As Bloomberg reported a week ago:
Italy's Parliament today passed a new measure on web advertising, the so-called “Google tax,” which will require Italian companies to purchase their Internet ads from locally registered companies, instead of from units based in havens such as Ireland, Luxembourg and Bermuda.
The tax has stirred controversy, with some lawyers saying it probably violates European Union laws regarding non-discrimination over commercial activity and could be subject to legal challenges.
It has since been reported that the tax will not commence until July 2014, but I think that's part of the plan for this tax.
It is very hard to see how this tax is legal under EU law as it currently stands. That law quite clearly states that there is freedom to transact across national boundaries within the EU and this new law clearly seeks to restrict that freedom. Italy must know that is illegal, but despite that it has taken action. The question to ask then is why, and with what consequence?
I think the reason why is obvious. What Italy is seeing is that whatever the good intention of the EU's laws on the free movement of capital and trade might be some states - Ireland and Luxembourg being obvious examples, but with the Netherlands and on some occasions the UK also being in the frame - are simply abusing those rules to seek a tax advantage. And the plain fact is that this action on their part is intended to undermine the fair operation of markets, and is doing so.
What Italy is saying is that enough is enough: you can't expect them to play by the rules of open markets (subject to regulation) when a critical regulation on which those markets depends - tax - is open to abuse. And so they have drawn a line in the sand. They've said they cannot afford the losses to Ireland and Luxembourg and are challenging the EU to challenge them - when they know most states in the EU back them.
What will happen? I don't know. What I do know is that this puts more pressure on the OECD to find a solution to this problem - and of course, many of the major EU states are also members of the OECD. The challenge is also there for the EU to respond to.
But what is clear is that this is not a projectionist act: what it really represents is a clear demand for properly regulated competition on which all can compete on a level playing field. That is not available now. And that is what is needed. In that case it is Italy who is taking the pro-business and pro-market stance. And that's why their move is significant, and an issue to follow in 2014.
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Well… if the EU were to let the little Englanders perpetuate the limitations on Romanians and Bulgarians, thus endorsing the idea that there are limits on free movement of labour, they could hardly object to the Italians doing the same with regard to free movement of capital without being accused of blatant hypocrisy…
Given that I was the first person to point out the illegality of this idea, if I might explain just a little more? It’s a VAT move and, as you say, quite clearly illegal under EU law.
But it also doesn’t actually do what is intended. The real aim is to make sure that Google’s advertising is sold through a Google permanent establishment in Italy. Thus the profits from that activity can be taxed in Italy. But insisting that Google sells through an Italian VAT registered organisation does not in fact achieve that. For the double taxation treaty is quite clear that appointing a local sales agent (with, say, an Italian VAT number) does not create a permanent establishment.
Thus the profits would still not be taxable in Italy.
I suspect that you have missed the point – but I do not have sufficient detail to be sure on this occasion
I somehow doubt that they have missed such a glaringly obvious point
I’m a little bit more involved in this. Francesco Boccia, the author of the provision, was actually asked about my Forbes piece where I pointed out that it was illegal under EU law (and yes, I was indeed the first to point out the illegality of it). His answer was just “Oh, Forbes would say that” rather than actually engaging with what we all know is the truth.
The research department of the Chamber of Deputies pointed out that it was illegal too: Boccia took no notice.
Boccia really has not thought this through at all.
Maybe so: the point I made is that this move has political and not tax significance as yet
I entirely agree that it is purely a political move. Not a very good one perhaps: Beppe Grillo has been having great fun with the idea that Boccia is so incompetent as to not understand that it’s illegal and won’t tax Google’s profits anyway.
I’m a bit confused. From what’s been quoted above, the Bloomberg article seems to be saying the Italians are trying to force advertising to be bought from “locally-registered companies”, which I took to mean Italian subsidiaries of, say, Google. In the comments, however, you’re both talking about permanent establishments. My knowledge of international tax is rudimentary at best, but I thought a PE in this context would be an Italian branch of a foreign company.
So which are the Italians trying to restrict this to and, if it’s actually Italian-registered companies, does Tim’s double taxation analysis still hold true?
While we’re at it, how certain should we be that this will breach European law? I don’t doubt that you guys, who clearly know much more about it than I do, are correct, but there’s not a lot to go on for an enthusiastic amateur like myself to understand why. All references to this above are basically “well it’s obvious, innit”, but my (again, very limited) experience of European law is that it frequently produces outcomes that may, on the face of them, appear counter-intuitive. Nobody’s actually said above which directive is likely to be breached, but I assume it’s the Freedom to Provide Services. If so, I gather for a start that that’s aimed at temporary service contracts and that the states have a public interest carve-out. I for one would certainly at least want to hear a bit more analysis before concluding that the Italians’ proposal is “quite clearly illegal”.
Tim says he has read this new law – I have not…if he is right it is very disappointing because the new law will not have closed a loophole of any significance
The breach is a fundamental one built into Maastricht etc which is the right to trade freely across borders – this law would appear to breach it by requiring local purchasing
I’ve not read the whole law, just the specific clauses concerning this. Worth noting that Sol Picciotto is of exactly the same opinion. Clearly in breach of EU law.
I am aware Sol agrees
But you have ignored his other comments, which are wholly consistent with mine
I have to admit I’m still struggling on both my questions. Do either of you know if there’s an English translation of the Italian law online? Do far I’ve been unable to find one. Thanks.
I have not seen one
Sorry