Italy Amends Digital Services Tax (DST) – Expanded Scope & Compliance Changes

Budget law for 2025 has modified Digital services tax (DST) withdrawing one of the two requisites to be subject to the law significantly expanding the scope of entities subject to taxation.

According to the recommendation of OECD and EU authorities, Italy has introduced DST by Budget law 2019 ( L. 145/2018) which came into force since 1^st of January 2020. Th aim was to tax revenues from digital services gained in Italian territory. Following the recommendations of the Pillar One and of the Directive COM (218) 148 (European directive on the common system of taxation on digital services applicable to revenues derived from the provision of certain digital services) the Italian legislator has tried to answer the concerns existing at international levels related to the economy digitalization and tax planning strategies of multinationals that can reduce their tax burdens by shifting the location of their profits to lo low or no-tax countries. The intangible presence ensured by digital activities and the lack of physical presence complicate the work of national authorities in fighting aggressive tax planification and ensuring that all revenues are taxed under the correct tax legislation.

The approach of Italian legislator has marked different steps compared to its European neighbors. Even if several European countries have adopted similar measures, Italian DST has one of the broadest scopes of action, together with France and Belgium.

SCOPE OF THE LAW

Delving deeply into Italian DSG, the taxpayer is someone that conducts a business activity regardless if it is a natural person or a legal entity. It is not relevant where the taxpayer is resident, that means that could be someone with legal presence in Italy or not: it only matters that the services, as after described, are rendered on the Italian territory.  This approach is consistent with the guidelines of the European Directive in which, entities are considered as taxpayer regardless of their residence or establishment for the only fact of providing digital services in the country. The Italian legislator requires also to non-residents taxpayer to identify themselves by requesting a fiscal code (Italian identification code): this latter requirement is needed also for formal obligations related to the tax, unless the non-resident has a fiscal representative or a permanent establishment.

OBJECTIVE REQUIREMENTS

From another point of view, the first configuration of the law, as condition to be subject to the DST was to exceed the size thresholds being necessary that the agent achieves, alone or at group level:

1)                         A total amount of revenue generated worldwide of no less than €750,000,000 ; and

2)                         An amount of revenue derived from digital services provided within the territory of the State of no less than €5,500,000.

Both conditions had to be exceeded together in the same calendar year before the application of the DST with the result of affecting mostly large companies that are the riskiest taxpayers in terms of artificial transactions that aims to avoid taxation or seek for beneficial treatments.

The DST applies a 3% excise duty on gross taxable revenues obtained during a calendar year deriving from three categories of services identified by art. Art. 1, co 35-50:

1.       Digital advertising services: Delivery of targeted advertising on a digital interface to users of the same digital interface

2.       Digital interfaces: Provision of a multilateral digital interface that allows users to connect and interact with each other

3.       Transmission of user data: Transmission of data collected from users and generated through the use of a digital interface

According to the Memorandum 3/E/2021 of Italian Tax Revenue Agency, sales of advertising spaces as well as intermediation done by using another digital interface, fall within the scope of the law. Advertising spaces sales ca be done indeed directly or indirectly and the creation of a channel of contact between the advisor and publisher is considered as included in the categories above mentioned. The idea, following the instructions received by the OECD, is to avoid the concealment of a permanent establishment often used by multinational through fragmented, ancillary, or artificial activities.

EXCLUSIONS AND SERVICE LOCALIZATION

As indicated in the Directive 148, also the Italian law, excludes from the list of services subject to the tax, the direct purchases of goods and services, even if the supplier uses a formal or substantive intermediation services. In this case, indeed, what matters is the creation of value for the business of selling goods and services and not the role of the user. It is important to underline that this exclusion refers to tangible and intangible services, so including consulting, packaging or transportation.

The services must be localized in Italy by considering the place in which the device is tracked according to the IP of it or other geolocation method. The service is rendered in Italy if the user  is located in Italy : in particular is considered located in Italy if the advisory figures in the device  when used in Italy or uses a device located in Italy to access to the interface for buying goods and services; finally with reference to data sale, the user is located in Italy if the data have been generated by the same with a device located in Italy. In all theses cases and in accordance to Pillar One indications, DST must be applied to the services provider considering only the place in which the services are supplied, despite of his residence.  

The relevant moment for identifying the existence of the territorial linked with Italy, is the one in which the advertising appears on a user located in Italy during a calendar year.

PAYMENT DEADLINES AND DOUBLE TAXATION

As said, on these services it is applied a 3% excise duty on gross taxable revenues: that means that revenues are considered without any possibility to deduct costs but excluding VAT or other indirect taxes already paid. This means that Digital services TAX applies regardless the service has been subject to VAT or other foreign indirect tax in another countries, considering only the amount charged on the invoice for it.

The application of the DST has been strictly limited by the parameters now mentioned, but the budget law 2025 has crossed out the second threshold requirement. Therefore, the only size condition for applying the DST is to have a total amount of revenues generated worldwide of no less than €750.00,00.

The changes introduced with Budget law 2025, also affected payment dates. Whereas the first version of DST foresaw one payment at the 16^th of May of the subsequent year in which the taxable event as occurred, new rules provide two different deadlines:

1)      Within the 30^th of November it should be paid the advance payment of the same calendar year. It is calculated on the amount of 30% of DST calculated on prior year revenues

2)      Within the 16^th of May of the following year the remaining part.

POTENTIAL MARKET DISTORTION

As result of the recent modifications, the tax applies on any amount related to the provision of one of the digital services foreseen by the law charging a larger audience of taxpayers. It means for a lot of taxpayers more attention on the location in which their services are considered rendered with a possible reduction of investments in Italy. The amendment seems to lean more towards revenue generation rather than protecting the market from distortions. This latter consideration gains even more strength if is deemed that DST has been classified as indirect tax with no pass-through obligation, and only resident taxpayers will be able to deduct the amount paid from CIT declaration whereas, no Double taxation convention is applicable with a high risk of double taxation not being the foreign entities able to claim a tax credit.