With a looming effective date of January 1 2020, the Italian government has yet to set out a definition of digital services in a draft decree and taxpayers are seeking further certainty. The bill has now passed to the Italian parliament, where it will be discussed and could be amended. The budgetary law will be approved by December 31.
“Governments must be aware that with the lack of detail and the short lead time for implementation of the DSTs, most companies will struggle to make the necessary changes,” said one tax manager of the directly targeted companies. “There are too many practical questions that remain unanswered.”
“Although there have been exemptions for financial services, we are looking closely at the draft legislation as there are a number of issues that require further clarification,” said the head of tax of a multinational financial service company. “We offer online products as well, so we’re uncertain whether these will fall under the scope of current draft legislation.”
The latest decree, approved as part of the 2020 draft budget, seeks to set a digital services tax (DST) at a rate of 3% on revenue generates by business-to-business (B2B) and business-to-customer (B2C) digital services provided to Italian consumers. Entities that fall under the provided scope must have total worldwide revenue above €750 million ($838 million) and, of that revenue, above €5.5 million ($6.1 million) has been obtained in Italy from the digital services.
The provision of digital services is defined as:
The placing on a digital interface of advertising targeted at users of that interface;
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; and
The transmission of data collected from users and generated from the use of a digital interface.
The digital services exempt from the DST include operations when the main purpose of making the interface available is for the entity managing the interface to provide users with digital content, communication services and payment services.
The provision of financial services regulated by financial entities and the data exchange between these entities are also exempt. Yet these exemptions have not calmed the fears of taxpayers.
“The provided guidance in the draft legislation will likely be the final legislation. Given the multi-phase nature of anything that is digital. I think there will be plenty of situations that are unclear, in a sort of grey zone,” said Stefano Giuliano, partner at CMS.
“The main aspects that, in my opinion, would need to be clarified are how the methodology to geo-localise the users actually works and which party is obliged to verify users’ location,” said Lorenzo Piccardi, managing partner at Tremonti Romagnoli Piccardi e Associati.
Much like the French DST, the Italian levy has been partly designed to add to the pressure on the OECD. The bill contains a “sunset clause”, meaning that it can be repealed if the OECD manages to forge an international consensus on the taxation of the digital economy.
Impact on digital businesses
It’s likely that the case that the Italian DST will come into force before any such consensus emerges. Companies that fall within the scope of Italy’s DST will face additional economic constraints alongside additional work to ensure full compliance.
“We will evaluate the significance of the jurisdiction to our business alongside the punitive measures in place if we are not able to comply. If the risks outweigh the benefits, we will shut down operations in that jurisdiction,” said the tax manager.
“Companies which provide digital services have to adopt instruments to track their revenues and users’ location and fulfil their tax obligation. This is likely to result in additional work and cost,” said Piccardi.
Digital service providers will suffer the economic burden of the tax, which could have a knock-on effect on the supply chain of services meaning that small and medium-sized enterprises and final consumers could bear a significant impact of the DST.
If companies decide to pass on the price increase to Italian consumers, this could mean demand falls for online platforms leading to less growth in e-commerce. This might be particularly harsh in cases where there are no alternative service providers.
Furthermore, the uncertainty surrounding the DST could have a wider economic effect on the domestic market. It could undermine investor confidence at a time when the Italian economy is still fragile.
At the same time, companies within scope are struggling to determine the amount of revenue that the levy would target. “How do you determine the revenue that a company should attribute to Italy to see if it is above or below the threshold of €5.5 million? That is a point that I think is still a pretty foggy,” Giuliano said.
“The additional work for companies is huge,” he added. “It’s just crazy to think that they will have to comply with so many different unilateral measures; different rates, different methodologies and potential double taxation. I think it's going to be a nightmare.”
Italy will soon join a snowballing number of countries that are taking unilateral measures to tax the digital economy. This DST and those being introduced in other countries are adding pressure on the international community to find a multilateral consensus.
“Under the unilateral measures that we are seeing right now, we feel that we could be unfairly affected along the digital giants,” the financial services companies head of tax said.
The more unilateral measures that are imposed, the more difficult it will become to replace them with a multilateral approach. The clock is ticking.
