The Italian Digital Services Tax (DST) was introduced as part of the 2019 Italian Budget Law and then amended by the 2020 Italian Budget Law. Among other things, the 2020 Budget Law: (i) provided the applicability of the Italian DST as from January 1, 2020, and (ii) introduced a sunset clause, according to which the Italian DST rules are repealed from the date of taking effect of the provisions resulting from agreements reached at international level on the taxation of the digital economy.
On March 23, 2021, Italian Tax Authorities issued interpretative guidelines, which provide some relevant clarifications on a number of aspects of the Italian DST.
ITALIAN DST AT A GLANCE
The Italian DST imposes a 3% levy on the gross taxable revenues generated from three categories of digital services (in-scope digital services):
1) Targeted advertising services
2) Digital interface services
3) Data transmission services.
The DST applies if the user of a taxable service is located in the Italian territory during the calendar year. The DST applies to companies that, during the preceding calendar year, generated: (i) €750 million or more in „worldwide“ revenues (global threshold), and (ii) €5.5 million or more in revenues deriving from the provision in Italy of in-scope digital services (national threshold).
As mentioned above, DST liability began accruing on January 1, 2020. Payment of the DST for 2020 falls due on May 16, 2021, and the corresponding tax return has to be filed by June 30, 2021.
TAXABLE ENTITIES AND THRESHOLDS
Taxable entities include companies, commercial entities and non-commercial entities (with respect to the commercial activities carried out) irrespective of their residence in Italy or elsewhere and of the existence of an Italian permanent establishment.
For the DST to apply, the global and national thresholds should be met either on a group or individual basis and include data from the calendar year preceding the taxable year (i.e., for the DST to apply in 2020, both the thresholds should be met in 2019).
The global threshold should be checked against the group/individual financial statements and on the basis of the accrual principle. Relevant revenues include not only those deriving from the sale of goods/supply of services, but also interest income, royalties and capital gains on assets.
The national threshold should be checked against in-scope digital services supplied in Italy (based on DST territoriality rules) and on the basis of the cash principle.
For the purpose of the global and national thresholds, the notion of „group“ includes the entities included in the consolidated financial statements.
IN-SCOPE DIGITAL SERVICES
A. The placing on a digital platform of advertising targeted to the users of the platforms:
The service includes both: (i) advertising hosted by a digital interface acting as publisher (hosted advertising); and (ii) intermediation in the advertising supply chain provided that the intermediation occurs on a digital interface (intermediated advertising).
The service is relevant insofar as the advertising qualifies as targeted advertising, which is meant to refer to types of advertising the display of which is shaped after users‘ data and information to reach consistently selected targets. This includes socio-demographic targeting, time targeting, geographical targeting, behavioural targeting and retargeting. Contextual advertising (e.g., sports apparel advertising broadcast during the Olympic Games) is out of the scope of the DST.
Taxation of intermediated advertising (i.e., taxation of all the intermediaries in the advertising supply chain) likely results in double taxation. To mitigate double taxation, intermediaries are allowed to apply DST on the amount of the revenues net of the amount on-paid to other intermediaries or to the publisher.
B. The making available to users of a multi–sided digital interface that allows users to find other users and interact with them and that may also facilitate the provision of underlying supplies of goods or services directly between users:
The service includes both: (i) multi-sided digital interfaces where the users enter into contact and interact without any supply of goods/services between them (e.g., social network, platform for sharing of videos or images) (social networking services); (ii) multi-sided digital interfaces where the users enter into contact and interact and a supply of goods/services between them occurs (e.g., marketplace) (digital intermediation services)
Social networking services are not relevant when supplied for free. Only services for which a fee is required (e.g., subscription fee) are relevant for DST purposes.
Digital intermediation services are relevant insofar as the digital interface acts as an intermediary in the supply of goods/services. In this respect, functions performed and risks borne (e.g., inventory risk) by the platform are relevant for its qualification as an intermediary, being the fact that goods/services are invoiced by the platform in its own name not decisive.
In any case, only the commission fee received by the digital platform is subject to DST (hence, the portion of the consideration referred to the cost of goods/services is not subject to DST). This also means that direct electronic commerce (i.e., a supplier of goods/services selling them on its own website, without being configured as an intermediary) is out of the scope of DST.
The portion of the consideration referred to the „supply of goods or services which is economically independent from the access to, and the utilization of, the taxable service“ is exempt from DST. Such exemption covers services that: (i) do not necessarily exist in all cases in which the taxable supply of goods/services is provided, and (ii) have a content that is essentially different from the one of the taxable service. Logistics or shipping services supplied by an interface qualifying as a marketplace should likely be covered by this exemption.
C. The transmission of data collected about users and generated from users‘ activities on digital interfaces:
Data can be collected directly or purchased from third parties.
The „transmission“ can include the sale of the data, in a license granted to a licensee or in any agreement attributing to the other party the right to use the data for economic purposes.
Only the transmission of data to the first purchaser is relevant for DST purposes. Subsequent transfers/transmissions of the same data are not relevant (as the purchaser would not be in the position to determine if the territoriality requirement of the service is met).
Specific exemptions are provided.
Apart from the mentioned exemption regarding the portion of the consideration referred to the cost of goods/services or economically independent services, the most relevant exemption concerns digital interfaces whose sole or main purpose is to supply digital content, communication services or payment services to users.
Digital content covers both online content (i.e., streaming content) and remote content (i.e., downloadable content). While the provision of digital content by the interface is exempt from DST, the provision of digital content directly between users is subject to DST. Specific examples of „borderline“ cases (e.g., videogames; online gambling) are provided in the guidelines.
Services ancillary to a principal service that qualifies for the exemption are also exempt. According to VAT, a service is regarded as ancillary when it does not constitute for the customers an aim in itself, but a means of better enjoying the principal supplied service.
In-scope digital services are taxable when the user is located in the Italian territory, confirmed via the IP address of the user’s device used for enjoying the digital service or any other method of geolocation. More specifically, with respect to a taxable service, a user shall be deemed to be located in the Italian territory in a tax period:
In the case of advertising services: if the advertising in question appears on the user’s device at a time when the device is being used in Italy in that tax period to access a digital interface;
In the case of digital intermediation services: if the user uses a device in Italy in that tax period to access the digital interface and concludes an underlying transaction on that interface in that tax period;
In the case of social networking services: if 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;
In the case of services regarding the transmission of data: if transmitted data is generated from a user who used their device in Italy to access a digital interface, whether during the same tax period in which data are transmitted or any previous one.
DETERMINATION OF DST
Taxable revenues include total gross revenues, net of value added tax and other indirect taxes. Tax rate is 3%.
Revenues deriving from intra-group supplies of in-scope digital services should be excluded from the taxable base. For these purposes the notion of „group“ includes controlling , controlled entities and entities that are under the common control of another entity in the meaning of Art. 2359 of the Italian civil code.
Specific rules for the determination of the DST in respect of each in-scope digital service are provided. More in detail:
In the case of advertising services, the amount of taxable revenues should be determined on the basis of the following ratio:
number of targeted advertising messages placed on the digital interface in the relevant calendar year at the time when the device is used in Italy to access the digital interface/
overall number of targeted advertising messages placed on the digital interface in the same calendar year
In the case of digital intermediation services, the amount of taxable revenues should be determined on the basis of the following ratio:
number of supplies of goods or services provided in the relevant calendar year in which one of the parties is located in the Italian territory/
overall number of supplies of goods or services provided in the same calendar year
In the case of social networking services, the amount of taxable revenues should be determined on the basis of the following ratio:
number of users having an account opened in Italy allowing the user to access all or part of the services made available by the digital interface and that have used the digital interface in the relevant calendar year/
overall number of users having an account and that have used the interface in the same calendar year
In the case of services regarding the transmission of data, the amount of taxable revenues should be determined on the basis of the following ratio:
number of users whose data have been transmitted in the relevant calendar year and generated by the access to a digital interface at a time when the users were located in Italy/
overall number of users whose data have been transmitted in the same calendar year
Resident taxable entities comply with payment and filing obligations on their own, through the tax identification number or VAT registration number already provided by Italian Tax Authorities.
Taxable entities residing (outside Italy and) in a white-listed country should file a request for obtaining a tax identification number from the Italian Tax Authorities. In this case the law provides for a joint and several responsibility of Italian resident entities (even if not qualifying as taxable entities for DST purposes) belonging to the same group of the non-resident taxable entity for the amount of the DST due by the latter.
Taxable entities residing (outside Italy and) in a black-listed country should appoint a tax representative for fulfilling payment and filing obligations.
In case of multinational groups, it is possible to appoint a single entity for the fulfillment of payment and filing obligations in respect of all the taxable entities of the group. The „appointed entity“ should be a taxable entity for DST purposes and, as a general rule, should be resident in Italy. In this case other Italian resident entities are relieved from the joint and several liability.
RECORD-KEEPING OBLIGATIONS AND RELATIONSHIP BETWEEN DST AND OTHER TAXES
Taxable entities are required to draft and keep: (i) a dedicated prospectus including the data that are relevant for the the determination of the DST; and (ii) an explanatory note including a concise description of the in-scope taxable services and the criteria adopted for the determination of the DST (among which the criteria adopted for the localization of the services pursuant to relevant territoriality rules).
The prospectus should be drafted within the deadline for the payment of DST (for 2020, May 16, 2021). The explanatory note should be drafted within the deadline for filing the DST return (for 2020, June 30, 2021).
Both the prospectus and the explanatory note should be electronically signed by the legal representative of the taxable entity, and a timestamp should be included to track the compliance with the mentioned deadlines.
DST is not covered by Double Tax Conventions (DTCs) entered into by Italy. Hence, the taxable entity is not entitled to the foreign tax credit generally provided under DTCs.
The amount of the DST paid is deductible for both Corporate Income Tax and Regional Tax (IRAP) purposes.
COMPARATIVE VIEW ON DSTs
Apart from Italy, a few EU Member States have adopted a DST
The Annex concisely illustrates the main features of the DSTs adopted by some EU Member States.
Check if your business falls within the scope of the DST and, in the affirmative, take steps to ensure assessment and compliance.
Consider whether your business model may be worth a reorganization.
Review agreements which may fall under the scope of DST (whether you are the DST payer or the recipient of relevant services) to understand if and how this tax is handled and consider a proper DST clause upon renewal or otherwise.
Monitor DST initiatives in other jurisdictions as double taxation of the same digital service may occur, and proper planning could be considered.
Be tuned on initiatives underway at the EU and international level on the taxation of the digital economy as they may put the DST to an end.