The Italian web-tax pasticcio

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(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”. 

Europe suggests more restrictions for web-blocking

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The Attorney General of the Court of Justice Cruz Villalón has rendered an opinion regarding the compatibility of web-blocking measures with EU law (here the press release). This opinion is expected to warm-up the never-ending debate how to tackle piracy in the internet. In fact, in several European countries web-blocking is imposed on ISPs (Internet access providers) as an ordinary measure to prevent illicit activities by Internet users in different areas, such as online piracy, paedoporno material, counterfeiting, consumer protection, ecc.

While various European decisions have already considered the matter of online copyright enforcement (in particular, the famous SABAM cases originating from Belgium), this is the first time the ECJ is dealing specifically with web-blocking.

It is arguable whether the opinion of the Attorney General may be seen as a step in favor of copyright holders or, by contrast, in favor ISP/libertarians/consumers. Such evaluation may vary because web-blocking practices throughout UE vary considerably from country to country and therefore the views of the Attorney General, should they be confirmed by the ECJ, may have different implications.

On one side, rights-holders will welcome the fact that opinion recognizes that the web-blocking instrument is not per se incompatible with European law. On the other side, however, the opinion lists series of restrictions and guarantees suggesting that courts or authorities should be very cautious when considering the practical implementation of this measure. In other words, the solution indicated by the Attorney General will create concerns in those countries (for instance Germany and Austria) were web-blocking is not normally used, but it will have the opposite effect in countries  where web-blocking is common practice (such as Italy and UK). In the latter countries the current web-blocking practice and jurisprudence should be likely revised.

The merits of the case concerned a web-blocking measure ordered by an Austrian judge upon local ISPs (including the cable operator UPC) in order to prevent access to a portal (kino.to) accused to distribute content in violation of copyright law. The Austrian judge imposed a combination of DNS and IP addresses blocks, while recognizing that such measures could be easily circumvented by users. UPC challenged the blocking measure and the case was brought to the attention of the European court to verify whether the Austrian legislation, allowing a national courts to block access to website as a measure to prevent infringement of copyright, was compatible with European law (namely the Copyright Directive 2001/29/EC and the Electronic Commerce Directive 2003/31/EC).

Firstly, the European Attorney is suggesting to the ECJ that access providers should be considered as “intermediaries” and, as such, could be subject to the relevant legislation in the matter of fights against online piracy. Secondly, he believes that, under certain conditions, European law allows – but it does not prescribe – national courts to force ISPs to block access to websites to prevent online piracy. However, the practical recourse to this measure should be subject to various caveat and therefore the national judge should take care of the following:

–       the blocking measure must be balanced and take into account primary interests of other parties, such as fundamental rights, freedom of expressions, privacy, non-monitoring obligation, freedom of business ecc, which may even restrict and limit the actual enforcement of copyright law. As a consequence of that, national judges may even come to the  conclusion that, in the concrete circumstances, web-blocking is an excessive and inadequate measure. The respect of privacy, in this context, will become particularly critical. EDPS (the European Data Protection Supervisor) has recently noted that network management practices, including blocking measures, should be balanced and proportionate also with regard to privacy; one should even wonder whether a blocking measure based on DPI (deep packet inspection) may be tolerated;

–       the blocking measure must be specific and it cannot consist in the obligation to generically prevent access to a certain website. This is particularly relevant in countries like Italy where judges are used to impose web-blocking measures as a kind of “result obligation”, i.e. ISPs are obliged to prevent access to the locked website at all costs and conditions;

–       the measure must be proportionate, i.e. should not prescribe more than what is necessary to achieve a certain objective. This is particularly relevant for cases where blocking of a website would impede access to both licit an illicit content (frequently with social networks and platforms);

–        the blocking measure must be imposed by a court or should be subject to strict judicial review.

As stated above, the conditions envisaged by the Attorney General are quite strict and, if approved by the European court, will force various members States to review their tolerance to web-blocking. Nevertheless, some parts of the conclusion seem to help the recourse to web-blocking:

– even if web-blocking may be easily circumvented, such measure remains adequate in the eyes of the Attorney General. It is interesting to whether this evaluation will be finally retained by the European court;

– web-blocking may be imposed even if involve some costs upon ISPs. However, since the ECJ in previous cases (Sabam cases) have banned costly measures imposed on operators to protect third parties’ rights, it will be interesting to see how the final decision will elaborate this question.

The final decision of the ECJ is expected by the end of 2014.

The eyes of Brussels over the online copyright reform in Italy

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The European Commission is soon to deliver an opinion about a proposal of Italian regulator AGCOM regarding the enforcement of copyright rules in the Internet. The proposed measures were notified to Brussels in September and the standstill period is due to expire on December 3, 2013. However, the content and the tenor of the Commission’s opinion will be decisive for the success of the proposed reform. Fact is, a similar legislative initiative aborted in 2011 following a very negative opinion of the Commission’s offices.

If the initiative of AGCOM goes through, it will create an important precedent in Europe, since the enforcement of copyright in the Internet is normally carried out by courts, not by administrations.

ISPs, consumers, libertarians and experts have vigourosly contested AGCOM’s proposal because it could affect freedom of speech as well as business rights. In particular, they challenge the modality whereby the Italian regulator would supervise and tackle copyright infringements in the Internet by way of orders of removal and blocking. By contrast, rightshodlers associations as well as the Italian Collecting Society SIAE have supported the initiative.

Remarkably, the matter has overcome the natural boundaries of a stakeholders debate and has become a subject for discussion at very high institutional levels. Various members of the Italian Parliament (including the president of the Chamber Laura Boldrini) have questioned the competence of AGCOM in regulating this matter and observed that only the legislator, not the regulator, should fix limits and guarantees of civil freedoms. The Foreign Affairs Minister Emma Bonino has also criticized the regulator’s initiative. Lastly, a mediatic bomb came from Frank La Rue, UN special rapporteur for protection and promotion of freedom of opinion and expression. The UN officers, during a series of meeting in Italy in mid-November, declared in a report the following:

The issue of intellectual property in the context of freedom of expression has been raised in more than one meetiing in the course of my visit. All regulations governing constitutional rights, especially if they relate to freedom of expression, should be approved by the Parliament. As an independent authority, the NRA has the sole responsibility to apply the provisions in force provided by the law. It is only for this reason that the NRA has the power to adopt their own administrative regulations.

One reason for concern is the role of AGCOM in the definition of sanctions in intellectual property, because this is a prerogative of the Parliament. Even if the NRA can apply by virtue of law certain restrictions to online content, the removal of an online content should however be established by the court in each case

In the following meeting with journalist, Mr. La Rue expressly stated that the reform envisaged by AGCOM may be against the Italian Constitutional Chart.

The proposal of AGCOM has been notified to the European Commission in compliance with Directive 98/34.

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Here a summary of the controversial AGCOM draft decision:

The draft regulation numbers 19 Articles, divided into five Chapters, and two Annexes.

Chapter I gives the definitions used (art. 1) and the regulation’s purpose and scope of application (art. 2). It is specified that the new rules will not apply to downloaders and peer-to-peer programmes.

Chapter II lists the measures (art. 3) taken by the Authority to encourage the development, promotion and awareness of digital works, and establishes a committee (art. 4) to develop and protect the legal offer of digital works, under which scope possible self-regulatory solutions may be discussed with the aim to support the development of digital works.

Chapter III regulates the procedure aimed at ascertaining and eliminating breaches of copyright or connected rights occurring on electronic communication networks in compliance with the national decree implementing Directive 70/2003/EC on electronic commerce, namely Legislative Decree of April 9, 2003 n. 70.

The envisaged procedure works in two stages:

–       firstly, if a self-regulatory procedure of notice & take down has been duly put in place by the web site manager (i.e. it has been previously notified to the Authority), the claimant shall notify the latter asking for the removal of the illicit content following that procedure (art. 6);

–       in the absence of a self-regulatory procedure, or when the illicit content is not removed in any case, then the claimant may notify the Authority about the infringement (art. 7).

The start of the process with the Authority is notified to the claimant, the uploader and the website manager (if traceable), and to service providers specifically identified in the claim (art. 8). The parties may file counterclaims. In case the recipient spontaneously makes, within 3 days from the communication, the necessary adjustments, the proceeding can be dismissed.

The proceeding with the Authority may last up to 45 days. If, upon completion of the proceedings, the Authority ascertains that a breach has been effectively committed, it shall order the concerned service provider to either selectively remove the illicit content or to disable access to it (i.e. web-blocking). While taking the decision, the Authority shall take into account the principles of graduality and proportionality, the gravity of the violation as well as the localisation of the server (art. 9). Compliance to the Authority’s decision must be ensured within 3 days.

A shorten procedure is envisaged by the draft regulation for massive violations (art. 10).

Chapter IV (arts 11-15) provides for similar procedures aimed at ascertaining and eliminating breaches of copyright or connected rights with regard to audiovisual and radio programmes pursuant to Directive 44/2010/EC on audiovisual media services.

Chapter V contains final provisions and, inter alia, a clause reserving to the Authority the right to amend the regulation.

Annexes 1 and 2 are the “Application Forms” to be compulsory used to notify the Authority respectively in accordance with Art. 7, paragraph 2 (digital works) and Art. 12, paragraph 1 (audiovisual or radio programmes).

The European Parliament breaks to pieces the Single Market reform of Commissioner Kroes

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Today the European Parliament published the report of the ITRE committee regarding the Connected Continent regulation proposed by Neelie Kroes, commissioner for the Digital Agenda, on September 11, 2013. The report constitutes a kind of counter-proposal to the Kroes’ attempt to substantially review the current framework for electronic communications. The result is not very good for the Commission: the Parliament intends to delete most of the proposals or to postpone them to an ad hoc reform to take place after the 2014 elections – in such a case, however,  a new proposal could not take place before mid-2016, which means approval not before 2018. In other words, it is clear that the European Parliament, despite the commitment to  vote on a first reading in April 2014, does not intend to bring the Commission’s proposal to a real conclusion under the current legislature. Nevertheless, the European Parliament is already defining the starting-point for the future review of the European Directives:

The Commission shall perform a comprehensive evaluation and review of the entire regulatory framework for electronic communications, and shall submit a report with appropriate proposals to the European Parliament and the Council by 30 June 2016 in order to allow sufficient time for the legislator to analyse and debate the proposals properly”.

Amongst the several significant changes to the Commission’s proposal brought by the European parliament, I would highlight the following:

– Dramatic reform of Kroes’ roaming proposal: instead of a system of alliences and voluntary agreement to create a kind of “roam like at home”, the Parliament intends to definitively delete roaming surcharges by June 2016;

– Deletion of the single authorisation regime & replacing it by a standardised template notification to BEREC;

– Deletion of the Commission’s veto powers – NRAs will be more than happy;

– Deletion of most controversial access rules, such as Recital 38 (on the competitiveness of the retail market in the presence of two fixed NGA networks) and the entire section on the European virtual access products (deleting both the harmonised access products and Article 18 and referring this issue back to the Commission for the Framework review);

–          Spectrum: new provisions on spectrum trading & minimum duration of all spectrum licences to be 30 years or longer (permitting also indefinite); this is impressive, by the way.

The rapporteur of the ITRE Committee, Pilar del Castillo, member of the PPE and with a long experience in the telecom sector, commented the report with a press release (in Spanish).

The committee IMCO (consumers) and CULT (culture) have rendered their opinion on the Connected Continent proposal. They are also quite critical, especially the IMCO’s one regarding the NN provisions (my next post will be about this subject). The CULT opinion is here.

Broadband deployment in Europe: better than expected

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Many have worried that the European Union is falling catastrophically behind a number of competitors (including Japan, South Korea, and the United States) in terms of deployment and adoption of broadband and high-speed access infrastructures. In July 2012 this assumption has lead in the European Commission, deeply lobbied by ETNO (the trade-association representing the incumbents such as Deutsche Telekom, Orange, Telefonica ecc.) to deregulate the Regulatory Framework of 2009 . At the end, after overwhelming critics by governments, national regulators and stakeholders as well as lots of internal controversies, a simple recommendation was adopted in September 2013.

The same presumption that Europe may fall behind the rest of the world urged Commissioner Kroes to launch the so-called Single Market Regulation, de facto another implicit review of the 2009 Regulatory Framework. Also this initiative is encountering oppositions and reservations at various levels (governments, regulators and stakeholders) which will likely extend the time of discussion and approval (if any).

This catastrophic view derives also from the presumption that the targets of the European Digital Agenda (universal coverage of basic broadband by 2013, and universal coverage of 30 Mbps and 50% take-up of 100 Mbps broadband by 2020) could not be achieved.

Now: a study commissioned by the European Parliament (on the initiative of the dynamic policy advisory team lead by Fabrizio Porrino and Mariusz Maciejewski) suggests that the above concerns were somewhat over-blown and that the picture is not as dark as Commissioner Kroes fears. Since the European Parliament will have to intervene on the Single Market Regulation proposal, no doubt that this study and the data herein reported will shake a debate.

With regard to basic fixed broadband, European deployment is close to universal (with however some gaps in newer Member States in the east). According to the most recent data (ITU), the top-ten countries are all located in Europe (except South Korea). The only non-European entrants into the top twenty rankings are Canada (12°), Hong Kong (China) (16°) and the US (20°). In terms of access speeds European citizens enjoy better performances than their US counterparts with both xDSL Internet (36% faster than in the US) and other technologies (such as cable and FTTx). In terms of prices, according to OECD, fixed broadband tariff ranges in the three largest European markets (Germany, France and UK) are lower than in the US.

In other words, Europe is doing quite well regarding basic broadband, although discrepancies between Members States are not negligeable.

Also in the mobile broadband the situation is not so dark, since the increase rate of the European market is spectacular. However, actual deployment and take-up of fast 4G mobile data services in Europe is still behind those in Japan, South Korea, and the US. Remarkably, the European Digital Agenda does not specifically address mobile broadband in terms of objectives and targets to be achieved.

The situation is more intrigued for fibre-based ultra-fast broadband and LTE, where a deficit effectively occurs. However, according to the study this deficit must be seen in a context: “Bandwidth is not just a question of the nominal speed of the link. Actual bandwidth available to customers in Japan and South Korea is far less than the speed of the access link. Available bandwidth is actually lower in the US than in many EU Member States”. Fact is, the data reported in the study show that the correspondence between broadband access speeds, actual speed delivered, and data usage reflects a complex scenario. For instance, data usage in Japan is actually less than that in the UK, while data usage in the US is very high (largely due to video), even though delivered bandwidth is actually lower than in a number of European countries.

The study explores in depth numerous theories put forward by commercial parties and experts in support of one or another policy measures in the matter of broadband deployment and make some final recommendations:

a) there is scope for cautious optimism on Europe’s progress on broadband against other countries. Evolutionary rather than revolutionary approaches should suffice in maintaining Europe’s competitiveness. There is no need for a radical overhaul of European policy.

b) The existing European targets for universal coverage are appropriate, but would benefit from further clarification and refinement. Upload speeds, the ability to use real-time applications, and the ability to access applications of the user’s choice deserve attention.

c) Policymakers should also consider setting specific targets in relation specifically to mobile broadband in order to foster the availability of services at any time and from anywhere.

d) A policy framework that is technologically neutral to the maximum feasible degree should continue to be preferred.

Berec shakes the Commission again and rules in favour of cheaper prices for telecoms

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Berec, the European agency grouping the national telecom regulators, has rejected the serious doubts expressed by the European Commission vis-à-vis the decision of Italian regulator AGCOM to decrease the price of access to the copper network (ULL and bistream) of the incumbent Telecom Italia.

It is a second time in the recent period that Berec takes a strong dissenting opinion against the European Commission on a fundamental matter like network access: few week ago a similar negative position had been expressed also with regard to a similar case in Austria, where the national regulator, likewise AGCOM in Italy, had decided to lower network prices.

The divergences of opinion between the 2 authorities regarding the modality and the criteria to fix prices for network access is becoming a fundamental matter of policy debate. The national regulators have openly contested the scope of Commissioner Kroes, responsible for the Digital Agenda, to “centralize” such decisions and impose the price from Brussels (although within a specific  band, i.e. 8/10 Euro/m in the case of ULL) . Commissioner Kroes tried to formalize this major step into a recommendation (announced since July 2012) which would have radically altered the 2009 Framework under various aspects (discrimination remedies; copper prices; NGA development). However, the reform found strong oppositions from the side of regulators and alternative operators, and also some cold approach by governments. Kroes’ recommendation was been finally approved on September 11, 2013, however the final text has been radically watered down with respect to the initial proposal. Fact is, the pretention to impose mandatory prices, and in general to restrict the discretionary powers of regulators, has been finally dismissed.

As regards the Italian case: regulator AGCOM will be now sufficiently confident to defend its decision and eventually to negotiate an amicable solution with the Commission from a strength position. In any case, art. 7a of the Framework Directive (Directive 2002/21/EC) empowers national regulators to disregard the position of the Commission, provided that a reasoned justification is provided. This happened recently twice with German regulator Bnetz, which decided not to obey the Commission’s instruction in a couple of cases of termination prices.

The divergences between Berec and European Commission on specific national cases like Italy and Austria run in parallel with another fundamental matter of conflict, i.e. the Single Market proposal, which national regulators have criticized with a surprising strong statement few days after the announcement by Commissioner Kroes, on September 11, 2013.

Acta, Robocop and copyright: when imagination goes beyond reality

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We had almost forgotten about ACTA, however the copyright industry has succeeded in the (non-easy) job to rewarm this debate and shake new discussions. Apparently, some copyright holders (MGM) requested Youtube to remove an hilarious video, based on the Robocop movie, making fun of the ACTA agreement. The video was published for the first time in 2010, became very popular for some days, then vanished, as most things in the Internet. By contrast, the Treaty spotted by the video, i.e. ACTA – the (initially secret) international agreement on counterfeiting – became a serious affair because it was reported to materially infringe human rights and digital freedoms. After long debates and controversies, even within the European Commission, the Treaty was abandoned, especially because of the rejection by the European Parliament in July 2012.

Now, the current decision of the rights holders to pretend the removal the this video is surprising and suggests that some initiatives of the copyright industry are brought by machines rather than by humans. Paradoxically, this is exactly what the parody of the movie pretended to demonstrate. In the truth, it is not clear whether the removal has been explicitly requested by the copyright holders or it is a result of the application of the ID Content filtering software, a technology permitting Youtube to automatically identify and remove content protected by IP. In both thew case, the analysis is alarming. Fact is, one could question whether the removed video was really infringing the the IP rights of MGM, since ist was clearly a parody, an instrument to express a political view, without economic scope. Once again, the borders between IPR enforcement in the web and censorship are blurring. 

Here the link to the hilarious video which is still available on the website of La Quadrature du Net. Now, for a matter of mechanical coherency the legal department machines of MGM  should bring an action against La Quadrature in order to obtain the final removal of the video. However, there is still possibility that the few humans left in the copyright industry may think about, send to the machines the signal laissez tomber, and desist. Who knows.