Daily Tax Report: International

Italy Courts Controversy With Adoption of Digital-Revenue Tax

Jan. 8, 2019, 12:16 PM

Amazon, Facebook, and other American technology giants could owe Italy hundreds of thousands of dollars under a new digital-revenue tax lawmakers approved as part of the country’s 2019 budget.

The 3 percent tax applies to revenue from online advertising, online sales, and data processing, for companies with global annual revenue of at least 750 million euros, at least 5.5 million from digital services provided in Italy.

The law, adopted Dec. 30, is worded almost identically to a European Commission proposal for a digital services tax that was introduced in March but stalled in late 2018, Davide Morabito, a tax partner with KMPG in Italy, told Bloomberg Tax Jan. 4.

If implementing legislation is passed by April, in line with budget law, then the measure is likely to become effective 60 days later. Tax burdens will vary greatly depending on details of the implementing legislation, Morabito said.

It isn’t clear yet how many companies the tax will affect, Morabito said, but he noted the target appears to be large foreign digital-business companies.

“It will be very important to obtain a clear definition of taxable services, because at the moment the definition is quite generic,” Morabito said. “Another important element will be how to determine whether a device is being used in Italy.”

Despite the uncertainties, it appears the technology companies could see their tax bills increase by hundreds of thousands of dollars, according to figures reported in public filings.

Facebook Inc.'s Italian business, for example, reported almost 11 million euro ($12.6 million) in revenue for 2017 and paid 120,080 euros ($137,839), or 1.1 percent, in taxes, according to the company’s financial statements submitted to the Chamber of Commerce in Milan.

“We operate in accordance with local laws in every country we operate in and we will continue to comply with our tax obligations as defined by Italian and European legislation,” a company spokeswoman said in a Jan. 4 statement to Bloomberg Tax. “We remain open to the dialogue with the Italian Government and we’ll continue to cooperate with all Italian authorities.”

Tax’s Sustainability Questioned

The Italian digital-revenue tax is based on sound logic, but it appeared to be applied in haste and modeled off a short-term solution, said Francesco Marconi, managing partner for Andersen Tax & Legal in Milan, Italy.

“The concept of the law is good,” Marconi said in a Jan. 7 interview. “It’s right to tax profits where they are generated. On the other hand, at the EU level, this type of tax should be temporary while we’re waiting for implementation of a whole new tax regime.”

Marconi said Italy’s tax appeared to be a quick fix for its budget showdown with Brussels, offering a way to insert 150 million euro ($172.2 million) into the 2019 budget regardless of the measure’s sustainability.

In its current form the tax is almost a hybrid income/value-added tax, with certain provisions—such as assessment of penalties and a joint-liability scheme—that either directly cite or mirror Italy’s VAT laws, he said.

Legal Challenge?

Marconi and Morabito both said the law is susceptible to challenges because it taxes revenue gross of costs, instead of profits. This could violate some double-taxation treaties and runs counter to Italy’s general taxation scheme, which focuses on profits. The two also said they expect businesses to push back against the joint liability rule, which provides that a local company can be liable for taxes owed by a foreign supplier.

Before the budget was even approved, the American Chamber of Commerce criticized Italy for not working with technology companies to find a workable solution to the issue of digital taxes.

By pre-empting European legislation, the tax “risks being a shortcut that will not result in a definitive solution, which is possible only by bringing digital companies to the table to discuss possible regulatory options,” said Simone Crolla, managing director of the American Chamber of Commerce in Italy, in a Dec. 20 statement. A spokeswoman told Bloomberg Tax on Jan. 7 that the statement represented the chamber’s current position.

To contact the editors responsible for this story: Kathy Larsen at klarsen@bloombergtax.com; Kevin A. Bell at kbell@bloombergtax.com; Penny Sukhraj at psukhraj@bloombergtax.com

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