Under the OECD (organization of economic cooperation and development), a corporate entity is subject to tax in a jurisdiction if it has a permanent establishment (PE) in that country.

Due to the explosion in the online and digital economy, tax authorities are looking to extend the definition of a PE. A company has a PE in an overseas country if it has a dependent agent. As a result, companies such as Netflix have ensured that they do not own the servers in countries necessary for providing their streaming. Similarly, a website was defined as a combination of software and electronic data and was specifically excluded from the PE definition.

In addition, the original definition did not include reference to servers (necessary for hosting websites) as this equipment was necessary for the collection and transmission of data and information related to the sale of goods and services and excluded as a PE.

The Italian tax authorities have changed the definition of the PE and instead interpreted it as ‘a significant and continuous economic presence’. This legislation specifically targeted digital businesses and instead of looking for a ‘physical presence ‘in the country, it focuses on the end result enjoyed by consumers.

To make matters worse, they have backdated the legislation to 1st January 2018 and are raising assessments for the unpaid tax, interest, and penalties to digital businesses that generate income in Italy.

The public prosecutor in Italy has alleged that the sole presence of an advanced technological infrastructure on Italian territory, used exclusively by Netflix could be considered to be a PE despite the fact that it was owned by third parties. This is because the ‘content delivery network’ was core to Netflix’s business operations and not ancillary to its business activity.

Despite Netflix not having any of its own employees in Italy it agreed to a settlement of $68 million for 2016 up to 2019. This will likely form a precedent and lead to tax liabilities for other businesses providing digital content to Italian customers.

In terms of risk management, the Italian tax authorities are requesting that other digital businesses volunteer information to them instead of risking a tax audit. To avoid discouraging new investment, any large investors investing a minimum of 20 million Euros with long-term employment benefits may be able to seek favorable terms.

If you are planning on doing Taxation or Advanced Tax in September 2022, I recommend you purchase Tax Condensed or Advanced Tax Condensed which will allow you to learn the technical rules If you then practice the key questions I recommend, you too will be ready for anything the examiner throws at you.

 These books will really make a difference. You can purchase them using the links below:

#netflix #permanentestablishment #digitalbusiness #neildacosta