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November 8, 2019
Italy’s unilateral Digital Services Tax advances
On 2 November 2019, the Italian Government presented the draft Finance Bill for 2020 (the Draft Finance Bill) to Parliament. The Draft Finance Bill includes some amendments to the previously proposed unilateral Digital Services Tax (DST) along with a series of other tax measures. The incorporation of the new DST in the Draft Finance Bill effectively removes the need for a special implementing decree to be utilized (as was previously the case) and also means that the DST is more likely to become effective as of 1 January 2020.
The DST, as currently proposed, closely aligns to the features of the proposed European Union (EU) DST Directive, with a 3% tax on certain services, and builds upon measures that were also proposed in Italy’s Finance Bill for 2019 (Law 145/2018). That law has not yet entered into force, nor has it been withdrawn.
The Draft Finance Bill effectively amends part of the proposed 2018 law, specifically removing the need for an implementing decree (an instrument used in the Italian legislative process) and adding other clarifying rules, which will become new articles in Law 145/2018 once the Finance Bill for 2020 is enacted.
The Draft Finance Bill must be approved by both Chambers of the Italian Parliament before the end of 2019, and it is possible that the wording of the provisions will therefore change. However, it is also the case that while other measures included in the Draft Finance Bill are already causing conflicts between representatives of the various political parties, the DST seems to be attracting the broadest consensus.
This proposed measure is not Italy’s first foray into digital taxation but represents a modification of a previous digital tax law proposal. Italy launched its “Web Tax” in 2017, but the relevant provisions never became effective due to the absence of an implementing decree. Hence, at the end of 2018, the Web Tax provisions were repealed and replaced with a different set of rules in the Finance Bill for 2019. In particular, these “2018 rules” were based on the proposed EU Directive on the common system of a DST per the European Commission COM(2018) 148 final (Proposed Directive). (See EY Global Tax Alert, European Commission issues proposals for taxation of digitalized activity, dated 22 March 2018, for further background information.) However, the 2018 proposal experienced the same fate as the Web Tax, and without the required implementing decree containing the related procedural guidance, it never became effective.
Same rules, new attempt
The 2018 proposal, like the proposed EU Directive, provides for a 3% DST to be applied to the revenues resulting from the (non-intragroup) provision of the following services:
Taxable persons would be entities – either Italian or foreign, and either standalone or at group level – meeting both of the following conditions:
With this relatively low local threshold, more traditional companies (such as, for example, a manufacturing group with a group subsidiary providing digital services in Italy generating revenues exceeding €5.5m) would theoretically be subject to the DST.
The Draft Finance Bill amends and integrates the previous unenacted DST legislation in the following ways:
With respect to the specific exclusions, reference in the Draft Finance Bill is mostly made to the services connected to making a multisided digital platform available to users, but which are not deemed “intermediation services.” These are defined as being other services that facilitate interaction between users but do not consist of intermediation, or those whereby the interaction remains ancillary to a supply of digital content.
The following activities are not deemed digital services that fall within the scope of the tax:
The Draft Finance Bill also provides guidance regarding the mechanism for taxation. It is stated that:
While some elements of the guidance may not be clearly specified, the Draft Finance Bill is so close to the proposed EU Directive that, while waiting for more precise and clear Italian guidance, an adequate interpretation may be drawn by making reference to the explanatory memorandum of the Proposed EU Directive.
The relatively low local revenue threshold set out in Italy’s Draft Finance Bill means that the DST may impact companies who may not have considered themselves as having significant digital business models. Companies should therefore continue to closely monitor the passage of the Draft Finance Bill, particularly where specific elements of the guidance are not yet fully clarified.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United Kingdom), Italian Tax Desk, London
Studio Legale Tributario, International Tax and Transaction Services, Milan
Studio Legale Tributario, International Tax and Transaction Services, Rome
Studio Legale Tributario, International Tax and Transaction Services, Bologna
Ernst & Young LLP (United States), Italian Tax Desk, New York