16 giugno 2020
How will the Italian Digital Services Tax affect the trade relations with the U.S. and China?
Il Punto di Yue ‘Daisy’ Dai* e Amedeo Rizzo**
* Assistant Professor | Shanghai University of Finance and Economics; Research Fellow | Working Party on Tax & Legal Matters
**Academic Fellow | Bocconi University; Research Fellow | Working Party on Tax & Legal Matters
Countries such as the U.K. and India started imposing Digital Services Taxes (“DST”) on April 1, 2020.
The U.K. DST, for example, is a 2 percent levy on revenues from multinational enterprises that have more than £500 million in digital revenues worldwide and £25 million attributable to U.K. users. The DST is viewed as a sales tax because it is based on a revenue percentage. It applies to all digital platforms, whether their parent companies are in the United States, Europe, China or elsewhere, as long as these have a consumer base in the DST jurisdiction. It is estimated that end-users will eventually bear the cost of the DST. For instance, digital marketplaces charge merchants a commission that is likely to increase with the DST.
This could cause some merchants to opt out for a cheaper marketplace or an increase in the prices applied to consumers to compensate for the commission increase. Alternatively, marketplaces can charge the DST directly to consumers, a 100 percent pass-on rate. Accordingly, large overseas tech companies would not face a significant effect by the introduction of the DST because of their ability to shift the burden downstream.
After various unsuccessful attempts, the Italian DST (“Imposta sui Servizi Digitali”) has been adopted by the Italian Government in 2019 (L. 27 dicembre 2018 n. 145, Artt. 35-49) and fully implemented in 2020 (L. 30 dicembre 2019, n. 45).
The structure of the tax is very similar to the digital tax proposed by the European Commission in March 2018, with some specific differences, especially in its scope. After an initial proposal of a 6% tax rate, the Italian DST rate has been fixed at 3%, in line with the other Countries.
The tax base for the Italian DST is set with the gross revenues obtained by the companies that fall under the subjective scope of the tax, when conducting specific activities. To be subject to the tax, a company (Italian and non-Italian tax resident) shall (i) have a total turnover of at least € 750,000,000 in a fiscal year, determined on a worldwide basis; and (ii) book revenues from digital services “sourced” in Italy amounting to more than € 5,500,000 in a fiscal year.
Digital services are considered as “sourced” in Italy if they include Italian users. In this respect, the Italian Government has opted for an “ad hoc” approach to the definition of digital services, in line to the EU approach, but with a broader scope.
Indeed, the scope of the Italian DST includes (1) the intermediation of advertising services to Italy-based users through digital platforms, hitting companies that use sponsorships in their platform-based business models, such as Facebook, Amazon, and Google; (2) the provision of a digital interface per se, allowing Italy-based users to interact or to buy goods and services, hitting any digital company that allows social networking, like Facebook, or online purchases, such as Apple and Amazon; (3) the transfer of data collected from Italy-based users of digital interfaces, which practically includes any digital company.
Digital and non-digital companies hit by this tax will have to pay it in February 2021. Before that date, the actual effects of the Italian DST are still quite uncertain, although several companies have already complained about being hit by the tax, even if they are not digital companies.
This is the case of some Italian media companies, such as Mediaset and RCS, which will be taxed on their online advertising services. The Italian Government is expecting the collection of ca. € 708 million per year from the DST. The forecast, nonetheless, seems to be quite optimistic, as it should have been calculated applying a simple GDP ratio to the forecasts contained in the EU proposal. Yet, the optimistic forecast and the indistinct application to both digital and non-digital companies are only a small handful of all the problems related to the DST.
Indeed, the detection of whether the revenues from digital services are generated through Italian users is responsibility of digital companies themselves, which need to geo-localise their users.
However, users might not want to be tracked and forcing data collection could originate privacy-related issues. Moreover, digital companies are strongly rooted in consumers’ behaviours and habits, as the COVID-19 pandemic has clearly emphasised. Therefore, digital companies could easily rebate the DST on their consumers increasing the prices of their services. The shift of the economic burden clearly contradicts the rhetoric of “taxing the digital giants”.
Another critical point involves Italy’s trade relations with the U.S. and China. Indeed, the US government has been criticising the DST since the beginning, as they consider it a discriminatory custom duty applied exclusively on American digital companies importing their services in Italy.
Because of the high revenue thresholds required to trigger the application of the Italian DST, tax scholars shared the concern that the DST would affect only a few companies in European countries, namely, the large U.S. tech firms known as the “FAANGs” – Facebook, Amazon, Apple, Netflix, and Google, which have dominated digital markets in Europe. Therefore, the US have announced counteractive measures on all products coming from Italy and from countries that have adopted the DST.
That is, Italy is not alone in this. France announced a 3 percent tax that applies to firms with global revenues above €750 million yearly generated from digital activities, of which €25 million are made in its inventory. In response, the U.S. Trade Representative Office (USTR) investigated the French DST bill to find whether that is an unreasonable or discriminatory tax policy that would burden or restrict the U.S. commerce.
Several industry associations representing the U.S. technology companies followed up by commenting that the French DST would disproportionately affect the U.S. companies and appear to violate WTO rules. Hence, facing prompted threats of trade retaliation from the U.S. against goods and sectors unrelated to digital services, at the beginning of 2020, both France and Spain announced to postpone the unilateral approach until the OECD and G20 countries reach a consensus.
Meanwhile, like the US, China has its own digital conglomerates Baidu, Alibaba, and Tencent (collectively known as the BATs). The BATs are of comparable size to the FAANGs, yet they are much less analysed in the English-speaking world. As the BATs are seeking more global market shares on a strong internationalization path, they may be subject to the DST in the near future in the DST jurisdictions such as Italy, although for now the BATs have not penetrated the European market.
In addition to the BATs’ expansion, Tiktok (owned by ByteDance) has emerged as a globally recognized platform that has attracted significant number of users, especially in the COVID-19 pandemic. The DST or any DST-equivalent tax burden serves an opposite purpose to the Chinese government’s encouragement of its tech firms to “go global.” Therefore, the U.S. is not the only Country whose digital companies will be hit by the Italian DST. China may soon intervene.
To reduce tensions between different Countries’ taxing interests, since 2018 the international community has been working towards a new global tax deal on taxing the digital economy, in the context of rising public dissatisfaction and political initiative to realigning the taxation of the FAANGs. Overall, the burden is now on the OECD and G20 to evaluate and adjust the proposed changes in international tax. The COVID-19 pandemic is likely to slow down the international tax reform agenda, but the world is nevertheless entering into the BEPS 2.0 era to prevent governments’ unilateral actions in the DST.
