Digital Services Tax in Italy

Italy has been grappling with the digital economy for some time, trying to identify rules for the taxation of revenues deriving from online transactions.

With the Budget Law 2019, Parliament approved a provision introducing a DST which never entered into force waiting for a common consensus at OECD level, to avoid unilateral measures.

However, due to delays in finding a common global solution, Italy implemented Italian DST 27 December 2019, and the provisions of the Director of the Revenue Agency dated on 15 January 2021. In order to answer questions raised by the tax community, on 23 March 2021, the Revenue Agency issued Circular Letter n. 3. The main features of DST are as follows:

1. All entrepreneurs are subject to DST if they , are individuals or companies resident in Italy or abroad and, individually or as a group (i) have recorded total worldwide revenues equal to or greater than 750 million euros; and (ii) have collected total revenues only from digital services in Italy equal to or greater than 5.5 million euros.
   Regarding the revenue threshold to be met at global level (EUR 750 million revenues), the accrual principle must be adopted, and revenues are all those calculated at group level, (i.e., not only those deriving from digital services) with respect to the prior year (i.e., FY 2019 for 2020 DST). The revenues reported in the consolidated financial statement are based on international financial reporting standards.
   With regard to the revenue threshold to be met at local level (EUR 5.5 million revenues), a cash principle is applied, and the calculation takes account only revenues deriving from digital services cashed in the previous fiscal year.
   Intercompany transactions between a controlling company and its affiliate are excluded from the scope of the tax in order to prevent double taxation. The notion of control makes reference to Article 2359 of the Italian Civil Code, i.e. the majority of the share ownership or voting rights. Transactions among affiliate companies are, instead, included in the DST taxable base, which may have a significant impact on the final calculation of the DST and would not exclude transactions between companies belonging to the same group.
2. Revenues subject to DST include those deriving from advertising services, intermediation and marketplace, and data transmission. “Advertising” refers to the placing of an advertisement(s) on a digital interface, targeting the users of that interface. “Intermediation and marketplace” refer to those platforms that offer a multilateral digital interface allowing users to contact and interact with each other and facilitate the direct supply of goods or services; “data transmission” refers to the transmission of data collected by users and generated by using a digital interface.
   DST also includes taxation of the transactions carried out in the marketplace, including the intermediation in the sales of goods, while transactions concluded directly with final consumers and pure e-commerce transactions are out of scope.
   In fact, DST does not apply to several sectors and related revenues that are specifically listed in the new version of the law, such as direct provision of goods and services both in case of use of intermediary or direct supplies through the website; revenues deriving from the digital interfaces which offer digital content, communication, and payment services. DST does not apply also to the supply of financial services provided by financial regulated entities
3. Intercompany transactions of digital services are excluded from the scope of the tax.
4. Revenues that are subject to taxation are mainly linked to the location of the users of the services (taking into account the IP address). As a result, they are considered taxable if the user of a taxable service is located in Italy in a specific tax period. Different localisation rules are applicable depending on the different type of services. In particular, based on the current wording of the DST legislation: (i) revenues deriving from advertising services are to be taxed when they appear on the user's device when the device is used in Italy in that tax period to access a digital interface; (ii) in the case of intermediation or marketplace services, the localisation of the user depends on whether the service involves a multilateral digital interface that facilitates the corresponding supply of goods or services directly between users. In the first case, revenues attract taxation in Italy if the user uses a device in Italy in that tax period to access the digital interface and concludes a transaction on that interface during that tax period; if this is not the case, the user is considered located in Italy if he/she has an account for the whole or part of that tax period that allows him/her to access the digital interface and this account has been opened using a device in Italy; (iii) in the case of data transmission, the localisation depends on whether the data transmitted was generated by a user who used a device in Italy to access a digital interface during that current tax period or a previous tax period. Revenues do not include the price paid by the user for the purchase of the goods or of the services.
5. DST will apply at a tax rate of 3 percent based on revenues generated during the tax period. The taxable base is not reduced by any "costs" but is net of value-added tax and other indirect taxes. There is no indication of whether non-deductible costs include traffic acquisition costs.
6. DST computation is based on the ratio between the total amount of revenues deriving from digital services, wherever realised and those connected with the Italian territory (specific rules apply to each of the different type of revenues) on a cash basis.
7. Payment of DST must be made on the 16th day of March following the relevant fiscal year. A return must be filed within six months after the end of the tax period (i.e., June 30 of the following fiscal year). The first payment was set on 16 May 2021. In case of more than one company belonging to the same group, the latter will identify the company responsible for all DST fulfillments (payments and declaration).
8. DST is not covered by any tax treaty against double taxation, but may be deductible from corporate income taxes due in the year of payment.
9. Non-resident entities without a permanent establishment in Italy or a VAT number, which in the course of a calendar year fulfill the conditions for the application of DST, must request an identification number for DST purposes from the Italian Revenue Agency. If a non-resident has an affiliate company in Italy, the affiliate is jointly responsible for compliance with the group's DST obligations. Particular attention will be given to companies that are resident in non-cooperative countries.
10. A sunset clause has been included. In particular, Italian DST will be revoked once provision for the taxation of digital services purposes will be adopted at international level.

Please click here to find, a translation of the DST rule in force as of January 1, 2020 (in Italics, the amendments brought by the 2020 Budget Law).