Users as digital assets: highlights from a tax perspective

As a result, tax authorities acknowledge that the current rules for taxing multinational enterprise with a high scale of digitalisation is obsolete and have instead focused on introducing new principles to ensure that digital economies are paying the correct share of tax. 

The consequence? A number of significant developments on the tax side are occurring around the globe, where the focus has shifted from the localisation of an enterprise to the presence of users. Therefore, users are to be taken into account as important assets for enterprises, capable of driving and changing the taxation approach of various transactions. 

Our thoughts on the changing landscape, including the implications on corporate transactions in the following areas:

1. new tax approach at global level – OECD Including Framework on BEPS and Digital Service Tax, 
   
   
2. transfer of data as digital asset - qualification of the transaction for tax purposes, and
   
   
3. Re-evaluating assets (even if not recorded in the financial statements for civil and tax purposes),

 are outlined below.

1. New tax approach at global level – OECD Including Framework on BEPS and Digital Service Tax 

At a global level, it has been acknowledged both that the allocation of taxing rights with respect to business profits should no longer  be driven by the physical presence of an entity in a certain territory, and also that tax authorities should adopt an aggressive approach with respect to highly digitalised business. 

The new approach on which the taxing rights will be based aims to give relevance to market jurisdictions and, therefore, to define a way to tax the revenues based on the place where users are located.

The OECD has started a long journey to agree and proceed with significant changes at global level, through the work of the OECD /G20 Inclusive Framework aimed at adopting a reform of the international tax system to address the tax challenges arising from the digitalisation of the global economy and prevent single states from introducing unilateral measures that can create complexity for multinational companies and give rise to double taxation. 

The reform currently under discussion is focused on  new tax rules that will initially affect Automated Digital Services (ADS) and Consumer Facing Businesses (CFB), i.e. those businesses  that are able to have significant interactions with customers and users in a market jurisdiction.

Waiting for the conclusions of the consensus at OECD level, however, different states have started to introduce a digital service tax (DST) in order to be able to tax all entrepreneurs, whether individual or companies, which can be either resident in certain countries (or abroad) and which meet certain thresholds in terms of global and local turnover. France and Italy have already introduced, and are collecting monies from, their DSTs. 

DST covers transactions deriving from advertising services, intermediation and marketplace and, in certain countries like Italy, data transmission services. An overview of the progress of implementation of DST by EU member states can be found here.

As a result, in some countries DST applies when a certain transaction has the scope of transferring data of third parties for a consideration. The third-party data includes the user's personal information, such as habits, spending, location, environment, and use of services, hobbies, or interests. As the taxable service concerns only the transmission of data obtained by the digital interface for a consideration, the, e.g: (a) collection of data or use of data for internal company purposes, (b) sharing of data collected by a company with other companies in the group or other subjects free of charge, are both excluded from DST.

It is, therefore, typical that the transaction subject to taxation is the transfer of all the information regarding the users, which become a relevant asset for accompany enterprise. 

A risk of double taxation, then, may also arise. Indeed, the transfer for a consideration of the data could give rise to taxation not only in the country where the enterprise transferring the data is located, but also in the country where users are located, i.e. the market country.

For this reason, the identification of a solution at OECD level is undoubtedly key in solving international tax issues in the digital age. 

2. Transfer of data as digital asset - qualification of the transaction for tax purposes 

Any transaction having as its object the transfer of data and information of third parties, which is already commonplace, must also be analysed for indirect tax purposes. 

In particular, it is important to understand whether such transfer would be treated as a transfer of ongoing business (which is normally subject to Registry Tax) or as a transfer of asset, which is subject to VAT. 

The approach of tax authorities may be different, but the better view is that the indications deriving from decisions of the ECJ should be followed. In relation to the transfer of a data base with information regarding users in particular, the qualification as on going concern or single asset should be based on the circumstance of whether the data and information transferred may be considered as having an independent potential of generating revenues or not^[1].  

Italian tax authorities, for example, have recently been asked to take a  position on whether the transfer of a “member list”, i.e. a list including the names of: (a) users, i.e. persons who are only registered on the website, (b) customers i.e. the users who have completed a purchase), and (c) invited users, i.e. the persons among relatives and friends who are invited to visit the website, could qualify as a transfer of going concern or of a single asset. Italian Tax Authorities, having reviewed the facts and the agreements in place as well as the use that was done of the member list in the context of the business activity, concluded that such member list should be considered as a commercial know-how which was not independently suitable to allow the beginning or continuation of a business activity. As a result, the transaction should qualify as transfer of a single asset and should be subject to VAT^[2].  

The increasing interest of both taxpayers and tax authorities on this topic and the recurring questions raised are a sign that the utmost attention must be given when the transfer of data regarding users and/or customers is made among different enterprises in order to identify the correct tax treatment and avoid the application of penalties by local tax authorities in case of aggressive enforcement approach at the time of investigation. Consideration should also be given if the transfer occurs among subjects based in different jurisdiction, leading to the analysis whether an exit tax is also payable. 

This is particularly important in the digitalized world, i.e. when the data transfer referred to are digital assets that may represent significant value for an organisation and could be the essential asset for the run of a certain business activity.  

3. Re-evaluating assets (even if not recorded in the financial statements for civil and tax purposes)

With respect to  intangible assets which have been developed by an enterprise but not recorded on financial statements as fixed assets, discussion is likely to take place in different countries as to whether they could, and should, be registered as such after having been provided a fair market value. 

The issue has been recently discussed in Italy, for example, since domestic tax legislation provided the possibility for organisations to revaluate intangible assets and apply a 3% substitute tax on the step-up value, instead of the regular corporate income tax^[3].  

Particular focus has been given to the know-how, i.e. the set of "company information and technical-industrial experiences, including commercial ones, subject to the legitimate control of the holder".

If know-how is developed internally, especially for a digital organisation, this raises the possibility that their financial statements may have such intangible assets albeit not as a very important component (even where it is one of great economic value for  the organisation).

After a prolonged debate, the Central Directorate for Large Taxpayers of the Revenue Agency has admitted it is possible, under certain conditions, to record in the financial statements the value of intangible assets which have not been purchased externally by the enterprise, including the know-how . In particular, the Revenue Agency concluded that "the know-how developed by the Company may also be stepped-up, provided that it is still legally protected at the closing date of the financial statements in which the revaluation is carried out, even if the relative costs, although capitalized in the balance sheet, have been charged entirely to the profit and loss account" (see Ruling no. 956-343/2021 of 8 April 2021).

For this purpose, an appraisal will be necessary to identify the value of the intangible asset.

[1] As provided by the Court of Justice in analysing a case of “customer package” transfer in the decisions n. C-17/18, C-497/01, C-444/10.

[2] See Ruling n. 609 of December 18, 2020.

[3] See art. 110 of Law Decree no. 104/2020.