The Italian Parliament just passed a new law requiring Italian companies to purchase web-based advertising solely from companies with a registered Italian VAT number.  This is clearly aimed at large web-advertising companies such as Google, Amazon.com or Apple, that sell web-advertising from subsidiaries based in other countries.  Google, for example, sells EU advertising from its subsidiary in Ireland, minimizing income subject to Italian income tax.  Corporate income tax in Ireland is 12.5% on trading profits, whereas Italy corporate income tax is a much higher 31.4%.

Generally speaking, VAT is taxed in buyer’s location or the place tangible goods are delivered; however, VAT on electronic goods and services are charged in the seller’s location.  This new law requires Italian companies to purchase web-advertising from local companies, thereby capturing VAT on the transaction.  To register for an Italian VAT number the company would have to maintain a local presence, thus increasing the income taxable in Italy.  If enforceable, this would be a win-win for Italy, by increasing its revenues twofold.

The new law, however, is highly criticized.  As drafted, the new law is contrary to EU fundamental freedoms and laws such as the EU Distance Selling Directive, and the principles of non-discrimination found in the double tax treaties in which Italy is a party.  Thus, its enforcement is doubtful as currently adopted.  But its introduction will be carefully watched since many other EU Member States are struggling to find new methods of capturing income within their borders in order to increase their tax base.  The Organization of Economic Cooperation and Development is scheduled to study the issue in 2014.

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