Taxing the digital services sector in Italy
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Taxing the digital services sector in Italy

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Taxing multinationals in the digital services sector has remained a complex international challenge for local governments limited in their jurisdictional capabilities. Tremonti’s Lorenzo Piccardi, Simone Zucchetti and Armando Tardini discuss how Italy is facing these challenges through regulatory developments surrounding permanent establishments and web taxes.

"If the origin of the ideological and juridical environment where the digital economy emerged was driven by the laissez faire – the philosophy that inspired the beginning of the internet era and of globalisation – it is now time to identify a fair legal framework to limit the spread of anarchy and anomaly in the social environment."

This is the thought that Professor Tremonti shared during a recent interview on the taxation of the digital economy with the Corriere della Sera newspaper.

The rationale behind these words is that the fast-paced growth that the digital economy has experienced in the past decade has not been followed by a consequential effort from lawmakers to release adequate regulation. Consequently, incertitude is now predominant, especially from a tax perspective.

The regulatory framework

Nowadays, multinational enterprises (MNEs) operating in the digital sector are viewed more in relation to their presumed recourse to aggressive tax planning, rather than acknowledged as contributors to sustainable growth and prosperity. This is mainly due to their peculiar business model, which is far away from the old-economy concept of physical presence.

From a more technical perspective, the regulatory framework does not fit with the main features of the digital players. In this context, it makes no sense for the local tax authorities to challenge digital MNE intervention surrounding the alleged avoidance of a permanent establishment (PE) and the presumed use of profit-shifting techniques.

The international system

In fact, the framework of international tax legislation is still grounded on the concept of physical presence, which represents the fundamental requirement to attribute taxing rights to a given jurisdiction.

In order to change this, agreements must be reached by supranational bodies such as the OECD, EU and UN to modify the existing set of international tax rules that pursue a single-based approach. However, some solid political endorsement from local governments is also necessary.

To this end, recently held discussions at the Fukuoka G20 summit in Japan, where it was stressed that to "introduce an international taxation system globally balanced, sustainable and modern", should be welcomed.

In this process, the OECD – first with the BEPS project and then through the work of the Task Force on the Digital Economy – has been trying to "find a solution" for digital taxation by suggesting amendments to the definition of a PE (which is provided under the Model Tax Convention), and to the rules for the attribution of profits to the PE in the given jurisdiction.

This revision started with the release of the BEPS Action 1 Report. In this document, the OECD acknowledged that the challenges raised by digitalisation could not be entirely tackled by the BEPS efforts. Subsequently, changes were suggested in order to broaden the scope of application of the PE definition, and to revise transfer pricing (TP) guidelines to create a more suitable environment for the relevant application to intangible-driven business models.

However, the OECD noted that broader challenges had to be considered. Namely, those related to "nexus, data and characterisation". The OECD acknowledged that the issue of taxation of the digital economy cannot be solved by simply modifying the existing rules. The entire international taxation system has to be re-evaluated.

The OECD found that one of the main obstacles is the presence of a political interest related to the allocation of taxing rights among jurisdictions. This gives rise to significant issues when trying to find a common solution, as no one at the OECD's table is willing to give up their own tax share.

In the meantime, concerns about the tax implications of the digital economy are widespread, with a significant impact on the public opinion that keeps demanding greater measures to fairly tax digital MNEs, at least in the direction of pursuing a par condicio with the non-digitalised players. The OECD is still at work on this.

OECD's Task Force on the Digital Economy

The Task Force on the Digital Economy, a body within the OECD created entirely to deal with the issue at stake, published an interim report in March 2018 aimed at updating stakeholders on the status of the work started after the publication of the Action 1 Report.

However, the report simply provided an analysis on digital business models and on the tax provisions that have been individually implemented by OECD member states. Regrettably, no conclusion was actually reached.

After the latest public discussion in Paris in March 2019, the OECD eventually published a new paper on May 31 2019, setting out a "programme of work to develop a consensus solution to the tax challenges arising from the digitalisation of the economy".

Accordingly, any solution to the taxation of the digital economy should necessarily imply the introduction of a new "nexus". The new provisions must be implemented in order to identify a taxable presence in the market where the value of digital businesses is created.

The programme contemplates the need to rebuild one of the cornerstones of international taxation in order to create a new concept of business presence not constrained by the physical presence requirement provided under double tax treaties.

The programme is supposed to deliver a "long-term and consensus-based" solution, which is to be agreed by January 2020. Considering that the OECD itself described its work on the taxation of the digital economy as being at "a preliminary stage" in March, it is extremely ambitious to expect the delivery of a result by that date.

Within this complex and unclear international context, public opinion has pushed governments to act in order to properly tax digital MNEs, leading to the proliferation of un-coordinated and unilateral actions, which if implemented, may undermine the international economic environment.

Italy's digital economy

Considering this international environment, Italy has been at the forefront of this crusade against digital MNEs since 2017, although without obtaining any practical effect.

Firstly, the Italian lawmakers unilaterally modified the definition of a PE in the Italian tax legislation, noting that the concept of a PE includes:

"A significant and continuous economic presence in the territory of the state built in such a way [as] not to result in any physical presence in the same territory."

This amendment is clearly inspired by the proposals presented at the OECD table and was conceived in order to demonstrate an effort to implement a new nexus rule in the Italian legislation.

However, as already mentioned, in order to claim any taxable right on digital MNEs in Italy, changes to the tax treaties in force are required. The inclusion of a new Italian nexus does not affect the rules applicable in cases where a foreign MNE that is a resident in states with which Italy has entered into a double tax agreement (DTA).

Italy's definition of a permanent establishment

It is worth noting that tax treaties – whose text is usually taken from the OECD Model Tax Convention – provide for two PE concepts, both of which are grounded on the existence of physical elements.

Firstly, the "material PE", which is defined as a fixed place of business through which a non-resident enterprise, wholly or partly, carries out its business activity in a given territory. Secondly, the "agency PE", which is deemed to exist when a person acts on behalf of a non-resident enterprise and habitually concludes contracts on behalf of the same enterprise.

Until 2017, the Italian definition of a PE was fully aligned with the OECD model, which only included purely physical PEs. As a consequence, over time, the Italian Supreme Court issued several different decisions noting a wide interpretation of a PE in order to adapt it to new business models. However, the issue lies in the fact that digital services do not obviously present physical features, making it difficult or even impossible for them to fit into the current scope of application of the PE legislation.

The emphasis on "significant economic presence" is therefore clearly an effort by the Italian lawmaker to broaden the nexus rule (to self-attributing stronger taxing right).

Adding to this, the Italian Parliament also implemented some provisions that aim for the disclosure of possibly hidden PEs of MNEs operating in Italy.

This was labelled a "web tax", even though it is not actually a tax itself, but rather a procedure more consistent with a form of tax amnesty. The so-called procedure of enhanced cooperation and collaboration (procedura di cooperazione e di collaborazione rafforzata), aims to intercept the income derived by non-resident entities that are part of larger multinational groups, from the sale of goods and/or the provision of services in the Italian territory by means of a hidden PE in Italy.

In brief, the provisions in question look at those subjects that:

1) Are part of multinational groups with a consolidated worldwide turnover higher than €1 billion ($1.12 billion) per year;

2) Sell goods or provide services in the Italian territory for an amount higher than €50 million per year; and

3) Benefit from the support of other Italian resident subjects that are part of the same multinational group.

In practical terms, this procedure provides the possibility of asking the Italian tax authority for an opinion by filing a specific request in order to mutually ascertain whether the conditions to qualify for the PE status are met. However, wherever the procedure actually leads to the ascertainment of the existence of an Italian PE, the regime allows the taxpayer to determine – in the due course of a formal negotiation – the tax underpayment of the (hidden) PE.

The procedure also grants reductions of penalties (which should be expected to be levied at 20%), as well as the non-application of criminal charges.

Advanced pricing agreements

It should also be emphasised that if adherence to the procedure of enhanced cooperation and collaboration results in an agreement on the criteria to be adopted for the attribution of profits to the Italian (formerly hidden) PE, the same enterprise may enter into an additional administrative procedure for the purpose of formally applying the same criteria for future years (i.e. the advanced pricing agreement, or APA).

In other words, the combination of enhanced cooperation and the APA should allow MNEs to reach the comprehensive goal of rectifying the past and setting rules for the future (formally the procedure is available to any operator irrespective of its digital or non-digital nature).

Even though the special procedure was introduced in 2017, it did not have such a wide appeal. Furthermore, the relevant implementation measures were not provided until May 31 2019.

A web tax

In 2017, Italy's Parliament introduced the first Italian "web tax". However, it never entered into force due to the absence of a relevant implementing procedure.

However, in December 2018, the Italian budget for 2019 introduced a second web tax (a digital services tax) that replaced the previous one (which had never actually entered into force).

Under this new provision, revenues derived from certain digital services rendered to Italian-based users will be subject to a 3% indirect tax. This levy will be applied only to resident and non-resident providers with a worldwide turnover higher than €750 million and that earn revenue from digital services in Italy that are at least equal to €5.5 million.

Italy's Ministry of Finance was required to issue the implementing decree within four months following the implementation of the Italian budget law (by April 30 2019). However, the decree has not been published, and consequently, the Italian web tax does not have any practical effect.

Italy's digital tax outlook

The absence of provisions regulating the digital revolution cannot be permanent. The benefits afforded by the digital economy should be accompanied soon by fair and balanced provisions, also in order to avoid social and political imbalances.

However, it is clear that any proposal aimed at modifying the allocation of taxing rights needs global coordination and consensus, while unilateral approaches simply run the risk of undermining the relevance and sustainability of the intervention, which result in the failure of the international diplomacy.

Lorenzo Piccardi


Managing partner

Tremonti Romagnoli Piccardi e Associati

Tel: +39 02 58313707

Lorenzo Piccardi specialises in international taxation, transfer pricing, structured finance, corporate and M&A taxation, banking, finance and capital market taxation. His expertise in these areas has allowed him to be part of major operations regarding cross-border acquisitions, takeovers, listings in Italy and the US, group reorganisations and financial product structuring.

Lorenzo is managing partner of Tremonti Romagnoli Piccardi e Associati since 2016 and joined the firm in 1989.

He holds a degree in business administration (Bocconi University, Milan).

Due to his expert knowledge and significant industry experience, he has been invited to participate as a panellist in several domestic and international workshops and seminars on international tax advisory issues. He is also a regular contributor to both domestic and international tax magazines.

Simone Zucchetti



Tremonti Romagnoli Piccardi e Associati

Tel: +39 02 58313707

Simone Zucchetti specialises in corporate and international taxation, in particular, M&A and private equity transactions. He advises domestic and multinational corporations, investment banks, private equity funds on M&A transactions, IPOs and debt transactions in a variety of industries such as telecommunications, IT, fashion, pharmaceuticals, cosmetics, energy, and real estate.

He actively participates in consultations organised by the OECD and the Italian Ministry of Economy and Finance on best practice guidance and legislative initiatives.

Simone is partner for international and corporate practice, and joined Tremonti Romagnoli Piccardi e Associati in 2006.

He holds a degree in business administration (Università Cattolica del Sacro Cuore, Milan) and a Master in Tax Law (Il Sole 24 Ore).

He has authored several publications in leading international taxation journals and has spoken at seminars and conferences on tax matters.

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