Eurispes Observatory on Fiscal Policies: the dawn of the web tax?

Eurispes Observatory on Fiscal Policies: the dawn of the web tax?

«As is well known, web multinationals enjoy a no longer permissible omission of taxation of their billion-dollar profits. What has finally been understood, after years of debate, is that in order to tackle phenomena such as the taxation of the digital economy, a new perspective is needed. After all, even at the Ecofin in Tallinn on September 21, 2017, Europe had already realised the inevitability of finding a solution by working, mainly, in two directions: taxation on turnover, and/or evolution of the concept of permanent establishment. With, in the background, the topic of Big Data».

Lawyer . Giovambattista Palumbo, Director of the Eurispes Observatory on Fiscal Policies, explains in a note: «The permanent establishment, in particular, constitutes the codification of the principle whereby a State can only tax business profits if the non-resident carries on business in that State through a fixed place of business. But what fixed place of business do Web operators need? And, however, the aforementioned definition of permanent establishment is enshrined in both domestic law and international conventions. This has been, until now, the main obstacle to the introduction of a specific regulation to stop the “fiscal haemorrhage”. In short, the approach to taxation in the digital world must be Darwinian. Meaning that there must be a legal evolution in step with the technological one. Those who operate (and earn) in our country must be subject to national laws like all normal citizens. And they must do so as a subject of the rule of law and not as a voluntary “contribution” to their local community of reference (Facebook’s words).

Moreover, on December 13, 2018, the European Parliament, meeting in plenary, voted and approved two reports calling for Europe to introduce a common system of taxation for digital services. The European Parliament had essentially proposed some changes to the previous suggestions made in March 2018 by the European Commission, adding to the list of services that can be considered tax revenue the provision of «content on a digital interface such as video, audio, games or texts» – regardless of whether such content was owned by the supplying company or whether it had acquired the distribution rights – and reducing the minimum threshold above which a company’s income is subject to taxation – any company that generates revenue within the EU in excess of 40 million euros during the financial year, whereas in the European Commission’s proposal the amount was 50 million euros. On the other hand, the 3% tax rate, also proposed by the Commission, was maintained, with the prospect of moving to 5% two years after the new rules came into force. The aim was to close the gap between the taxation of digital and traditional revenues where, on average, digital companies are only subject to an effective tax rate of 9.5%, compared to 23.2% for traditional business models. Only certain entities should, however, be considered as taxable persons, with the proposals referred to considering as such those entities that jointly fulfil the following conditions:

– the total amount of revenue (worldwide) reported by the entity for the most recent complete financial year for which consolidated financial statements are available exceeds €750,000,000;

– the total amount of taxable revenues earned by the entity in the Union during that financial year exceeds €40,000,000.

The path of taxing these types of activities is, however, being taken, or has already been taken, individually, by various countries. With the English Digital Service Tax, for instance, the aim is to intercept income from transactions via telematic platforms and social networks, Big Data, online marketplaces, and so on. The English Digital Service Tax is therefore specifically targeted on certain digital business activities, whose revenues amount, globally, to more than 500 million pounds per year, of which at least 25 million derive from transactions related to the participation of a British resident citizen and with an exemption threshold up to the first 25 million pounds. France has also prepared its own web tax, operational as of 2021. The tax has already been named the “GAFA tax” (from the initials of Google, Apple, Facebook and Amazon) and the French Finance Minister has reportedly aimed to bring in at least 500 million euros per year into the state treasury. Again, this will come from revenues generated by advertising, platforms, and the sale of personal data.

And Italy? Italy, to be honest, had been the first to move on this ground, approving already during the 2018 Budget Law, its own web tax, which however then remained only on paper due to the lack of implementing decrees. With the 2019 Budget Law, a new solution was then put forward – which should have materialised by April 30, 2019, but then did not see the light of day. Finally, the Budget Law 2020 (Law No. 160/2019) further amended the Italian tax on digital services. Compared to the previous version, with the new provision certain digital services not subject to taxation have been specified, certain characteristics relating to the realisation of the taxable event and the revenue subject to taxation have been better identified, and new accounting obligations have been introduced. The web tax has, moreover, already come into force as of 01/01/2020 (although the implementation modalities are still awaited). However, the national web tax itself will be abolished when any international agreements on the taxation of the digital economy come into force.

The tax is to be charged on revenues obtained through the provision of specific services rendered through a digital interface, namely: the delivery of targeted advertising to users of the interface; the provision of a multilateral digital interface enabling users to interact with each other, including for the purpose of facilitating the direct delivery of goods and services; and the transmission of data collected from users, generated through the use of the digital interface. The tax will apply when the user of a taxable service is located – through the IP address or other geolocation system – in the territory of the State.

In conclusion, some, brief, reflections. It is clear that the issue is not only a tax policy issue, but has real geopolitical repercussions. The US, both at the level of government and of the major American multinational corporations, has consistently represented its opposition to the introduction of a unilateral measure by the various European states on the taxation of digital companies. The US has strongly opposed justifying any unilateral measure.

The language adopted in the 2018 Interim Report of the Task Force on Digital Economy broadly reflects the US position («[…] there is no consensus on either the merit or need for interim measures with a number of countries opposed to such measures on the basis that they give rise to risks and adverse consequences irrespective of their design»), although the Report also identifies key features that states should take into account if they nevertheless intend to proceed with the adoption of temporary measures. The American Chamber of Commerce in Italy has also always expressed its position against the introduction of such a tax, not only because only an internationally agreed solution could (in its opinion) be suitable to meet the challenges posed by the digitalisation of the economy, but also because: the tax would affect gross revenues rather than profits; there would be doubts in terms of compatibility with the VAT directives and treaties against double taxation; it could be considered a duty against US companies.

The American approach is therefore to postpone the application of a web tax until a global agreement is reached at OECD level. And if this does not happen (which is very likely, at least in the short/medium term), retaliation in terms of customs policy has been (not even veiledly) threatened. Who knows whether now, with the change of government in the White House, that line will change. Certainly, however, the opposition of the multinationals will not change. The year 2021, perhaps also thanks to the ‘hunger’ for resources from Covid, could however finally be the year of the turning point.