Italy – Budget Law For 2018 Introduces Major Developments To Domestic Tax System

The Italian 2018 Budget Law, approved by the Parliament on 23 December 2017 and turned into Law No. 205 of 27 December 2017, has introduced a package of tax reforms for corporations and individuals.

This is the first of a series of posts on the major developments introduced by Law No. 205. In each post is provided a general overview of a specific tax reform.

Corporate taxation – Tax on digital transaction: Web Tax

Italy accomplishes a white mark in the development of tools to tackle the new challenges posed by the digital economy. The introduction of a Web Tax is aimed at preventing the erosion of the Italian taxable base by tech giants carrying out a business in Italy, due to weak international tax rules (e.g. recognition of a “virtual” permanent establishment or taxation of profits where value is created) and favourable arrangements negotiated by corporations with some EU countries, allowing them to reduce the taxation in market jurisdictions (e.g. on behalf of licences and sub-licences IP rights’ structures) and shifting the booking and taxation of profits to low tax jurisdictions.

Budget Law for 2018 has introduced, as from 1 January 2019, a tax on digital transactions performed between service providers (either resident in Italy or not) and resident entities or other taxable persons as well as permanent establishments in Italy of non-resident companies, on the “delivery of services via electronic devices” defined as those performed through the Internet or another electronic network the nature of which nature renders the service essentially automatic, with minimum human intervention and impossible to be performed without the Information Technology component. The new regulation establishes that the tax would be applied at a 3% rate on the amount paid in exchange for the performance of the service, net of VAT. The transaction would be relevant for Web tax purposes irrespective of the place where it is concluded. The tax would be therefore due by the service provider, while the clients would act as withholding agents: the payment shall be made by the 16th day of the following month in which the transaction took place. The new provision would be applicable only if, in any fiscal period, the number of digital transactions carried out in Italy from the service provider would be higher than 3.000 units. In any case, the service provider will inform the client, upon delivery of the invoice, about the applicability of the regime at hand. Finally, a Decree from the Ministry of Economy and Finance is expected within 30 April 2018, providing full guidance on the scope, eligible entities, eligible transactions, reporting obligations and methodology of tax recovery by withholding agents of the new digital transaction, operative as from 1 January 2019.

Entry into force of Law No. 205 of 27 December 2017: 1 January 2018.

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