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

In 2019 Parliament approved a provision in the Budget Law which introduced a DST. This DST never entered into force: legislators were waiting for a common consensus at OECD level, with the aim of avoiding unilateral measures.

However, due to the delay in finding a common global solution and needing additional revenue, the Italian government is following the French example (below) by approving an Italian DST. The DST will be effective from January 1st, 2020. There is no need for a specific Decree for implementation unlike the previous version of the rule.

The revenues of the DST are expected to be in the range of 600 million euros ($684 million).

The main features of DST include the following:

1. DST will apply only to organisations which, individually or as a group:

• Record total worldwide revenues equal to or greater than €750 million; and

• Obtain total revenues from domestic digital services equal to or greater than €5.5 million.

The above parameters apply to both foreign and Italian entities.

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” refers to those platforms that offer a multilateral digital interface allowing users to contact and interact with each other and facilitating the direct supply of goods or services; “data transmission” refers to the transmission of data collected by users and generated by the use of 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 still seem to be out of scope.

3. Business to business transactions relating to digital services are excluded from the scope of the tax.

4. Revenues that are subject to taxation are generally linked to the location of the users of the services: they are considered taxable if the user of a taxable service is located in Italy in a specific tax period. The localization rules vary depending on the type of services. In particular, based on the current wording of the DST legislation: (i) revenues deriving from advertising services will be taxed when they appear on the user's device where the device is used in Italy to access a digital interface in that tax period; (ii) in the case of intermediation or marketplace services, the localization 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 where the user uses a device in Italy to access the digital interface and concludes a transaction on that interface during that tax period; failing that, the will be deemed to be located in Italy if they have an account that allows them to access the digital interface and this account has been opened using a device in Italy during that tax period; (iii) in the case of data transmission, the localization 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.

5. In accordance with the proposals made by the EU DST will apply at a rate of 3 percent and will be based on revenues generated in each quarter. The taxable base will not be reduced by any "costs" but it will be exclusive of value-added tax and other indirect taxes. There is no indication of whether non-deductible costs include traffic acquisition costs.

6. DST is not, in principle, deductible from income (for the application of Corporate Income Tax).

7. Non-resident entities, which in the course of a calendar year fall within the scope of DST, but which lack a permanent establishment in Italy or a VAT number will have to request a DST identification number from the Italian Revenue Agency. If a non-resident has an affiliate company in Italy, the affiliate will be jointly responsible for compliance with the group's DST obligations.