The Web Tax
Italy has introduced a new so-called “Web Tax”, a new tax on certain digital transactions. This will apply from 1 January following the issue of the relevant Decree of the Ministry of Economy and Finance, most likely 1 January 2019.
Web Tax applies to digital services provided by Italian and foreign operators via the internet or other electronic means (e. g. services concerning data transmission and processing, cloud computing, online and social media advertising, etc.) to Italian resident companies and to Italian permanent establishments of non-resident companies.
The precise scope of the digital services subject to Web Tax will not be clear until we have the relevant Decree of the Ministry of Economy and Finance, anticipated to be issued by 30 April 2018.
Points to note at this stage are:
– B2B only – Web Tax applies exclusively to business-to-business (B2B) digital transactions. Business-to-consumer (B2C) digital transactions will be excluded from the application of the new tax. Also the online sale of goods (e-commerce) B2B would seem to be excluded.
– 3% rate and 3,000 transactions threshold – Web Tax is applied at the rate of 3% on the value of any transaction, exclusive of VAT and is due only by operators performing more than 3,000 digital transactions yearly. Whether this minimum threshold is met or not must be communicated by the service provider on the invoice issued to the client or in another document to be issued together with the invoice.
– Collected by the purchaser – The Web Tax is collected a bit like a withholding tax. The purchaser is responsible for charging and collecting the Web Tax and for all obligations relating to the tax. The tax must be paid by the 16th day of the month following the one in which the payment for the digital service occurs.
– Compliance – The provisions on Value Added Tax apply to the assessment, penalties, and the collection of the Web Tax and related proceedings.
This leaves a number of uncertainties. In particular
– Nature of the Tax? – It is debatable whether it is a direct (withholding tax) or indirect tax. If it is a withholding tax, it needs to be clarified whether double tax treaties are applicable. On the other hand, if it is similar to VAT, the question arises as to whether or not it would be compatible with Article 401 of Directive 2006/112/EC, which prevents Member States from introducing a new tax on turnover.
– The 3,000 transactions threshold – How are the 3,000 digital transactions counted? A service provider will not be in a position to determine in advance whether or not it will exceed this threshold by the end of the year. How does it then determine whether the Web Tax applies? Does it take into account the number of transactions carried out in the previous year? If not, the Ministerial Decree needs to explain how the threshold is applied during any year.
The new definition of “permanent establishment”
Italy has also specified a new definition of “permanent establishment” in line with BEPS Action 7 (“Preventing the artificial avoidance of Permanent Establishment Status”). The new definition applies from 1 January 2018.
Under the new law, the existence of a permanent establishment does not require the physical presence of a foreign entity in Italy. It is now sufficient that there is “a significant and continuous economic presence” in Italy. Furthermore, specific activity exemptions are now explicitly restricted only if such activities are actually preparatory or auxiliary.
Italian law also specifies the concept of “personal” permanent establishment.
This exists where a person:
– habitually concludes contracts in Italy in the name and on behalf of the foreign company; or
– participates in the conclusion of contracts by the foreign principal and the foreign principal routinely simply approves the terms proposed to the clients without material modifications.
There can be no “personal” permanent establishment if the person is an independent agent, i.e. the person operates in Italy on behalf of a non-resident company as part of his ordinary activities. However, a person cannot be an “independent agent” if it operates exclusively or almost exclusively for or on behalf of one or more related principals.