(SEE THE 2014 UPDATE BELOW)

In December 2013 Italy passed a controversial law provision whereby online advertising services directed to the Italian market shall be subject to the condition that the provider is registered with Italian VAT. Technically speaking, the obligation concerned the Italian citizens and businesses, which are obliged to buy online advertising services only from service providers holding an Italian VAT registration number. 

The initiative aimed at addressing the hot debate of taxation of Internet companies in Europe. Although concrete figures should be assessed cautiously, there is a wide perception that big Internet players are taking benefit of the opportunities opened by asymmetries and fragmentation of national taxation regimes in Europe (and in the world) in order to considerably reduce their VAT and tax income duties. To make few examples, the European operations of Google are located in Ireland, while Skype has headquarters in Luxembourg, and in both cases the selection of the location was clearly driven by tax optimization purposes. It should be noted, however, that any kind of companies, not only Internet OTT, are used to exploit the bugs offered by European dis-harmonization. The list of European companies established in Luxembourg, Ireland or in the Netherlands is almost unlimited, and the location decision is driven not only by favorable tax treatment, but also by other factors (which still escape to European harmonization) such as: lighter financial security regulation, banking discretion, flexible corporate costs and formalities, cheaper social contributions. A well-known case is the one of Ryan Air, the low-vost Dublin airline company who became an European giant while continuing to be subject to Irish taxation and social schemes.

Thus, the problem exists and in the case of Internet company may be particularly important because the level of income tax paid by such operators rarely reflect their profits and turnover in many European countries. Even if this situation is the result of a legitimate exploitation of puzzled tax regimes, a reaction from politicians is unavoidable at the end. Therefore, the taxation of digital company became part of the European Council in Brussels while various countries, in particular France, United Kingdom and Germany, have been considering possible solutions.

The case of Italy is a bit peculiar. Despite the fact that the Italian government wanted to stay cautious on the subject, the proposal obliging Internet companies to somehow pay taxes in Italy was brought ahead on the initiative of some members of the Parliament. The approved draft focused on advertising rather than Internet services in general, therefore it could be considered a “spot tax” rather than a “web tax”, as correctly mentioned by author Guido Scorza.

It is however unlikely that a provision such that will ever became effective, because of various reasons.

Firstly, because of the EU constraints: the VAT registration requirement is clearly against EU fundamental rules in the matter of free circulation of services and free establishment and the European institutions will rapidly take action when the norm will be finally approved. In addition, because of the potential impact on trade, the draft should have been notified to the European Commission pursuant to EC Directive 98/34, however it was not. The register of the notifications held by the Industry Directorate has currently no news of the Italian bill.  Failure of due notification involves radical nullity of the provision. The Italian government should maintain, in this case, that this is a pure tax provision and therefore it escapes the ambit of application of Directive 98/34, however this is debatable. NB: the notification should occur before entry into force and during notification the validity of the provision is suspended for 3 months.  

Then , there is a problem of actual enforcement. Transactions between Italian citizens and Internet companies deprived of Italian VAT registration will continue to occur. The Internet companies, established outside Italy, will lawfully refuse to adopt an Italian VAT registration number but they will continue to make business with whoever is contacting them from Italy. Applying sanctions upon Italian citizens and business would be very unpopular.

Finally, the Italian government will likely withdrew such a measure when the exact calculation about the taxable revenue will be done. The figures will likely be much lower than expected, also because of the application of double imposition treaties, and also because most of the supporters of the web-tax have been doing calculations on the basis of the theoretical profits of the Internet companies, whereas they should consider the revenue basis deprived of costs.

The debate, however, remains open, and it could be solved only when European countries will decide to tackle the problem at the roots: the lack of harmonization of European tax regimes, successfully exploited by US companies (but not only by them).

UPDATE February 28, 2014: while the Italian Parliament finally approved the web-tax on December 23, 2013, as a part of a general financial bill (so-called “Legge di stabilità”: Law n. 147 of December 27, 2013), the effects of that provision were immediately suspended until July 1st, 2014 by the government with an ad hoc decree (Law Decree n. 151 of December 30, 2013, art.1.1). The reasons for suspending is that the government wants to check whether the provision is compatible or not with EU law. On February 28, the new Italian premier, Matteo Renzi, announced via twitter that the provision is definitively abrogated, and that the question of taxation of OTT in Italy will be discussed an regulated within a “European framework”.