(Corrects first, ninth paragraphs to say law will require Italian companies to buy Internet ads from local companies.)
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.
In July, at the request of the Group of 20 nations, the Organization for Economic Cooperation and Development proposed a blueprint to fight strategies used by companies such as Google Inc. (GOOG), Apple Inc. and Yahoo! Inc. (YHOO) to shift taxable profits into havens. Italy is the first major European government to pass legislation to combat the problem of moving corporate taxable earnings into havens, which costs Europe and the U.S. over $100 billion a year, since the OECD proposal.
Italy’s measure is “fairly obviously contrary to EU law,” said Sol Picciotto, an emeritus professor of law at Lancaster University in the U.K. Still, he said the law “will put further pressure on the OECD to sort it out.” The OECD isn’t scheduled to complete its plan until the end of 2015.
Google, Starbucks Corp. (SBUX) and Amazon.com Inc. have been criticized for strategies that shift billions of dollars of profits offshore. Google, for example, says that it sells nearly all its advertising in Europe from an Irish unit, leaving little taxable profits in the countries where its customers are based. That unit in turn pays royalties to a second Irish subsidiary, which says its headquarters are in Bermuda.
Google last year moved nearly $12 billion to the Bermuda unit, the majority of its worldwide income, cutting more than $2 billion off its global income tax bill. Google’s Italian unit last year reported total income taxes of just 1.8 million euros, corporate filings show.
Italy’s new law is “the wrong answer to the right problem,” said Carlo Alberto Carnevale-Maffe, a professor of strategy at Bocconi University’s School of Management in Milan. “It’s driven by finding excuses for the Italian government’s fiscal laziness and fiscal profligacy, and needing new tax revenues. And the second thing is to protect the interest of traditional publishers.”
An earlier version of the Italian measure also applied to goods purchased online. It was scaled back after Matteo Renzi, the new leader of Prime Minister Enrico Letta’s Democratic party, said it should be scrapped.
The law will require advertisers to purchase web ads from an Italian company, rather than from one in a more tax-favorable jurisdiction. This restriction could run afoul of EU laws giving European companies freedom to buy and sell across borders regardless of where the corporation is established.
“At first glance, we would have doubts about the amendment as it now stands, as it appears to go against the fundamental freedoms and principles of non-discrimination,” said Emer Traynor, a spokeswoman for the European Commission on tax issues. “We’d encourage the Italian government to ensure any new legislative measures they adopt are fully compatible with EU law.”
Letta said Dec. 20 that his government will coordinate with the European Union on the Italian tax measure.