Italy’s parliament passes “Google tax” on digital advertisements

Italy’s Senate, the Senato della Repubblica, passed a law on Monday under which Italian companies will be required to purchase online advertising from Italian companies, rather than from companies based in foreign countries. The law was passed by the lower house, the Camera dei Deputati, on December 20th.

However, opponents say the new measure, which some have called a “Google tax,” violates EU law, which generally allows European companies to transact business across national borders without regard to where the company is based and forbids legal discrimination amongst people based in different EU countries.

The law requires Italian companies to purchase their online advertising from companies with Italian VAT registrations, which is designed to keep these transactions within the reach of the Italian tax authorities.

Currently, advertising bought from foreign companies may avoid taxation in the country where it is purchased, and much online advertising in Europe is purchased that way. For example, most of Google’s European advertising sales are reportedly made through a subsidiary based in Ireland, which in turn pays royalties to another subsidiary based in Bermuda. As a result, the countries in which the advertising is bought realise no tax revenue on the transaction. Google’s Italian subsidiary reportedly paid just €1.8 million in tax last year.

Under the supremacy principle of EU law (Declaration 17 of the Consolidated EU Treaties), EU legislation trumps national legislation, so if the new law is found to conflict with EU law, it can be struck down. However, it is not yet known if anyone will mount a legal challenge.

—Alistair M. Nevius (anevius@aicpa.org) is editor-in-chief, tax for CGMA Magazine.