Italy eyes ‘Google Tax’ to help fix public finances

Using standard provisions in tax codes internet companies face low or no corporation tax bills in the countries of their customers.  This issue has been repeatedly raised in the UK by Margaret Hodge, chair of the Westminster Public Accounts Committee.  In relation to Google in particular much of the focus has been on whether Google has a permanent establishment in the UK.

This issue is also agitating the chair of the Italian lower house Budget Committee, Francesco Boccia, who has drafted a bill to try and force companies like Google to engage with their customers in Italy through a party that has a permanent establishment in Italy.  See this report from Reuters.

The proposal would not tax the multinationals directly but would force them to use Italian companies to place their advertisements, rather than doing so through third parties based in low-tax countries like Luxembourg, Ireland or outside the European Union.

Doubts about the feasibility of such a proposal seem justified but it does show someone trying to take some action on this issue.

Comments

comments

20 thoughts on “Italy eyes ‘Google Tax’ to help fix public finances”

  1. seems unlikely to be legal

    1. EU law precludes this type of barrier to trade. Hence the end of Ireland’s tax reduction for vehicles assembled in the state.
    2. To avoid discrimination, the law would have to penalise every internet commerce company into dealing through Italian agents.
    3. Mail order. Would that also be illegal?
    4. Sadly Italy needs Google more than Google needs Italy. A weekend with Italian Google search, Gmail and Gmaps shut down for maintenance would be the end of this proposal.

    Francesco Boccia and Hodge are economists and presumably understand this well, so I hate to say it but you have to suspect insincerity.

  2. Hey John

    Thanks for that. Really wearing the arse out of the trousers aren’t they!

    Few of the current generation remember just how quickly German corporate money left Ireland’s shores in the early 1990s when Germany changed the rules…..took less than a year to unwind….after they had left elsewhere.

    Playing with fire…..but I’m told by one senior PWC partner to “cop yourself on”, this has been a threat for 30 years……

    Disagree….the threat has never been more serious.

    Beyond that, I have MNC employed family in Ireland, all of whom have contingent plans to depart with their employers (if that’s necessary).

  3. I should add that the family (solicitor sister) report today from Cork is that there is an improvement in the CRE market, with activity picking up. Mainly domestically driven given the zero CGT exemption for holding CRE for 7 years.

    Wonderful use of Ireland’s resources….again. Again driven by govt tax policy (trying to buy the next election).

    What a screwed up country (for most).

    Hidden also is the pension fund outflow…plus the halt of personal AVCs in recent years. Have just done an analysis of my Irish pension fund costs versus moving my (old) pension funds elsewhere. The overall cost in Ireland is approx 4pc pa….moving elsewhere to a Goldman Sachs managed alternative is 2pc pal reducing to 1pc after a few years…..what does that say. especially given the amount of value the Irish pension fund indusy has lost for its clients over the last 12 years.

    Banana republic, for financial management and related.

  4. @Paul W,Hi Paul just finishing reading their earnings call from this morning,so basically shortly,like soon any day now they are going too ehm have like say something called an ‘operating company’..
    In effect its a PO box for now,nice way to do business yeah thats going to last!
    Must be fun trying to negotiate a line off credit with the IMF etc. and this is the mood music in the background…

    “Chief Executive Officer, President and Director
    Thank you, Tim. Thanks for the question. So I’m not going to comment on any other company’s tax structure. But this is certainly a different kind of inversion than you may have seen in the past. And to repeat what I have said at the front end, when I answered one of the questions, this inversion is enabled by us merging with another — a foreign company where the shareholders of the foreign company will end up owning more than 20% of the new entity. In that context, we are able to invert Endo. And in doing so, we picked Ireland as the domicile for multiple reasons, not only the — what we believe to be the stability of the corporate and tax base in Ireland, but also reflecting the talent base in Ireland because our expectation, once you domicile there, is to build out some infrastructure there and to create an Irish operating company. And as you know, there are many other companies that are present in Ireland as a result. It has a very solid base of talent in areas like R&D, supply chain, as well as commercial and other administrative functions. Does that help?”
    http://seekingalpha.com/article/1808942-endo-health-solutions-management-discusses-q3-2013-results-earnings-call-transcript?page=7&p=qanda&l=last

  5. John

    “It isn’t us” is not going to work this time. MH to be given the (Irish version) Nobel prize for political tax analysis /forecasting……I’ve been in this space for 25 years and know well what’s coming.

    The shit will hit the fan.

    See you Friday same place at 5pm….without my Northern European Brethren this time!

  6. Great article by Martin Wolfe in current FT (can’t copy ….on the move). Germany’s surpluses weight on the Euro /World economy. Germany declines to adjust. Yet, it’s not as simple as that. Germany is having many problems itself……all is not well. Its bank system is bust (like others in EU), but it has long and strong accumulated strength, and is helped by its current low cost of funding subsidy……but that can only continue so long before the cracks appear and widen…slow process but happening.

    Big upheaval coming but nobody knows when……I suspect it will be quick once started (no idea when though). As fickle as “when”……

    And it still won’t sort things out anytime soon……creditor vs debtor will continue……which is why the “takers” are “taking” and won’t change course. Disastrous for Ireland in the medium to longer term, particularly if the Ct rate advantage is lost (or more likely, “compromised”).

    Increasing flow of educated young graduate family looking to relocate herento the US and elsewhere no doubt….noticeable already.

    Who’s going to pay the bills? Nigerian taxi men and women in Cork, Dublin and Limerick (all investing in Kuman supplemental education for their kids).

  7. Irrespective of what happens in Italy, change is coming.

    Germany, the UK and France have agreed to wait for OECD proposals on changes to international tax rules and even the small countries involved have at least given a tepid endorsement to change.

    The rising tax avoidance and the cost within the United States of attracting jobs are serious issues while the tech elite in Silicon Valley dream of techno-utopias:

    Wall Street Journal on Silicon Valley dreams of techno-utopias and arrogance

  8. I thought the VAT payable based on point of delivery was settling this transfer pricing issue

    (Luxbg has been benefitting of that since they had the lowest VAT rate in the EU and strangely enough had almost all the internet service providers billing out of Luxbg)

  9. http://www.irishtimes.com/business/economy/germany-beggaring-its-neighbours-by-running-trade-surplus-1.1583535

    This issue has been central to the euro crisis and it is time the relevant powers that be focussed their minds on it. Germany’s indignant response is an affront to a fundamental of Keynesian economics that is rarely disputed by the most ardent opponents to the philosophy and that is if financial crises is to be avoided surplus countries must redistribute the wealth through invesment or otherwise in deficit countries. In 2007 90% of Germany’s surplus was with EZ partners. Last year it was 35%. It flogged its wares for years to its EZ partners. Now it uses its poor cousins to maintain an artificial low German Euro to keep the train a running….running around the bend….and the rest of us won’t see sunshine til….i don’t konw when…’cause we’re stick in ECB prison…and time keeps Draghi’n on….if they don’t hear that whistle blowin’….then end of the euro is nigh! (and thanks be to…!)

  10. @ john gallaher,

    Thanks very much for the links on New Endo. Very interesting.

    I assume that the holding company New Endo will be incorporated here but will be tax resident elsewhere (unless they registered before October 15th in which case might be able to pull off being tax resident nowhere until 01/01/15!). The follow-up will then be the “Irish operating company” will presumably by owned by New Endo.

    The Irish corporation tax regime is very favourable but the main benefits are intentionally available only to companies which have a presence of substance in Ireland. A question emerges of what Endo have to do to satisfy the “trading” requirement of our CT code.

  11. @Seamus Coffey,I was keeping an eye on these for you!
    Reviewed the company’s press release,specific details are still a little vague.Tried to find a link to the earnings call w/o having to register but no luck so far.
    New Endo is to trade on the NASDAQ,closing first quarter next year.
    It was my read that a operating company had to be involved,clearly not.
    http://www.endo.com/investors/overview
    http://taxfoundation.org/blog/long-goodbye-us-corporations

  12. The legal online world is becoming fractured in terms of data protection laws and privacy and tax. Online commercial transactions are somewhat more coherent but not as much as they should be. A golden age of internet freedom is shuddering to a halt.

    Apart from companies trading online, other firms who want to store data online are running into huge legal obstacles to availing of the benefits of shared computing services (“cloud”) and are thereby missing out on efficiencies. Ironically, the USA which has been the greatest violator of internet privacy may obtain an advantage as its citizens are properly protected by its laws from US companies and the US Government.

    The fracturing of the online world within the EU is a major economic and legal challenge for the EU.

  13. Update on proposed deal structure,a circular/memo is to be distributed to shareholders,had a look at both companies public announcements not much in them.Company analysts are not focusing on the risks associated in my opinion..short it:)

    The ‘key’ piece is the conf. call on earnings link above.-from NYT.

    “To accomplish the inversion, Endo first had to identify a foreign target that it could buy using more than 20 percent of its own stock. Meeting that 20 percent threshold allows U.S. companies to legally reincorporate in a new country, escaping the American corporate tax rate of 35 percent, which is the highest in the world.
    Endo will now set up a new company, called New Endo, in Ireland. The old Endo and Paladin will then each exchange their shares for stock in the new company, thereby allowing it to take advantage of Ireland’s significantly lower corporate tax rate.
    On a conference call with analysts, Endo’s chief executive, Rajiv De Silva was remarkably forthright about the motivations behind the move.
    “The concept here is a inversion that is enabled by the fact that we are acquiring a company which will end up having more than 20 percent of the shares of the combined Newco, which then allows us to invert into another geography,” he said.”
    http://dealbook.nytimes.com/2013/11/06/health-care-deal-is-latest-to-seek-corporate-tax-shelter-abroad/?_r=0

  14. I presume if the US reduced it’s ridiculously high corporate tax rate to the mid 20% and closed off some loop holes then a lot of this tax arb stuff would end.

    Anybody know why would you move to Ireland with its 12.5% rate when you can set up in the UK with its 10% rate inside its patent box.

  15. @Tull,they have tried closing the stable door.looks like these guys wet their beak.

    ‘As a result, the market is becoming more adept at how to navigate through the complex statutory and regulatory hurdles necessary to structure such transactions, successfully for international tax purposes.”
    http://www.eversheds.com/global/en/what/publications/shownews.page?News=en/ireland/ma-inversions-in-ireland-nov-2013

    The NYT article,embedded was linked here before,this unusal and first off this type.

    http://www.ctj.org/taxjusticedigest/archive/2013/10/how_congress_can_fix_the_probl.php#.Unr4HpSDQXx

  16. @ Tullmcadoo

    There was no tax on receipt of patent income in Ireland until restrictions were introduced in 2011.

    Patents could be located in Ireland to collect income from other countries tax-free that could be used to pay staff tax-free bonuses or shareholders tax-free dividends.

    Arthur Cox said in 2011: “”There are numerous advantages for multi-national companies with large Intellectual Property (IP) portfolios who locate and manage these portfolios in Ireland. The effective corporation tax rate can be reduced to as low as 2.5% for Irish companies whose trade involves the exploitation of intellectual property…A well-known global company recently moved the ownership and exploitation of an IP portfolio worth approximately $7bn to Ireland.”

    This was Accenture which switched its hq to Dublin from Bermuda in 2009.

    Now as regards patent income, it’s looked at on a case-by-case basis by the Revenue and it would hardly be a surprise that IDA Ireland would do quiet lobbying. So companies such as Microsoft and Pfizer would still collect patent income tax-free.

    The effective rate of tax in the US is 25% but during the recession because of additional incentives the rate was as low as 12%.

    Companies want a territorial system in contrast with the current one where world income is taxable with offsets for foreign tax. However, absent new rules such as a requirement for a minimum tax rate to apply for any foreign country, the territorial system would only encourage more avoidance.

    Ireland’s headline tax rate is too high for American companies that already have an average foreign tax rate of 2.5%.

  17. “The view in Germany and among some economists is that there is no threat of deflation. This group sees slowing inflation merely as a sign that wages are falling in countries like Spain and Greece, where labor costs had become too high for companies to compete in the international marketplace.”

    “Wages falling?” “Labour costs have become too high for international companies?”

    Less wages, less tax revenues. That’s good economic news? Labour costs in so-called ‘low-cost’ economies are low precisely because these economies have a large surplus of potential employees, have minimal or no Health and Safety laws, have minimal or no Environmental Protection laws. Their governments do not extract high amounts of taxes from citizens. Need one say more?

    I suppose those ‘some economists’ have little to fear by way of un-employment or salary reductions. Conventional wisdom, no matter the quarter it is associated with, is usually short on nuance and long on arrogance.

    Might it be preferable to express uncertainty with some probability of being correct, rather than claim certainty – and be constantly wrong?

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