Italy - Update on the Digital Services Tax
Pending the discussions regarding the possible enactment of a European Directive aimed at taxing the digital economy, Italy has decided to push ahead with its own domestic digital services tax (the DST) which applies at a rate of 3% on revenues deriving from certain digital services including digital advertising, intermediation and data transmission.
The Italian DST, as amended and supplemented by the 2020 Italian Budget Law (Law no. 160 of 27 December 2019), mirrors the EU Commission proposal for a directive on the common system of digital services tax (COM(2018) 148 final of 21 March 2018) (the DST Proposal).
Italy has tried in previous years to introduce a domestic DST. A first attempt was made with the 2018 Italian Budget Law (Law no. 205 of 27 December 2017) and a second attempt with the 2019 Italian Budget Law (Law no. 145 of 20 December 2018). However, the afore-mentioned DSTs never entered into force.
With the 2020 Italian Budget Law, the Italian government has reshaped the Italian DST framework and further aligned it with the current version of the DST Proposal. In a nutshell, the 2020 Italian Budget Law has:
(i) further clarified certain operative aspects related to the application of the Italian DST (i.e. the method of determining the Italian taxable revenues, the tax reporting and payment obligations);
(ii) introduced certain exclusions from the Italian DST along the lines included in the DST Proposal;
(iii) clarified the Italian DST obligations for non-Italian tax residents that do not have an Italian permanent establishment;
(iv) repealed provisions requiring the issuance of an implementing decree, so that the Italian DST applies with effect from 1 January 2020 without need for implementing rules (although certain implementing regulations will need to be issued by the Italian tax authorities to govern aspects relating to the application of the Italian DST);
(v) introduced a sunset clause whereby the Italian DST will be automatically repealed once an agreement on the taxation of the digital economy is reached at an international level. The sunset clause introduced by the 2020 Italian Budget Law does not however provide an obligation for Italy to pay back any amounts collected in excess of those that would have been paid under the globally agreed digital services tax.
Potential criminal consequences deriving from possible violations of the Italian DST obligations are not expressly governed by the laws.
On the basis of the current legal framework, entities which, on the basis of their 2019 revenues, exceed the relevant thresholds will become subject to the Italian DST from 2020 and will have to pay Italian DST and file the related tax return by 16 February 2021 and 31 March 2021 respectively.
Considering the complexities around determining whether the DST applies and the fact that the 2020 Italian Budget Law has also introduced an obligation to keep monthly accounting records in respect of the revenues to be taxed in Italy, the Italian tax authorities will hopefully issue the implementing regulations as soon as possible to avoid generating uncertainty amongst taxpayers.
The below paragraphs provide further details on the Italian DST.
1. Entry into force
The provisions governing the Italian DST entered into force from 1 January 2020.
The entry into force of the Italian DST is no longer conditional upon the issuance of implementing decrees as the 2020 Italian Budget Law has abrogated the provisions which required the issuance of such decrees.
Implementing regulations are however expected to be issued by the Italian tax authorities in order to define the operative aspects relating to the application of the Italian DST.
2. Taxable revenues
The Italian DST applies to revenues (gross of costs and net of VAT and other indirect taxes) realised in a calendar year in respect of in scope digital services supplied to users located in Italy.
Taxable revenues do not include revenues deriving from in scope digital services supplied to affiliated entities (reference to Article 2359 of the Italian civil code is made in order to define the notion of “group” for Italian DST purposes).
The Italian DST will apply regardless of the nature of the users. Accordingly, the Italian DST will be due on revenues realised on both B2C and B2B transactions, whilst intragroup transactions are excluded.
The provisions make reference to revenues from the supply of services and revenues should be taxed on accrual basis as opposed to a cash basis.
3. Taxable persons
For the purposes of the Italian DST, taxable persons are entities carrying on a business activity which in the previous calendar year have realised at stand alone or group level:
(i) total worldwide revenues, wherever generated, not lower than Euro 750m; and
(ii) Italian revenues deriving from in-scope digital services not lower than Euro 5.5m.
On such basis, in 2020 an entity will be liable to the Italian DST if the revenues realised during the 2019 calendar year exceed the above mentioned thresholds.
In order to determine whether the thresholds are exceeded, the DST Proposal clarifies that reference should be made to the financial year covered by the latest available financial statements issued by the entity before the end of the tax period in question. The Italian law provisions seem to adopt a different approach requesting the relevant entity to make reference to the revenues realised in the previous calendar year. This could create some complexities for entities which do not have a financial year ending on 31 December.
As no express limitation is provided by the law, the Italian DST appears to apply to both Italian taxpayers and non-Italian resident entities, to the extent the above thresholds are exceeded.
4. In scope digital services
The Italian DST applies to revenues deriving from the supply of the following services:
(i) the placing on a digital interface of advertising targeted at users of that interface (Digital Advertising);
(ii) the making available to users of a multi-sided digital interface which allows users to find other users and to interact with them, and which may also facilitate the provision of underlying supplies of goods or services directly between users (Intermediation Services);
(iii) the transmission of data collected from users and generated from users’ activities on digital interfaces (Data Transmission).
The 2020 Budget Law has introduced a number of exclusions to align the Italian DST to the DST Proposal. In particular, the following digital services are excluded from the scope of the Italian DST:
(i) the direct supply of goods and services in the context of digital intermediation services;
(ii) the sale of goods and services which are contracted online via the website of the supplier of such goods and services, when the supplier does not perform intermediation functions;
(iii) the making available of a 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;
(iv) the making available of a digital interface used to supply a series of financial and banking services (including inert alia interbank systems under Decree no. 385 of 1993, trading facilities under Article 1(5-octies)(c) of Decree 58/1998, wholesale trading venues under Article 61(1)(e) of Decree 58/1998, central counterparties under Article 1(1)(w-quinquies) of Decree 58/1998, central securities depositories under Article 1(1)(w-quinquies) of Decree 58/1998, other connections systems whose activity is subject to authorisation and supervision) as well the transmission of related data; and
(v) performing the activities of organising and managing platforms for the exchange of electric energy, gas, environmental certificates and fuels, as well as the transmission of related data and any other related activity.
6. Place of taxation and calculation of the Italian DST
Specific rules are provided for each type of in scope digital service in order to identify revenues realised with users located in Italy and hence taxable therein. Such rules mirror those included under Article 5 of the DST Proposal.
Taxable revenues shall be treated as obtained in Italy and hence taxable therein if the user in respect of an in scope digital service is located in Italy during a relevant tax year (i.e. the calendar year). In order to determine the amount of taxable revenues subject to the Italian DST for each tax year, entities shall (a) determine the overall worldwide taxable revenues from in scope digital services wherever realised; and (b) apply to such amount the percentage representing the portion of such services which are deemed to be related to Italy. Only that amount will be subject to Italian DST.
In particular, the following rules should be followed:
(i) for Digital Advertising services, the user is deemed to be located in Italy if the advertising appears on the user’s device at a time when the device is being used in Italy in that tax year to access a digital interface. Related Italian taxable revenues are determined in proportion to the number of times an advertisement appears on users' devices located in Italy in the relevant tax period;
(ii) for Intermediation Services,
(a) if the service involves a multi-sided digital interface that facilitates the provision of underlying supplies of goods or services directly between users, the user is deemed to be located in Italy if such user uses a device in Italy in that tax year to access a digital interface and concludes the underlying transaction on the digital interface in that tax period. Related Italian taxable revenues are determined in proportion to the number of users having concluded underlying transactions on the digital interface in Italy in that tax period;
(b) if the service involves a multi-sided digital interface of a kind not covered by point (a), the user is deemed to be located in Italy if such user holds an account for all or part of that tax period allowing the user to access the digital interface and such account has been opened using a device in Italy. Related Italian taxable revenues are determined in proportion to the number of users having used their account to access the digital interface in the relevant tax period;
(iii) for Data Transmission services, the user is deemed to be located in Italy if data generated from users having used a device in Italy to access a digital interface, whether in that tax period or a previous one, is transmitted in that tax year. Related Italian taxable revenues are determined in proportion to the number of users who have used a device located in Italy to access the digital interface in the relevant tax period and from whom all or some data transmitted has been generated.
The 2020 Budget Law has also clarified that, without prejudice to data privacy regulations, a device is deemed to be located in Italy mainly by having regard to the IP address of the device or to another geo-localisation system.
The criteria identified by the DST Proposal to identify the place of taxation also indicates that the place from which any payment for the taxable service is made is not to be taken into account.
7. Tax rate:
The Italian DST will apply at a rate of 3%.
There is no express provision for the deductibility of the Italian DST for the purposes of corporate income tax (B+I) and regional tax (B+I). The DST Proposal however clarifies that in order to alleviate possible cases of double taxation, “Member States will allow businesses to deduct DST paid as a cost from the corporate income tax base in their territory”.
8. Payment and tax reporting:
The Italian DST must be paid by 16 February of the calendar year following the one in which the taxable revenues are realised. An annual return is to be filed for Italian DST purposes by 31 March of the same calendar year. Companies belonging to the same group may appoint a group company to fulfill the tax obligations relating to the Italian DST.
Accordingly, the 2020 Italian DST should be paid by 16 February 2021 and the relevant return should be filed by 31 March 2021.
Taxable persons are required to keep ad hoc monthly accounting records setting out taxable revenues from in scope digital services as well as the quantitative elements used to determine the portion of taxable revenues allocable to Italy.
Revenues obtained in a currency other than Euro are to be converted by applying the last exchange rate published in the Official Gazette of the European Union as at the first day of the month in which the sums are collected. This provision differs from the DST Proposal which makes reference to the exchange rate published in the last day of the relevant financial year.
Non-Italian taxable persons with no Italian permanent establishment and a VAT identification code must request an identification number for the purposes of the Italian DST.
Non-Italian persons with no Italian permanent establishment which are established in a Country other than a EU or EEA country with which Italy has executed an agreement for administrative cooperation in respect of tax evasion and tax fraud and an agreement to collect taxes, must appoint an Italian tax representative for the purposes of the Italian DST.
Italian residents belonging to the same group as a non-Italian taxable person are jointly liable with the latter for the tax obligations relating to the Italian DST.
Implementing regulations will be issued by the Italian tax authorities to define the operational details around the Italian DST.
9. Tax assessment, tax penalties and collection of the Italian DST:
The rules applicable for VAT purposes also apply, to the extent compatible, in relation to the assessment, penalties and collection of the Italian DST.
Considering that the laws makes a general reference to the VAT rules, there is uncertainty as to the potentially applicable tax penalties in case of violations relating to the Italian DST obligations.
Another aspect to take into account is that the potential criminal consequences deriving from possible violations of the Italian DST obligations are not expressly governed by the laws.
10. Sunset clause
The Italian DST will be automatically repealed once an agreement on the taxation of the digital economy is reached at an international level. The sunset clause introduced by the 2020 Italian Budget Law does not however provide an obligation for Italy to pay back any amounts collected in excess of those that would have been paid under the globally agreed digital services tax.