By Giuliana Polacco & Annarita De Carne, Studio Legale Bird & Bird, Milan
The Italian Revenue Agency, on March 23, issued long-awaited guidance clarifying the application and implementation of the digital service tax.
New circular letter n. 3/20 takes into account the comments raised by the business and tax community during the public consultation closed on December 31.
The circular letter includes comments, clarifications, and practical information aimed at resolving questions and doubts detected by the taxpayers and tax advisors.
The Italian Revenue Agency’s open and constructive conduct during the digital services tax’s implementation has been welcome and is consistent with Italian tax authorities’ trend of engagement and dialogue with taxpayers.
Italy’s digital services tax
The digital services tax rules are provided by article 1, paragraphs 35 through 50 of Act No. 145 of December 30, 2018, as amended by article 1, paragraph 678 of Act No. 160 of December 27, 2019, and the provisions issued by the Italian Revenue Agency on January 16, 2021.
The tax has been in force as of January 1, 2020, and applies a 3% rate on transactions deriving from advertising services, intermediation and marketplace, and data transmission.
The first payment is due on May 16, while the first digital services tax return should be filed by June 30.
It is considered an indirect tax and assessed and paid pursuant to VAT rules. Therefore, the Italian Revenue Agency takes the position that it is not covered by any double tax treaty but may be deductible from corporate income taxes due in the year of payment.
Revenue thresholds
Taxpayers subject to the digital services tax include all businesses, whether individual or companies, resident in Italy or abroad.
However, to be subject to digital services tax, a taxpayer must individually or as a group, in the preceding fiscal year (i.e., FY 2019 for FY2020) have recorded worldwide revenues equal to or greater than EUR 750 million and collected revenues from digital services in Italy equal to or greater than EUR 5.5 million.
The circular letter has clarified that the accrual method shall be adopted to determine the global revenue threshold. Also, revenues considered are all those calculated at the group level, i.e., not only those deriving from digital services.
The circular letter has clarified that the accrual method shall be adopted to determine the global revenue threshold. Also, revenues considered are all those calculated at the group level, i.e., not only those deriving from digital services.
Moreover, according to the circular, revenues reported in the consolidated financial statement are those reported based on international financial reporting standards.
Regarding the revenue threshold to be met at the local level (EUR 5.5 million), the cash method is applied. The calculation takes into account only revenues derived from digital services recognized in the previous fiscal year.
Intercompany transactions
Intercompany transactions between a controlling company and its affiliate are excluded from the tax’s scope to prevent double taxation.
The notion of control is the same as that in art. 2359, paragraph 1 and 2 of the Italian Civil code, which makes reference to majority share ownership or voting rights.
Transactions among affiliate companies provided by art. 2359, paragraph 3 seem, instead, to be included in the digital services tax taxable base. This may significantly impact the final calculation of the digital services tax. Transactions between companies belonging to the same group that do not fall within the notion of control, as provided by the Italian civil law, would be included.
Many details of the circular letter are focused on explaining which transactions are subject to digital services tax and how to calculate the taxable basis.
It is clear that the business models adopted by potential taxpayers are not fully known by the Italian Parliament and the Revenue Agency, which initially adopted very general definitions that are difficult to implement in practice.
In particular, it is clarified that the digital services tax applies to revenues generated by providing certain digital services. This seems to require the use of a digital interface and the creation of value on the part of the users. Thus, relevance is given to the monetization of the users’ contributions, not the users’ mere participation on a digital interface.
The service should be automated, without human intervention, and provided through an electronic network or the internet, the guidance states.
It is, therefore, important to take into account that the digital services tax applies when the digital platform is exploited to obtain revenues. The users and their behaviours generate the real value of the business. It is a completely different approach from all taxes introduced so far.
Advertising services
Three groups of services are potentially subject to Italy’s digital services tax, and it is important to distinguish among them.
Advertising services have received a lot of attention due to the sector’s complexity and the need to prevent double taxation for chain transactions involving different players, like publishers and advertisers.
Advertising services falling within the tax’s scope are those that are rendered for consideration and are conveying, either through intermediation or hosting, targeted advertising on a digital interface.
The notion of a digital interface is therefore broad, including television services and pay programs. “Conveyance” covers both the sale of advertising space by so-called publishers (such as sites, internet, blogs, publishers) and the intermediation carried out through another digital interface (i.e., different from the one directly hosting the targeted advertising) along the online advertising supply chain.
Since not all advertising activity falls within the scope of digital services tax, but only the services involving “targeted advertising,” it is important to precisely review the business model in light of the Italian Revenue Agency’s clarifications.
To eliminate possible double taxation where multiple taxpayers are involved, the circular letter has clarified that in the case of revenue sharing mechanisms, the digital services tax’s taxable basis shall take into account only the portion of the revenue retained by the taxpayer.
For instance, if an advertiser pays EUR 10,000 to an intermediary to place the advertisement on a publisher’s interface and the intermediary pays the publisher EUR 7,000 for the publication of the advertisement, retaining a fee of EUR 3,000, the intermediary will be subject to digital services tax for EUR 3,000, while the publisher will be subject to digital services tax for EUR 7,000.
Social networks, intermediation
Many useful indications have been provided in the circular letter with respect to the second group of transactions to which digital services tax applies, i.e., the “provision of a multilateral digital interface that allows users to be in contact and interact with each other, including for the purpose of facilitating the direct provision of goods and services.”
The transactions are those where contact between users occurs, i.e., so-called “social networks” and those where the service consists of intermediation in the sale of goods and services between users, so-called “intermediation activities between users.”
In both cases, the circular letter indicates that a hallmark is that the service enables users to find other users and connect with them. Connecting or interacting with users is a factor that enables providers of such services to benefit from digital network effects and gain revenue.
Therefore, both in the case of social network services and intermediation services, the main issues to address are understanding whether the activity can be revenue-generating and determining the taxable basis.
For example, social network services will not per se be subject to digital services tax if the use of the digital interface is free of charge (since revenues will be collected through the advertisement).
With respect to the intermediation services, it is key to identify the form and substance of the intermediary’s role to calculate the taxable basis of the tax.
The analysis of the type of services rendered and of the business model is of particular importance. The supply of goods and services by the operator of the interface itself is excluded from the digital services tax scope if the operator does not act as an intermediary.
An intermediation role is required for the digital service tax to apply. If goods are sold or the services rendered by a user (platform seller) to (or in favor of) a customer through a digital interface, the digital interface owner’s commission falls within the digital services tax scope. The consideration for the good and/or the service subject to intermediation is not recognized as revenue from digital services.
In such a case, digital services tax is applied to the revenues obtained by the digital interface for the intermediation service provided.
For intermediation services, taxable revenues are determined by the ratio of goods or services transactions carried out in the calendar year where one or more digital interface users is located in Italy over the total of the transactions of supplies of goods or services concluded in the same period.
This method of calculation has been highly criticized since it may raise double taxation issues by capturing the same transaction in two different countries when the users in one single underlying transaction are not located in the same territory.
Data transfers
The transfer of data to third-party for consideration is the third group of transactions covered by Italy’s digital services tax.
The third-party data includes the user’s personal information, such as habits, spending, location, environment, and use of services, hobbies, or interests.
A taxable service includes only the transmission of data obtained by the digital interface for consideration. The collection of data or the use of data for internal company purposes or the sharing of data collected by a company with other companies in the group or other subjects free of charge is excluded from digital services tax.
It was explicitly mentioned that the use of SIM cards does not fall within digital services tax, since network events are produced by the simple hooking up of the SIM card to the network cells and with respect to which the user has a completely passive role.
Calculation
For the calculation of the tax, again, a ratio is used.
Reference is made to the users whose data, sold in part or in full and transmitted in the calendar year, was generated or collected on a digital interface when the user was located in Italy over the total users to whom the data sold and transmitted refer.
The digital services tax does not apply when the digital platform is used for the purchase of goods and services or if the creation of value for the business is derived from the goods or services sold and not from the user’s role. There are a number of situations that are, in any event, excluded by digital services tax, and reference to the regulations and the circular letter would be relevant.
Delivery services, gaming
To provide specific examples, the Italian Revenue Agency has made reference to the food delivery sector and game sector since many questions have been raised about these industries.
In particular, with respect to food delivery, it has been clarified that the consideration for the direct supply of meals or foodstuffs with delivery by the commercial establishment (e.g., restaurant, bar, food laboratory, etc.) to the consumer (end-user) with the support of a digital intermediation service does not fall within the scope of the regulation. Only the intermediation commission is relevant as digital revenue.
Moreover, if the owner of the digital interface not only intermediates the food directly between users or by triangulation (including the intermediation service), but also directly renders the delivery service, the consideration for the delivery service organized and rendered by the operator of the interface should be excluded from digital services tax.
As it can be understood from the above analysis, the key point on which the calculation of digital services tax is based is the location of the users.
Responding to questions raised by the business community, the circular letter confirmed that the main methodology for determining the location of the user is the location of the IP address.
Responding to questions raised by the business community, the circular letter confirmed that the main methodology for determining the user’s location is the location of the IP address.
It was clarified that additional criteria could be used to detect that a device is present in Italy to attract taxation, such as information gathered at the time of user’s registration GPS, API, WIFI signals, and beacons.
The circular letter clarified that the taxpayer must prepare and retain a record of procedures implemented internally to detect users’ location and track the relevant revenues, aggregated/periodical data relevant to the outcome of the localization criteria used, and an explanation of the chosen criteria.
The guidance allows a multinational group to appoint a designated company to comply with all the digital services tax formalities (i.e., payment and digital services tax return) on behalf of the affiliate entities, based on the data and information provided by each entity.
The designated company could be an entity subject to the tax and does not need to be an Italian resident.
Irrespective of the appointment of a designated entity, group entity should have or obtain a fiscal code in Italy if they are not resident or established in Italy.
The circular letter also confirmed the joint liability of companies belonging to a multinational group based in Italy, irrespective of whether a company is a taxable subject or not.
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Giuliana Polacco is Senior Counsel, Studio Legale Bird & Bird, Milan.
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Annarita De Carne is Senior Associate, Studio Legale Bird & Bird, Milan.
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