Italy Digital Services Tax threshold withdrawal proposal

2025 Budget Law draft ends threshold for 3% DST

On 15 October 2024, the Italian government submitted to Parliament its 2025 Budget Law, including a proposal to scrap the two-pronged threshold on its 3% Digital Services Tax (DST). The implementation date would be 1 January 2025.

A withdrawal of the threshold on the DST turnover tax would bring all Italian and non-resident providers of digital services into the tax net for the first time. This would include non-digital services speciliants who are providing ancillary digital supplies e.g. car manufacturers.

This would risk trade retaliation from the US, which believes it disproportionately targets its global digital businesses.

An agreement between the U.S. and five EU countries including Italy that resulted in a freeze of Washington’s threatened tariffs formally expired in June.

Controversial tax on pause pending OECD reform talks

As with countries like France, Spain and the UK, Italy introduced a controversial DST on revenues from online advertising, user data exchange and digital intermediation between online sellers and buyers.

The OECD Pillar 1 project is attempting to reform taxing rules on such cross-border digital services, and countries have been on a moratorium to pause or at least not change DST’s for fear to retaliation by the US, where most affected global digital providers are resident. Pillar 1 seeks to allocate part of the digital services revenue to the countries where the services are provided, and not just where the provider is resident. It is the income tax – or rather a turnover tax – equivalent of VAT on non-resident digital service providers

The EU proposed DST has been suspended subject to OECD progress.

However, progress on Pillar 1 has been slow, and Italy’s move reflects impatience for progress and a desire to raise income from its DST.

VAT Calc’s global VAT and GST on digital services blog keeps a live update on how countries are imposing indirect taxes on non-resident providers and electronic marketplaces.

Scraping DST’s two-thresholds

Like other countries Italy has two thresholds which it is now considering withdrawing:

1. Total amount of worldwide revenues (wherever arising from the exercise of any business activity) equal to or exceeding €750 million and
2. An amount of revenues received from the provision of qualified digital services (as defined below) linked to Italian users equal to or exceeding €5.5 million.

The tax is to be paid by Italian taxpayers as well as by non-Italian-resident companies, regardless of the nature of the service recipient.  Intragroup transactions are excluded.

Italy’s Digital Services Tax (DST)

Italy introduced its Digital Services Tax (DST) as part of Law No. 160/2019, effective from January 1, 2020. The DST aims to capture revenues from large multinational digital companies that benefit from Italian users and digital markets but may not otherwise be fully subject to the traditional corporate tax regime due to the intangible and cross-border nature of their services.

Scope of the DST

The Italian DST is applicable to companies with global annual revenues exceeding €750 million, and revenues derived from digital services provided within Italy surpassing €5.5 million in a calendar year. The DST is designed to target large digital companies, particularly those offering services that involve user interaction or the sale of user data. These thresholds ensure that the tax is focused on the largest digital players, many of whom may have low or no permanent establishment in Italy under traditional tax treaties.

Taxable Services

The Italian DST applies to revenues derived from the following specific categories of digital services:

1. Online Advertising Services: Revenue from placing targeted advertising on a digital interface based on data gathered from users.
2. Multisided Digital Interfaces: Revenues from the provision of a digital platform facilitating interaction between users, which may result in the supply of goods or services.
3. Transmission of User Data: Revenues derived from selling or transferring data collected about users and generated through their activities on digital platforms.

The taxable base includes gross revenues, excluding VAT and other indirect taxes. Importantly, the DST is levied on the revenues that companies derive specifically from Italian users, making it a turnover-based tax rather than a profit-based one.

Rate and Payment

The DST is levied at a rate of 3% on revenues generated from the digital services outlined above. It is a gross revenue tax, meaning that costs associated with generating the revenues are not deductible for DST purposes. Companies subject to the DST are required to make quarterly advance payments, with the balance paid in the following year.

Nexus and Allocation

One of the defining features of Italy’s DST is its focus on “user-based” nexus, reflecting the principle that value creation in the digital economy is driven by user interaction and data collection. The allocation of revenues to Italy is determined by the location of the user, meaning that if a service is consumed or a user’s data is generated in Italy, the associated revenues fall within the DST’s scope.

Compliance and Administration

Firms subject to the DST are required to self-assess their liabilities and submit annual returns, specifying the amount of taxable revenue attributable to Italy. Failure to comply with DST obligations can result in administrative penalties, and companies must also keep detailed records of transactions that fall under the DST’s purview to substantiate their filings.

DST in Other European Countries

Several European countries have introduced similar DST measures:

• France: 3% tax on digital services revenues from user data collection, advertising, and intermediation services.
• Spain: 3% DST targeting online advertising, data sales, and digital platforms.
• United Kingdom: 2% tax on search engines, social media platforms, and online marketplaces with user-driven revenue.
• Austria: 5% DST focused on online advertising services.
• Hungary: 7.5% tax on online advertising revenue.
• Poland: Announced intentions for a DST, but its implementation has been delayed.

These taxes, while similar in structure, vary in rates and scope, reflecting the individual digital market dynamics and revenue models targeted in each jurisdiction.

Europe Digital Services Taxes (DST)