Italian Revenue Agency clarifies digital services tax
The 2020 finance law (amending law 145/2018) provided for the entry into force – from 1 January 2020 – of a tax on digital services (DST).
With Circular 3 / E of 23 March 2021, the Italian Revenue Agency has provided clarification regarding daylight saving time, taking into account the implementing rules set out in the provision of 15 January 2021.
The subjective scope of DST is characterized by the joint existence of two conditions:
- the exercise of commercial activities; and
- exceeding two-dimensional thresholds.
With regard to “the exercise of commercial activities”, this expression includes companies and commercial and non-commercial entities (limited to the commercial activity carried out), regardless of their residence. In this regard, the DST also applies to non-resident companies that do not have a permanent establishment in Italy.
There are no subjective requirements for clients, who can take any legal form and operate either as economic entities or as private users.
The second criterion for identifying DST taxpayers refers to the overstepping of dimensional thresholds, requiring entities – either individually or jointly at group level.(1) – have generated:
- 750 million euros or more of “worldwide turnover” (first threshold); (2) and
- € 5.5 million or more in income “from the provision of digital services” and “obtained in Italian territory” (second threshold).
These thresholds must be exceeded jointly during the financial year preceding the one during which summer time becomes due.
Digital service revenues
The DST is levied on the income generated by the provision of certain digital services characterized by:
- the use by the taxpayer of a digital interface; and
- contributing to the creation of value for users.
The service provider does not necessarily need to be physically established where the users are located and where value is created or monetized.
More specifically, daylight saving time applies to income generated by the provision of the following services:
- the placing on a digital platform of advertisements intended for users of the platform. The large number of operators involved (both national and international) may give rise to double or multiple taxation (the so-called “cascading effect”);
- providing users with a multi-sided digital interface which enables them to find and interact with other users and which can also facilitate the provision of underlying supplies of goods or services directly between users. In this case, it is possible to identify two different categories of DST income, deriving from:
- interaction and contact between users, which can be defined as “social networks”; and
- intermediation in the transfer of goods and services between users, which can be defined as an “ intermediation activity between users ”, whereby the intermediary role played by the digital interface in sales operations and / or provision of services becomes relevant for the purposes of DST not only from a formal point of view, but also from a substantial point of view; and
- the transmission of the data collected concerning the users and generated from the activities of the users on digital interfaces. In this case, the data includes the personal information of the users, such as their personal and spending habits and their location.
In addition, the definition of “digital services” in the context of summer time expressly excludes certain categories of services relating to digital interfaces. For example, revenues from the following digital services are considered outside the scope of daylight saving time:
- the direct supply of goods or services as part of a digital intermediation service;
- the provision of goods or services ordered through the website of the supplier of such goods or services, when the supplier is not acting as an intermediary;(3)
- the supply of a digital interface the exclusive or main purpose of which is the supply of digital content, communication services or payment services addressed to users of the interface by the entity operating the interface;
- the provision of a digital interface used to manage financial services (ie regulated financial activities); and
- data transfer by entities providing financial services.
The application of DST is strictly linked to the location of the user.
The DST framework provides different definitions, depending on whether or not the user is located in Italy, depending on the type of digital service involved:
- In the case of targeted advertising, the DST framework provides that a user is in Italy when the advertisement appears on the user’s device when it is used in Italy to access the digital interface.
- In the case of a multi-sided digital interface, the DST foresees two circumstances:
- If the multi-sided digital interface facilitates the provision of goods or services directly between users, the user is located in Italy when they use the device in Italy to access the digital interface during this fiscal period and conclude a corresponding transaction on this interface.
- If the multi-sided digital interface is “of a different type” from the first circumstance, the user is in Italy when he has an account for all or part of the fiscal period which allows him to access to the digital interface and that this account was opened using a device in Italy.
A user’s device should be considered in use in Italy on the basis of their Internet Protocol address or any other geolocation method that the entity responsible for DST may use. The use of virtual private networks (VPNs) may affect the result.
In addition, there are other tools to establish the geolocation of a device. The use of VPN may affect the result. Thus, other geolocation criteria could apply (for example, GPS and radio base stations).
The 3% tax rate applies to taxable revenue, which includes total gross revenue, excluding value added tax and other indirect taxes. For the purposes of determining the tax base, income from digital services provided to entities, whether resident in Italy or not, which are deemed to be controlled, controlled or controlled by the same controlling entity during the same year civil, should not be taken into account.
The deadlines are May 16 for the payment of the DST and June 30 for the filing of the income tax return.
Non-resident taxpayers can submit the return in the following ways:
- via a permanent establishment in Italy;
- directly, if in possession of a tax code issued by the Italian tax authorities; or
- through a tax representative.
In addition, the Italian Revenue Agency highlighted the indirect nature of the TSN, stating that it does not fall within the scope of the double taxation treaties of Italy. Therefore, the same income may be subject to DST levied by both Italy and other states, under their respective national laws.
In this regard, taxpayers are not entitled to claim a tax credit, even if there is a double taxation treaty. Since DST is an indirect tax, it can be deducted from the taxpayer’s total income for corporate income tax purposes in the year in which the relevant payment is made.
For the sake of completeness, it should be noted that the DST paid is also deductible from the regional business tax base if it is included in an element that contributes to the determination of the net production value of the taxpayer.
(3) This exclusion applies when the supplier receives income from the sale of goods and services ordered online on its website, but does not apply to any other supply of goods or services for which the supplier acts in as an intermediary.