Some Italian parliament members published a proposal for a new law that may dramatically change the scenario for e-commerce and and digital businesses in Italy.
The proposal (called by some commentators as “Digital” or “Web Tax”) is substantially a combination of domestic rules affecting the taxation of the digital economy. In line with the OCSE “Action Plan on Base Erosion and Profit Shifting (BEPS), the proposal includes:
- the setting up of a new concept of permanent establishment in Italy (which should cover also a “virtual permanent establishment” in line with the OECD approach);
- he application of a 25% withholding tax to be applied by the financial institution processing the payments made to a foreign e-commerce provider by an Italian customer (B2C transaction);
- the application of a 25% withholding tax to be applied where it is identified a hidden “virtual permanent establishment” on payments made by an Italian company to a foreign e-commerce provider (B2B transaction). Also in this case the withholding tax is applied directly by the financial institution processing the payment process.
The new concept of “virtual permanent establishment” should allow the taxation in the State where the e-commerce player sells its products/services each time there is a “continuative presence of on-line activities connected to the non-resident entity for a period of not less than 6 months which grants a payments flow to the non-resident entity not lower than Euro 5 Million”.
The main objective of the proposal is to avoid tax evasion schemes for e-commerce transactions (which, according a study by the Politecnico di Milano – a Milan University -, amounted to 11 billion Euro revenues in 2013, and are bound to increase). The proposal sets up a new concept of taxable presence based on a “digital residency”, whereby the digital services’ revenues should be subject to the taxes of the State in which the services or products are provided (“destination based tax“), and not to the taxes of the digital operator’s official residency. Any double taxation event due to the application of said withholding taxes, according to the proposal, will be set off through the recognition of a tax credit.
In any case, the existing provisions set forth by the double tax treaties signed by Italy should continue to prevail over the domestic rules.
This is not the first attempt to introduce a web or digital tax in Italy. According to some commentators, this new regulation may be successful as it relates to a local tax (IRES), instead of VAT (which is defined at an EU level) and accordingly the approval process may be easier.
Whether this law proposal will be enacted without substantial changes is yet to be determined; although it cannot be excluded that it will be effective by 1° January 2017 should the EU decide not to centrally tackle the taxation of the digital economy with similar provisions. According to said proposal, a pivotal role will be played by the financial institutions (banks) involved in the payments process related to the acquisitions of goods and services (e.g. for the application of the withholding taxes on B2C payments).
That said, this initiative once again confirms the belief of certain EU Member States that new broad rules will have to be promptly issued with regard to the digital economy, also taking into account the necessity that revenues should be taxed where the customers are established. Such rules will however be effective if they are harmonized (at least throughout the European Union). This will no doubt ignite the broader debate over a global digital level playing field.