With the 2020 Budget Law, the Italian government has reshaped Italy’s digital services tax (DST), mirroring the EU Commission proposal of March 2018. The revised version of the Italian DST is now in force effective January 1, 2020.
The new Italian DST regime is an income tax regime. The new tax on the turnover from qualified “digital services” that indicate a high degree of users’ involvement in the generation of value is set to apply at a rate of 3 percent on the turnover from certain digital services. The tax will be paid by service providers, both Italian and foreign, and covers both B2C and B2B transactions.
Meanwhile, the Organization for Economic Co-operation and Development (“OECD”), through its Digital Tax Initiative, is working to achieve an international consensus position on this new taxing right. Notably, Italy’s DST provisions contain a sunset clause: they will be automatically repealed once an agreement on the scope of DST is reached at OECD level.
The legal framework of the Italian DST essentially mirrors the EU Commission proposal for a directive on the common system of a digital services tax, dated 21 March 2018 – COM(2018) 148.
The DST will apply to taxpayers carrying out business activities that, individually or at group level, jointly meet, in the previous fiscal year, the following thresholds:
- Total amount of worldwide revenues (wherever arising) equal to or exceeding €750 million and
- An amount of revenues from qualified digital services (as defined below) arising in Italy/ linked to Italian users equal to or exceeding €5.5 million
The tax is to be paid by Italian taxpayers as well as by non-Italian-resident companies regardless of the nature of the service recipient. That is the DST must be paid on both B2C and B2B transactions. Intragroup transactions are excluded.
Affected services – qualified digital services
The DST affects revenues derived from the provision of qualified digital services when tax-relevant in Italy.
Digital services subject to the DST are divided into three categories:
- placing advertisements on a digital platform targeted at users of that interface (i.e., digital targeted advertising)
- making available online platforms and multi-sided digital interfaces that allow users interaction and may also facilitate the supply of goods or services (ie, intermediation services)
- transmission of data collected about users generated from such users’ activities on digital interfaces (ie, collecting users’ data and selling the data to another – data transmission services)
DST is not owed on the following activities:
- online intermediation activity in the context of direct sales of goods and services from business to consumer
- online sales of goods and services from the web portal of the business to the consumer (ie, “no intermediation”)
- a digital platform with the sole or main objective of providing its users with digital content, communication services, or payment services
- digital interfaces that manage interbank or financial instruments’ settlement systems, trading platforms, wholesale market of government securities, consulting activities related to equity investments, as well as other connecting systems, the activity of which is subject to authorization, and the performance of services is subject to an authority’s supervision
- the management of electronic platforms for the exchange of electricity, gas, environmental certificates and fuels
- sale of data by entities supplying services (4) and (5).
The exact perimeter of the exclusion list leaves room for uncertainty and should be assessed in light of the taxpayer’s business model.
Not all digital services will be taxed − only those entailing a high degree of users’ involvement in value generation. As a consequence, the territorial requirement is linked to the place where the user is located; the place where the payment is made would not be relevant per se.
The law establishes complex rules in order to determine where the user is located. The rules are different for each of the three categories of tax-relevant digital services.
For each tax period, entities shall (a) compute the overall worldwide taxable revenues from the provision of digital services (to any user wherever located) and (b) determine the proportion of qualified revenues to be allocated to Italy. Only the latter amount is subject to Italian DST.
The proportion should be determined according to the following rules:
For those services consisted of placing of advertisements on a digital interface, the DST is due when the advertisement appears on the user’s device at the time when the device is being used in Italy. Reference is made to the number of times an advertisement appeared on users’ devices located in Italy in the relevant tax period.
To read more about the effects in intermediation services, data transmission services, collection and compliance click here.