On December 29, 2017, the Italian Government published Law No. 205 of December 27, 2017 (Budget Law) in the Italian Official Journal, which contains key tax measures including a new tax on digital transactions (Web Tax) and revisions to the definition of permanent establishment (PE) in the domestic law.
A new Web Tax on digital transactions
With the aim of enacting immediate measures to address the tax challenges of digital economy, the Italian Budget Law introduces a new Web Tax on digital transactions, which applies to services supplied through electronic means to Italian enterprises and PEs of non-resident enterprises. The Web Tax is computed as three percent of the gross payments due for the services (exclusive of value added tax), regardless of where the transaction is concluded.
The Ministry of Economy and Finance is due to issue a decree in April this year, identifying the meaning of “services supplied through electronic means.” Based on the definition contained in the Budget Law, such services are performed through the Internet or through an electronic network, and the nature of which makes the supply essentially automated, with a minimal human intervention and impossible to perform without the use of information technology. Traditional e-commerce transactions should consequently fall outside the scope of the Web Tax.
Both resident and non-resident digital service suppliers are subject to the Web Tax, which is withheld by customers (that is, by resident enterprises and PEs that receive the services) upon payment of the consideration. A Web Tax is due only when suppliers exceed the stipulated threshold of 3,000 transactions during any given calendar year.
The Web Tax will apply as of January 1 of the calendar year following the one in which the decree of the Ministry of Economy and Finance is issued (that is, most likely on January 1, 2019).
Revisions to the PE definition in domestic tax law
The Budget Law amends the domestic definition of PE, making it more consistent with some of the guidelines set forth by the OECD in its Final Report on base erosion and profit shifting (BEPS) Action 7. In particular, the Budget Law revises the specific activity exemptions, introduces the anti-fragmentation rule, and expands the agency PE definition.
The list of specific activity exemptions has been modified so that each of the exemptions is now explicitly restricted to activities that are actually of a “preparatory or auxiliary” character.
Additionally, the anti-fragmentation rule recommended in BEPS Action 7 has been introduced in the domestic PE definition: the activities performed by closely-related enterprises at one or more fixed places of business have to be analyzed on an aggregated basis for the purposes of assessing whether they may qualify as “preparatory or auxiliary,” provided that the business activities carried on by closely-related enterprises constitute complementary functions that are part of a cohesive business operation.
As for the agency PE definition, the amendments provide that persons acting on behalf of non-resident enterprises and habitually concluding contracts, or participating in the conclusion of contracts routinely concluded by such enterprises without material modifications, may give rise to an agency PE, unless they qualify as independent agents. According to Budget Law, persons who act exclusively or almost exclusively on behalf of one or more closely-related enterprises do not qualify as independent agents.
Significant and continuous economic presence
Furthermore, the Budget Law introduces an anti-avoidance provision pursuant to which a PE is deemed to exist in cases of a “significant and continuous economic presence” in the Italian territory. Such new provision, by alleviating the link between the physical presence of an activity in Italy and the identification of a PE, could be considered as a further tax measure targeting digital businesses.
Indeed, even if the concept of “significant and continuous economic presence” will have to be further specified in order for the provision to be effectively applicable, such wording clearly evokes the phrase “significant economic presence” as described by the OECD in its Final Report on BEPS Action 1.
How the above changes will actually impact taxpayers resident in countries with whom Italy has a tax treaty will depend on how PE is defined in the relevant tax treaty; to what extent the BEPS Multilateral Convention (which Italy signed on June 7, 2017) will modify such tax treaty; and (iii) whether these changes will be regarded by the Italian Revenue Agency and courts as specific applications of the general anti-abuse rule.