The draft legislation provides for the introduction of a 6% tax on revenue from transactions from digital operations. The idea is that the buyers will be paying the service provider 94% of the amount due, while the remaining 6% is forwarded directly to the Italian tax authorities. This is expected to be applied to transactions, but not e-commerce.
“A decree from the Ministry of Economy is expected to clarify the activities that will be subject to this new tax,” Gian Luca Nieddu, partner at Hager & Partners Italy, told International Tax Review. “These provisions will apply only to those operators that will exceed specific thresholds in terms o the number of transactions and overall value.”
The equalisation tax has the support of France, Germany and Spain, while the European Commission is holding a consultation to see if this proposal should be implemented across the EU. Alternatively, the EU could opt for a withholding tax on digital transactions or a levy on the revenue generated from the provision of online services.
“A number of questions remain pending with respect to each and every one of such short-term proposals, in terms of (i) practical application; and (ii) compatibility with EU law,” Filipa Correia, partner at Valente Associati GEB Partners in Italy, told International Tax Review about the possible EU tax.
While many European governments have floated the possibility of such a levy, it looks as though the Italian government will be the first to implement this measure.
Prime Minister Paolo Gentiloni has backed the idea of a digital tax, while the Finance Ministry has expressed conditional support – emphasising that the measure must not be ‘punitive’ or contravene EU regulations.
Whether or not Italy should take a unilateral approach to taxing the high-tech economy is another question. The concern of the business community is that the compliance burden will only be increased by actions undertaken by national governments outside of a multilateral agreement.
Economist Paolo Cellini, author of ‘Internet Economics: Understanding Digital and new Media Markets’, is confident that the Italian government will moves towards implementing this levy. He argues there is a great deal of public support for taxing the big tech corporations.
One problem with the digital sales tax is that the cost would likely be passed onto the consumer by the companies facing this kind of levy. The effect could be regressive in the end.
“The worst case scenario will be Google and Facebook raising advertising prices, which will increase the overall cost of digital marketing,” Cellini told International Tax Review. “In this case, they will have a new range of enemies from the media to corporate marketing.”
However, Cellini said the negative impact of the tax on the high-tech economy would be “very limited” in Italy and this is partly why it will be “important if and when the tax is adopted in all EU countries”.
Sending a message
Today, companies are subject to corporate tax in EU countries based on the profits they generate, rather than the overall revenue they amass. Yet the value tech companies create is in the exchange made in the private homes of citizens, in office blocks by advertising staff, or in the algorithms run by giant servers. Taxing the turnover of the tech companies may be one way to generate revenue for countries where they are present but not present, where value is created by consumers in a way that the global tax system was not designed to understand.
“Taxpayers, and MNEs in particular, are aware that due to the BEPS project there is an overall international consensus to tackle base erosion and profit shifting designs,” Nieddu said. “The adoption of a digital tax across the EU would send a strong message to the market.”
“The digital tax initiative is expected to raise the pressure on the European Commission in order to push forward the agenda,” Nieddu said.
In September 2017, Italy joined France, Germany and Spain in calling for an EU-wide tax on the digital economy. The main advantage of a multilateral pact on digital tax is that the agreed upon framework would reduce the level of tax complexity involved. The European Commission and the OECD are now gathering opinions on what a digital tax framework should look like.
At the same time, the Italian government has launched the ‘Industria 4.0’ plan to raise tax incentives for the high-tech sector. This plan included measures such as a patent box to lower taxes on income from intangible assets, a 30% tax deduction for investment in innovative start-ups and a 50% tax credit equal for R&D investment.
“The ‘Industria 4.0’ plan was conceived to boost R&D expenditures. So, a digital tax may not have direct consequences for the plan, rather it may affect the identification of the profit that is entitled to benefit from the various measures,” Nieddu said.
A plethora of new business models are emerging as part of the so-called “fourth industrial revolution”. The European Commission has singled out four major models, such as retail (Amazon), social media (Facebook), subscription (Netflix) and collaborative platforms (Airbnb). The difficulty of digital tax arises in the lack of a fixed presence for such entities and the scope of intangible assets.
New business models allow companies to run without the need for a physical presence in every country in which they operate. This is complicated in retail because the company might not have a physical presence in the country, its sales taking place remotely but it will have supply chains and storage facilities for delivering tangible goods.
The international tax system was ill-prepared for the internet age, and remains largely ill-suited to it, as it was devised to focus on physical presence in order to locate a company and its profits. These procedures fall apart with intangible assets.
With the rise of the high-tech economy, the average effective tax rate for digital businesses is 8.5% whereas traditional companies face an average rate of almost 21%. In short, the old rules don’t work when the game changes.
