The recently-introduced Italian “Web Tax”

A number of recent changes are affecting the Italian business model of companies engaged in on-line advertising. As a consequence, companies operating in that field may need to review their transfer pricing model, possibly taking into consideration the possibility to apply for an APA.

Transfer pricing

At the end of 2013 a number of amendments were made to Italian tax law, also affecting transfer pricing. In response to the international debate on taxation of the digital economy, the Finance Act for fiscal year 2014 – law no. 147/2013, effective from 1 January 2014 – introduced new rules concerning the determination of the arm’s length value of intercompany transactions for companies that operate in on-line advertising or provide ancillary services.

In particular, article 1, paragraphs 177-178 of the law introduced a limitation in the available profit level indicators that can be used in calculating transfer prices for multinational enterprises that operate in the on-line advertising sector. For such companies the use of profit level indicators based on cost is no longer permitted. Companies can only use cost-based indicators if they come to an Advanced Pricing Agreement (the so-called International standard ruling) with the tax authorities. However this new provision only concerns transfer pricing methodology and has no effect on any permanent establishment considerations.

VAT

To support the tax authority in monitoring such transactions, changes have also been made in relation to VAT and payment methods. The new dispositions relate to purchases of on-line advertising services, sponsored on-line links and on-line advertising spaces appearing in the web pages of search engines that can be visualized in Italy, either on-line or on mobile devices.

In particular article 1, paragraph 33 of the 2014 Finance Act establishes that such advertising services can only be purchased from entities holding an Italian VAT registration number. This last provision will enter into force from 1 July 2014, unless amendments or further delays take place in the meantime.

The payment of these services must be made by the client via bank or postal wire transfer or any other means of payment that permit full traceability of the transactions, expressly indicating  the VAT identification number of the recipient of the services.