15 May An Italian web tax? A potential boomerang effect?
The Italian proposal on a potential web tax might prove to be useless against the tax evasion and damage to the image of the country.
Update of 27.12.18 – An Italian web tax was eventually adopted and you can find the details in this article “Italian digital tax – what it is, how it works and when it applies?“
I already discussed on this blog about the several proposals on an Italian web tax, also known as Google tax. This is an interesting article from my colleague, Christian Montinari, on a new proposal of web tax.
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The difficulty of local taxes to catch digital economies
Among the many dossiers that occupy the government desks and parliamentary committees, one seems ready to take advantage of the current uncertainty around the Italian government. I am talking about the so-called web tax which is not a single tax, but a set of measures to tax in Italy income generated by multinationals of the web.
The digital economy is characterised by the ability of businesses to provide intangible services on the web., thus avoiding both the alarm systems designed by tax law and the indexes of “economic presence” in the territory of the state that allow “to capture” corporate income generated by non Italian resident companies. This concept has a name: stable organisation or permanent establishment.
The new proposal on an Italian web tax
The topic has been the subject of several Italian law proposals. However, the proposal that is currently at the most advanced stage of the approval process provides significant changes to the Italian definition of stable organisation, deviating from the concept agreed at the OECD level.
The bill states that “irrespective of the presence of fixed material instruments” in Italy, there is a “hidden” stable organisation in the country when:
- “Fully dematerialised digital activities” are continuously performed in Italy; and
- The non-resident company demonstrates a significant presence on “the digital circuit” through the conclusion of more than 500 transactions per semester that generate revenues of at least € 1 million in each tax period.
What will happen if the web tax is challenged?
When these requirements are met, the Italian Tax Authority invites the non-resident company to “regularise” its position.
The challenged company has the chance to either prove that the agency is wrong or ask the tax authority to sit at a table to discuss together what should be taxed and how. But, if within the 30 days following the request no “regularisation” is made, the Italian Tax Authority has the power to start taxing the income of the non-resident company (inductively determined, i.e. on the basis of presumptions and regardless of the accounting data).
The concerns raised by the law proposal
The proposal raises a number of concerns though:
1. Can this issue be addressed at the national level?
A problem of such magnitude and complexity cannot be regulated by a single country. As happened with the so called Tobin tax which led to a considerable reduction in the number of stock exchanges carried out in Italy, global solutions need to be identified in response to global problems.
2. When would the law proposal apply?
According to the fundamental principle of the hierarchy of sources, the new Italy definition of hidden stable organisation would not apply when there is an international bilateral treaty with the country of residence of the foreign company which sets out the scope of the definition in line with the OECD principles. Therefore, the Italian definition of hidden stable organisation would prove to be effective in the limited number of cases in which the foreign company is established in a country that which does not have an international treaty with Italy.
3. How can the law proposal be interpreted?
The language of the provision is very broad. For instance when can we speak of a “fully dematerialised digital activity“? What does “presence on digital circuit” really mean?
The fact that the first definition will be addressed in an implementing decree is in breach of the Italian Constitution, according to which primary laws have to define the prerequisite for the applicability of taxes.
The proposal fuels the debate about the problem of updating the concept of a stable organisation with reference to the digital economy, but collides with the difficulties in adopting a country specific approach. At the moment, the risk is that the measure, if approved, will be substantially useless in terms of recovery of new taxes and will just damage the image of Italy.