Italy Unilaterally Implements the European Commission’s Digital Service Tax Proposal

Di Gabriele Colombaioni -

1.              Introduction

The Italian Budget Law for 2019 (Law No. 145 of 30 December 2018) introduced a new tax on digital services that have been labelled as “Web Tax”. Such new tax seems essentially a unilateral implementation of the Digital Service Tax (“DST”) proposed by the European Commission in March last year as the Italian legislator replicated several of the provisions of the Commission proposal (“DSTP”)[1].

It should be noted that the discipline of the Web Tax is not complete as the Budget Law provides that an implementing decree (“the Decree”) should be issued by the Ministry for Economic Development. The Decree should be issued within April 2019. That said, I provide below a first comment on the provisions introduced by the Budget Law 2019.

2.              The taxable revenues

The notion of taxable digital services is taken (without any significant change) from the definition laid down by Article 3(1) DSTP and it comprises three categories of services:

  1. the placing on a digital interface of advertising targeted at users of that interface. This first category seems meant to subject to tax revenues from advertising obtained by search engines such as Google or social networks such as Facebook, which, on the basis of the intensive monitoring of user data, are able to tailor advertising to specific users (g., contextual advertising of behavioral advertising);
  2. 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. This category of services should cover the revenues realized by online platforms such as Airbnb, Uber, eBay;
  3. the transmission of data collected about users and generated from users’ activities on digital interfaces.

As it is commented at recital no. 9 of the DSTP, “the digital services should be ones that are largely reliant on user value creation where the difference between the place where the profits are taxed and the place where the users are established is typically greatest”. The decision to target services characterised by user value creation stems from the idea that the business models that generate revenues from these services are those that “are responsible for the greatest difference between where profits are taxed and where value is created.[2] Therefore, such business models (allegedly) are those in relation to which the current criteria of international taxation are most likely to fall foul since they were developed in connection with an essentially bricks and mortar economy.

It is worth noting that Article 3(4)-(6) DSTP provided for a list of several (and relevant) services that were explicitly excluded from the scope of the DST. This list has not been replicated by the provisions of the Budget Law 2019. Such list included the following services:

  • Provision of digital contents;
  • E-commerce transactions;
  • Communication or payment services;
  • Multi-sided digital interfaces which allow users to receive or to know about the existence of trade execution services, investment services or investment research services;
  • Investment and lending based crowdfunding.

The most relevant categories of excluded services are probably the provision of digital contents and e-commerce transactions as they exclude from the scope of the levy (significant) revenues obtained by several major operators of the digital economy when they use digital interface in order to sell digital and non-digital products (think about an entity that operates an online multi-sided digital interface through which users may (i) place orders for goods that are sold and delivered by the same entity or (ii) acquire, against the payment of a price, online content, such as movies or music, that is sold by the same entity and downloaded by the users).

One may wonder whether the above services should be considered as excluded services also for the purposes of the Italian Web Tax. In this respect, it should be noted that the rationale behind the exclusion of the above listed transactions lies with the very rationale of the DST: the DST is a tax meant to catch revenues from services where the value creation lies predominantly with the users’ input while the above services are all characterised by the fact that users’ input plays a minor role (by way of example, as commented at recital no. 14 of the DSTP, the revenues from the provision of digital contents should be excluded from the scope of the levy because “the focus from the perspective of value creation is on the digital content itself which is supplied by the entity[3]). Based on the above, considering that the Italian legislator seems to have intended to introduce a levy that is essentially a unilateral implementation of the DST (and therefore, should have the same rationale) it may be concluded that the excluded services listed by the DSTP should be considered as excluded services also for the purposes of the Web Tax. A clarification on this point may be provided by the Decree.

The taxable base of the Web Tax consists of the gross revenues from the taxable services, net of value added tax and other similar indirect taxes. The criteria are the same endorsed by Art. 3(2) DSTP and reflect the intention of the legislator to design the Web Tax as a tax on revenues (the qualification of the tax has a direct bearing on its compatibility with EU law and with DTTs; please see below).

3.              The taxable persons

Similarly to the DST, the Web Tax is meant to catch only big operators of the digital economy and is due only by persons that meet two dimensional thresholds that are below commented. It should be noted that the tax is able to apply equally to resident and non resident entities and, therefore, it may be due by entities tax resident of Italy as well as by non-resident entities with an Italian permanent establishment.

  • First threshold: the total amount of worldwide revenues reported by the person during a calendar year are not lower than 750,000,000 Euro. If an entity is part of a group, the threshold should be assessed with reference to the revenues realised by the group. Such first threshold is essentially similar to the threshold of Article 4(1)(a) DSTP[4]. The main difference is that the latter provision makes reference to the financial year of the taxable entity while the Web Tax provision makes reference to the calendar year. This circumstance might trigger significant compliance burdens for those entities whose financial year does not coincide with the calendar year;
  • Second threshold: the total amount of taxable revenues from the provision of taxable services from Italian sources[5] realised by the entity during a calendar year is not lower than 5,500,000 Euro. The rationale of this threshold is similar to the rationale of the second threshold of the DSTP laid down by Article 4(1)(b) DSTP, which required an entity to realise more than 50 million Euro revenues from taxable services from EU sources[6].The definition of this second threshold might operate to the detriment of entities mainly operating in the Italian territory compared to what would have been the case if the text of the DSTP had been implemented. Indeed, an entity that realises at least 5.5 million Euro of taxable revenues from Italian sources will be subject to the Web Tax irrespective of whether it realises over 50 million of taxable revenues within the rest of the EU. However, the potential negative outcome for Italian based entities operating mainly in Italy should be mitigated by the operation of the First Threshold which should catch in the net of the Web Tax only big operators of the market (with operations that are likely to be spread over different countries).

The Budget Law 2019 does not clarify which calendar year should be taken into consideration for the purposes of the computation of the thresholds. It is expected that a clarification on this point should be provided by the Decree.

4.              The territorial scope of the Web Tax

The rules on the territorial scope of the Web Tax are essentially replicating the rules of Article 5 DSTP which were laid down to determine when revenues were obtained in the EU. Pursuant to the territoriality criteria of the Budget Law 2019, revenues are considered as stemming from Italian sources if the users of the taxable services are located in Italy in the relevant taxable year, given that, for Web Tax purposes, the taxable year is the calendar year. The rules according to which it is to be determined when a user is to be considered as located in Italy vary depending on the typology of services that is subject to the Web Tax:

  1. In relation to the services of point 1 of the previous paragraph (placing on a digital interface of advertising), a user is to be considered as located in Italy if the user is in Italy when the device is being used in the relevant tax year to access a digital interface;
  2. In relation to the services of point 2 of the previous paragraph (making available to users of a multi-sided digital interface):
    1. 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 to be considered as located in Italy if he uses a device in Italy in the relevant tax year to access the digital interface and concludes an underlying transaction on that interface in that tax year;
    2. if the service involves a multi-sided digital interface of a kind not covered by point (a) above, the user has an account for all or part of that tax period allowing the user to access the digital interface and that account was opened using a device in Italy.
  3. In relation to the services of point 3 of the previous paragraph (transmission of data collected about users and generated from users’ activities on digital interfaces), a user is considered as located in Italy if data generated from the user having used a device in Italy to access a digital interface, whether during that tax period or any previous one, is transmitted in that tax period.

From a practical perspective, the enforcement of the Web Tax might trigger several issues. The most relevant may be the fact that taxable persons will need to monitor and keep track of the location of all their users when they access their digital interfaces.

Some examples on how the tax should work in practice may be found at Annex 12 of the Impact Assessment.

With reference to the first and third categories of taxable services (placing of advertisements on the digital interface and transmission of user data), one matter that seems to have not been addressed by the DSTP or by the Budget Law 2019 is that the legislation determines the territoriality of the taxable revenues on the basis of the location and number of users without any reference to the number of uses[7]. Nothing seems to be provided if, for example, an user moves outside of Italy and accesses the digital interface while in different countries during the taxable year[8]. In addition, in relation to certain taxable services (such as the placing of advertising and the transmission of users data) it may be objected that, from the perspective of the rationale of the tax, the number of uses might have been a better allocation key. Indeed, the value generated by an individual that makes several uses of a digital platform during a day seems to be higher than the value generated by an individual accessing the digital interface only once or twice during the taxable year (indeed, the amount of revenues deriving from the placing of advertising is often based on the number of “clicks” received by a certain ad). Another practical issue might derive from the fact that the Budget Law 2019, unlike the DSTP, does not provide for a definition of “user”. However, for the reasons already outlined above, it seems fair to conclude that the notion of “user” for Italian Web Tax purposes should be given the same definition provided by Article 2 DSTP where it is stated that “’user’ means any individual or business”. In this respect, it should be noted that the owner of a digital interface may not always be able to (lawfully) determine the identity of the individual or business that is accessing the interface. Taxable entities may be able to track data about their visitors (such as the IP address and the Internet Service Provider) that may possibly be used as a proxy to estimate the number of users but this may have some practical difficulties (think about an individual using more than one device. Even in relation to digital interfaces that require the creation of a personal account, an individual is generally able to have more than one account[9]).

5.              Double taxation

As the Web Tax is (is designed to be) a tax on revenues, the levy of the tax potentially triggers an issue in terms of double taxation if the taxable person is also subject to income tax in Italy on the profits from the same revenues.

Based on the general provisions of the Italian Income tax Code, the Web Tax should be considered as deductible against the corporate income tax due by the taxpayer. This is because, under Article 99 of the Income tax Code, indirect taxes that cannot be passed on to the payer, are generally deductible.

On the other hand, lacking an explicit legislative provisions, the Web Tax, like the DST, should not be creditable against the corporate income tax due by the taxpayer. This seems to be in line with the intention to design the tax as an indirect tax on revenues (as already indicated, the qualification of the tax as indirect tax has a direct bearing on its compatibility with EU law and with DTTs; please see below[10]).

6.              The compatibility of the Web Tax with EU Law and with DTTs

The Web Tax, like the DST, has been designed to qualify as an indirect tax and, therefore, it could be argued that it falls outside the scope of double tax treaties (“DTTs”) signed by Italy. Particularly, as already pointed out, the qualification of the Web Tax as an indirect tax is mainly based on the fact that the tax base consists of the gross amount of the revenues and that the Web Tax is not creditable against corporate income tax. However, there are sounds arguments pointing towards the opposite direction, such as the fact that it has been drafted in order to have an effect equivalent to an income tax, both in terms of tax burden and terms of the persons bearing that burdens (the taxpayers).

A tax on revenue such as the web tax may also trigger an issue in terms of compatibility with the VAT Directive. In this respect, however, as pointed out by the European Commission in relation to the DST, also the Web Tax should not be considered as in breach of the VAT Directive as the tax does not feature at least one of the essential characteristics of the VAT according to the case law of the CJEU.[11]

7.              Entry into force

It is provided that the Web Tax will enter into force on the 60th day after the publication on the Italian Official Journal of the Ministerial Decree implementing the provisions of the Budget Law. As already commented above, based on the provisions of the Budget Law 2019, the implementing Decree should be issued within the end of April 2019. If such deadline will be met, companies may be subject to the levy starting from June 2019.

[1] “Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services” (COM(2018) 148 final) of 21 March 2018.

[2] Page 7 of the Explanatory Memorandum of the DSTP.

[3] With reference to the rationale of the DST and the exclusion from the scope of revenues from the provision of digital contents, I may quote the following telling example made by J. Cape, Is the European Commission’s Digital Economy Proposal the Work of Daft Punks, (11 May 2018), Journal Tax Analysts. (accessed 31 May 2018): “to give an example, look at music streaming companies like Spotify. The DST would tax the value created by users of an online music streaming service who don’t pay the $10-a-month subscription fee, but instead are content to listen to deliberately annoying advertisements between the second and third movements of Beethoven’s Seventh Symphony. However the $10-a-month fee paid by a subscriber would not be taxed”.

[4] Article 4(1)(a) DSTP : “the total amount of worldwide revenues reported by the entity for the relevant

financial year exceeds EUR 750 000 000”.

[5] A taxable service is considered as a service from Italian sources on the basis of the territoriality criteria set forth by the specific provisions of the Budget Law 2019 (see the following paragraph 4).

[6] Article 4(1)(b) DSTP: “the total amount of taxable revenues obtained by the entity within the Union during the relevant financial year exceeds EUR 50 000 000”.

[7] See the Example 2 of the mentioned Annex 12: the taxable person is located in a third State and targets users that are located in its home jurisdiction and in the EU. Assumes that the taxable person derives a consideration for the placing on a digital interface of advertising. However, such consideration cannot be specifically linked to a specific supply of such services. Is such a case the number of users located in the MS of the EU should be used as allocation key in order to determine the total amount of revenues in the territorial scope of the tax (because obtained in the EU as well as the amount of tax due in each specific EU MS. For example: if the person obtains 1,000 revenues and there are 4 users of which one is in the third State; 2 are in MS 1 and the last one is in MS 2; then 250 of revenues is non-taxable (because relevant to the revenues deriving from the user located in the third State); 750 are taxable and should be attributed as follows: 500 to MS 1 (for its 2 users) and 250 to MS 2 (for its user).

[8] It should be noted that the Examples contained in the mentioned Annex 12 of the Impact Assessment are (conveniently) based on the assumption that there is only “one display for each user”.

[9] Other practical issues have been laid down by the consultation paper issued by the UK HM Treasury and the HMRC in November 2018 in relation to the proposal to introduce a Digital Services Tax in the UK: “Generally, the government expects that businesses will have a good understanding of the location in which a service is performed given that analysing where users are participating with their platform is essential to these business models.

However, it recognises that there could be difficult cases that need further consideration. Those include:

  • cases where the intended destination of advertising is unclear e.g. where user location is not actively tracked
  • cases where there is contradictory evidence of user location e.g. a difference between intended destination of advertising and the IP address of the user viewing the advertising
  • cases involving users who are mobile across borders e.g. a user who travels for work while participating with a social media platform
  • cases where the initial payment or registration of a user occurs while they are travelling e.g. if a user normally located in the UK signs up for a service while on holiday
  • cases where participation is unclear in the case of a legal person e.g. if a company located abroad purchases access to a social media platform on behalf of UK employees” (the document is available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/754975/Digital_Services_Tax_-_Consultation_Document_FINAL_PDF.pdf).

[10] On this point, see the Impact Assessment document accompanying the DSTP (SWD(2018) 81 final/2) at page 57: “alleviating double taxation by crediting corporate tax already paid against the new tax or vice versa is not a feasible option. Crediting would involve deducting one tax against the tax liability of another tax, thereby potentially fully compensating for the tax paid. First, crediting the new tax (an indirect tax) against corporate income tax (a direct tax) or vice versa would compromise the legal nature of the tax and impact double tax conventions.”

[11] Impact Assessment (pp. 148-149): “The preferred interim option would also be compatible with VAT rules. According to the VAT Directive, any taxes, duties or charges are compatible with VAT as long as they cannot be characterised as turnover taxes. As interpreted by the existing case-law of the CJEU, any tax, duty or charge is not to be found as qualifying as ‘turnover tax’ if it does not display at least one of the essential characteristics of VAT. Such essential characteristics of VAT have been defined by the CJEU in the following way: (i) it applies generally to transactions relating to goods or services; (ii) it is proportional to the price charged by the taxable person in return for the goods and services which he has supplied; (iii) it is charged at each stage of the production and distribution process, including that of retail sale, irrespective of the number of transactions which have previously taken place; and (iv) the amounts paid during the preceding stages of the process are deducted from the tax payable by a taxable person, with the result that the tax applies, at any given stage, only to the value added at that stage and the final burden of the tax rests ultimately on the consumer.

The interim measure could not be seen as having the essential characteristics 1 and 4 of VAT, given that it would not be applied to goods and services generally, and that no deduction of tax paid in previous stages of the production would be allowed. As regards the essential characteristic 2 of VAT, where there is a tax based on the gross turnover of a business during a specific period, it would not be possible to determine the precise amount of that charge which may be passed on to the client. Based on the existing case-law of the CJEU, if it is not certain if and to what extent that tax will be borne by the final consumer, the tax cannot be said not to be proportional to the price charged, and therefore, the measure cannot be seen as having the essential characteristic 2 of VAT.”.

Contributo in PDF

Tag:, , ,