce new indirect taxes similar to VAT.
- IDST will become effective after the publication of a ministerial implementing decree which will clarify the actual practical impact on users of a digital interface and owners of the latter. At the present time it is difficult to predict the final impact on Italian digital business.
- The main area of concern raised by the first commentators on the IDST refers to the wider scope of application of the Italian web tax compared to the EU Council proposal directive. In particular, the main concern regards the owners of the interface digital platforms (i.e. the large global digital players) that would seem to be subject to IDST on services and transactions hosted on their digital interface.
Francesco Bonichi is Tax Partner and Elisa Cesetti is a Senior Tax Consultant at EY Italy.