STARTUP

THE ITALIAN DIGITAL SERVICE TAX

Daniele MAJORANA

Tax Adviser

Chartered Accountant

12 February 2021

From the taxation of physical presence to the taxation of significant

economic presence:

“The current tax rules no longer fit the modern context where

businesses rely heavily on hard-to-value intangible assets, data and

automation, which facilitate online trading across borders with no

physical presence. These issues are not confined to the digital economy

and potentially impact all businesses. As a result, some businesses are

present in some countries where they offer services to consumers and

conclude contracts with them, taking full advantage of the infrastructure

and rule of law institutions available while they are not considered

present for tax purposes”. (Communication from the Commission to the European

Parliament and the Council, 21.9.2017 COM(2017) 547)2

Digital Economy and the new paradigm of taxation

The tax on digital services (DST) at the EU level works as an

equalisation levy to react to:

Aggressive tax planning through low tax countries allowing digital

companies to build-up large masses of tax-free digital extra-profits in

the European market;

US Taxation of the income of foreign subsidiaries at the level of

the ultimate company, with a minimum tax (US Global Intangible

Low-Taxed Income - GILTI);

China exemption and reduced tax rate for digital companies.3

Systematic framework of DST taxation at EU level

The Italian DST imposes a 3% levy on the gross taxable revenues achieved

on the calendar year, generated from three categories of digital taxable

services entailing a high degree of users involvement in value generation:

”Digital targeted advertising services”: Transfer or placing on a digital interface

advertising messages targeted at users of that interface;

“Data transmission services”: Transmission of data collected about users and

generated from such users activities on digital interfaces;

“Digital interface services”: Making available a multi-sided digital interface that

allows users interaction and may also facilitate the supply of goods or

services among users;

4

FEATURES OF ITALY’S DST – Covered Services

The definition of digital services under Italy’s DST excludes certain

categories of services, such as:

direct supply of goods and services, in the context of online

intermediation activity

the supplies of goods or services from the website of the supplier to

consumer, with no form of digital intermediation;

the making available of a digital interface where the sole or main purpose

is to supply to users: digital content; communication services; payment

services;

revenues from intragroup service provisions5

FEATURES OF ITALY’S DST – Covered Services

Moreover, the definition of digital services under Italy’s DST excludes

certain categories of services related to digital interfaces that manage:

Certain financial services subject to public authority’s supervision,

such as: interbank or financial instruments settlement systems,

trading platforms, wholesale marketing 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 public authority’s

supervision;

electronic platforms for the exchange of electricity, gas, environmental

certificates, and fuels.6

FEATURES OF ITALY’S DST – Exclusions

Businesses, either individually or as a group, are subject to the Italian DST

when they generate simultaneously :

More than €750 million worldwide revenues without a caveat that

those revenues must derive from digital services. This threshold

matches the one provided by the Directive 2016/881 (automatic

exchange of information on the country-by-country report);

More than €5.5 million in revenues in Italy “deriving from the provision

of digital services” and “obtained within the territory of Italy”. This figure

is equal to Italy's percentage contribution to the EU's GDP (11%)

multiplied by the threshold of 50 million "revenues from digital services"

envisaged in the proposed EU DST Directive.

(see below) 7

FEATURES OF ITALY’S DST – Revenue Thresholds

The DST is “net of value added tax and other indirect taxes”.

Italy’s DST will be repealed “from the date of taking effect of the provisions

resulting from agreements reached in the international fora on the taxation of the

digital economy” (Sunset Clause)

Public sources estimate that Italy’s DST will generate approximately €708

million in tax revenue annually

8

FEATURES OF ITALY’S DST – Calculation of DST

The territorial requirement is linked to the place where the user is located. A user's

device should be considered used in Italy by reference to the Internet Protocol (IP)

address of the device or by any other method of geolocation that the DST-liable

entity may be able to use. The use of virtual private networks (VPNs) can affect the

result.

To determine where the user is located DST law provides different rules for each of

the three categories of tax-relevant digital services.

For each tax period, entities shall:

i. compute the overall worldwide taxable revenues received from the provision of

digital services (to any user wherever located);

ii. determine the proportion of qualified revenues to be allocated to Italy. Only the

latter amount is subject to Italian DST.9

FEATURES OF ITALY’S DST – Territoriality

10

FEATURES OF ITALY’S DST – Revenue Thresholds

Definition of Digital services Theresholds Rate

Italy • Targeted advertising;

• Data transmission;

• digital interface.

• Worldwide turnover (not limited to

revenues generated by the provision of

digital services) of more than €750

million;

• Digital turnover in Italy of more than €5.5

million

3%

France • Digital intermediation services;

• Targeted advertising services

• Digital worldwide turnover of more than

€750 million;

• Digital turnover of more than €25 million

in France

3%

Spain • targeted advertising;

• intermediation services

• sale or lease of data

• Worldwide turnover (not limited to

revenues generated by the provision of

digital services) of more than €750

million;

• Digital turnover in Spain of more than €3

million

3%

Entities subject to DST should prepare monthly accounting reports of

revenues from digital services and highlight the portion of qualified

worldwide revenues is allocated to Italy.

Foreign business taxpayers resident in non-EU/EES states that have not

concluded an agreement with Italy for mutual assistance in the recovery of

tax claims should appoint an Italian tax representative.

Where a non-Italian DST-liable entity is part of an MNE group that

comprises also Italian subsidiaries, the latter may be held jointly liable for

the DST payment.

11

FEATURES OF ITALY’S DST – Burdens

The results of USTR investigation indicate that:

(1) due to the selection of covered services and the revenue thresholds, Italy’s DST

is selective and discriminates against U.S. digital companies Thresholds

have been set to preserve start-ups, therefore mainly US digital companies

operating in an oligopoly regime remain affected from DST

(2) Italy’s DST is unreasonable because it is inconsistent with principles of

international taxation Italy’s DST: 1) is an tax on consumption and not a

corporate tax; 2) for simplification, the tax base is identified in gross revenues

earned by the «significant economic presence» and not by the “physical

presence”; (OECD – BEPS, Action 1);

(3) Italy’s DST burdens or restricts U.S. commerce there are burdens for all the

tax payers. 12

US TRADE REPRESENTATIVE - Report on Italy’s DST (January 6, 2021)

The DST could be introduced at the EU level, in the form of a tax on

data consumption (indirect taxation), with operating mechanisms more

akin to excise duty than to VAT and with the possibility of deducting

the tax from production costs, in order to limit double taxation.

A DST introduced at national level would be likely to increase the

fragmentation of the European single market, leading to distortions of

competition and exposing individual countries to the risk of

retaliatory measures in international trade by the adoption of tariffs.

13

CONCLUSION

1. Digitalisation challenges traditional tax concepts but also opens

up new opportunities to transform the way that EU tax systems

operate. How can we minimise the risks and maximise the

benefits?

- It’s possible to MAXIMISE benefits by focusing on the allocation of taxing

right (Pillar 1) and on the introduction of a minimum tax rule (Pillar 2) under

negotiation at the OECD level;

- Minimise the risks of (i) double taxation through the adoption of an EU DST

that would affect the consumption of data akin excise duties affect the

consumption of oil; (ii) of aggressive tax planning within EU supplementing

ATAD Directive with a Global Minimum tax on the same basis of the one

disposed by Pillar 2. This would anticipate the effects of Common

Consolidated Corporate Tax Base (CCCTB), from the substantial point of

view.14

Conclusion

2. What’s at stake for the EU in the current international debate on

reforming the international tax arrangements?

Increasing EU resources to be able to repay debts arising from the

next generation EU recovery fund;

3. What criteria should Parliamentarians use to judge the outcomes

from the G20 debate ?

i. In the digital economy users are involved in value generation;

ii. Overcoming the notion of PE based on physical presence favouring

the one based on 'significant economic presence’;

iii. Allocating profits between countries considering all the factors that

contribute to wealth creation (wages, sales, investment,

infrastructures, laws). 15

Conclusion

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