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“Italy plans to introduce a web-tax. Problem solved?”
Italy is moving fast towards the approval of a “web-tax” on Internet giants. First in Europe, the law is poised to pass together with the budget by the end of the month. Entering in force from the 1st of January 2019, the law prospects to bring to the country up to one billion additional euros.
All is good then? Obviously not. Criticism arises from those who believe the law will be ineffective as well as those who think it will, instead, damage the market. Nevertheless, tax avoidance has become too big of a problem to continue doing nothing about it. The European Parliament estimated the loss of revenue for the continent as roughly 70 billion euros. This enormous sum does almost as much political damage to the credibility of the nation states, and the EU as a whole, as it does economically. With the widening inequality gap, news like “Facebook paid just €30m tax in Ireland despite earning €12bn” are fueling the skepticism over a system that is clearly unfair to the common people and to nation states as well. Every industrialized country has become aware of this, which is why the international community at the G20 is trying to find a permanent solution to the problem. The EU has the topic on the next agenda and the European Commission has said the Union should move independently if an agreement is not reached at a global level. This would clearly be a less favorable solution but it would signal change to the people, the companies and to the rest of the world too.
But why is this a problem now? And why especially for digital services? The solution lies in the service provided. Up until three or four decades ago, it was easy for the governments to identify where companies produced their income and, subsequently, tax them. With digital services though, digital companies can easily avoid taxation by having their headquarters in a country with low taxation and sell their “immaterial” product everywhere else. Google for example has earned in 2015 about 637 millions from the Italian market. Only 67 millions have been accounted by Google Italia, while the remaining 570 have been accounted by Google Ireland. This is merely the first step in the many different ways of tax avoidance.
So, what’s the solution? The European Commission have reached the same conclusion as the OECD. Special tax regimens are to be avoided and the solution lies in making the current system more efficient through agreements between countries, at least between European ones. The EU could pass the necessary legislation but, once again, has to deal with its intergovernmental nature with the opposition of member states like Ireland, Luxembourg and the Netherlands who are profiting from this situation.
However, the Italian proposal risks of being unpractical because the companies can simply let the final user foot the bill or just transfer the revenue to a controlled company with the headquarter in a tax haven or a country with a lower taxation regimen. The EU itself has lukewarm enthusiasm for the Italian plan since they would prefer a continental (or even better an international) proposal, as given that the risk of damaging the consumers is higher if member states act alone.
In the end though, just as much as the credibility of the governments is damaged politically more than economically, laws like this could act as a symbol of the institution fighting for a good cause and, hopefully, gain some much needed legitimacy from the people.