1.1 The Issues to Be Discussed and the Alternatives That Are Available
The extraordinary importance of the digital economy to businesses, services and to the production of value in various sectors of the economy has not always been clear for all to see. The intense debate in the Italian parliament, the European Commissionâs Report, the OECD BPES working group, and the debate in several states in the USA testify to how much society has changed in the era of the digital economy and so must the tax regime that regulates relations between governments, service companies, and industrial enterprises. Such a complex issue must be approached with the clarity, determination and rigour typical of the analysis of economic phenomena. The USA, France, Germany, UK, Spain and most of the European governments are moving in the same direction as Italy: those who produce profits in a country should pay taxes in that same country. Most of the chapters presented in this volume were initially delivered by the authors at the Interparliamentary Conference under Article 13 of the Fiscal Compact held in the Chamber of Deputies in Rome as part of the 2014 Italian Presidency of the European Union.
After an introductory discussion of the issues associated with e-commerce and the questions that have been raised regarding national tax regime and how taxation is applied to the multinational corporations operating on the Web, this book looks at the wider international debate. Does it make sense to impose one uniform approach on companies operating on the Web or should each large market (e.g., the USA, the European Union (EU) and China) have their own separate taxation rules? This question is important in that the Web is universal in nature, and the profits that are generated flow to a limited number of operators who have established their dominant presence in the world market.
The volume consists of eight chapters that cover the ongoing debate from a theoretical as well as a legal point of view in addition to looking at specific cases of how the Internet has affected commerce and the impact that cross-border interactions have had on the tax base in important national markets. We wind up the volume with the Appendix which summarizes the work carried out by the European Commission in support of the BPES initiative undertaken by the OECD in response to the 2012 mandate to formulate recommendations on how to reform the rules for international tax regimes to make them capable of tackling the issues and opportunities presented by the expanding digital economy and increased cross-border transactions undertaken by multinational corporations.
In the discussion on the tax policies implemented by the large multinational corporations that dominate the Internet, we are referring to large Web multinationals, such as Google, Facebook, Amazon, AirBnB, Apple, eBay, Baidu, JD.com, Alibaba, Netflix, Samsung and a few others that, under the current conditions, continue to enjoy tax privileges not available to others. With the arrival of the digital economy, the value chain has been deeply and radically changed and the dematerialization of the generation of wealth requires a totally reformed tax system, otherwise we will simply continue to fuel a bad example of unfair competition to the detriment of national financial interests and the overall health of Europeâs economy. It is no longer acceptable to allow foreign companies to pay taxes in the countries where they have their registered office (obviously with a considerably cheaper tax rate) rather than in those where they operate with production and sales activities. The issue primarily concerns the huge market for the sale of goods and services online and the purchase of so-called search advertising, the advertising spaces that appear on the pages of search engines, and secondly, all activities related to online services (music, cinema, tourism and games, to name a few) and the entire sector of electronic commerce (e-commerce). This is the idea of the proposal that, in 2013, was brought to the attention of the Italian Parliament and the European political and cultural debate.
Paying a tax to the country where the company is generating profits is, moreover, in line with the general principle of similar proposals in other European countries. It also meets the severe difficulties of operators that maintain their headquarters in the EU. The point is not to increase the tax burden, but to create equal rules for all. The debate that has been raging about what was wrongly and provocatively renamed the âweb tax,â âGoogle tax,â and âAmazon taxâ demonstrates how poorly the issue is understood. This is an issue that is much broader than the digital economy and that is often limited to superficial considerations. The so-called web tax does not restrict access to the network and is not against those who surf the net, but it is aimed at those who do not pay taxes in the countries in which they operate and therefore are in a position to remove billions of euros and dollars (and therefore also jobs) from the domestic market. It is not a new tax for the citizens but an attempt to equalize from a tax perspective the taxes paid by multinationals that are operating on the Internet and are enjoying huge tax breaks.
It is unthinkable that, today, in the world of the digital economy a company pays tax only in the country where it has its registered office. A company must pay âindirectâ taxes on sales and part of its âdirectâ taxes in the country in which it produces, sells and generates its profits. The entire digital economy is worth almost 22% of world gross domestic product (GDP) and is growing at an unprecedented rate. And it is absurd that with such growth national governments only manage to pick up the crumbs. We are not talking therefore about increasing taxation but creating equal rules for everyone. This would allow us, among other things, to trace cash flows that are fleeing abroad. The web tax that has been under so much discussion in recent years is anything but a tax. It merely states that companies that do business in Italy should charge Italian value-added tax (VAT) rates, just as, in France, the French use the national VAT and likewise other countries apply their own national rates, with the same being true in the case of the 50 US states where sales taxes are collected at the local level.
There is no new tax in Italy that is aimed at hitting the web multinationals; the aim is to apply the same VAT rate that Italian businesses pay today in Milan or Bari no matter where the companies have their headquarters or where they earn their profits. Taxation then, for the digital economy, must be entirely switched to indirect taxes in the form of the so-called âconsumption taxesâ that are represented by the sales taxes in the USA or the VAT levies in Europe. This was exactly the solution proposed by the Italian Parliament in 2013. The proposal that was the subject of parliamentary debate was in line with European regulations. The aim was to oblige the client, if they were taxable, to purchase from a company possessing an Italian VAT code. No obligatory opening of a VAT number by taxable subjects in non-European countries was envisaged. The taxation, among other things, did not clash either with the European Directive of November 2006 or with the Italian legislative decree of 2010 that transposes the provisions of the Directive into Italian law. That text, in fact, made it clear beyond any doubt, that âthe provision of services is not applied in the territory of the State (the list also includes advertising services) when rendered to non-taxable clients.â
The turbulence in the stock exchanges in addition to the highest share price in history (Alibaba), definitively contribute to the rewriting the boundaries of the commercial world. The celebrated âsilk roadâ that historically connected East and West seems to have been reconfirmed. The USA and China compete but also intertwine themselves financially and commercially at the world level. They challenge each other by skipping traditional geographical boundaries, but through their competition they absorb the value produced by the smaller continental economies that emerged in the pre-Internet world. The USA in a de facto capacity and based on its technological superiority supervises the exchange of information on the net of much of the so-called Western world, largely exceeding the 1 billion consumers in the Americas, Europe including Russia, Oceania as well as large parts of Africa and Asia. Beijing has over 600 million Chinese on the Web and is able to reach 1 billion consumers including those outside its borders. Among todayâs top-ten Chinese billionaires, five belong to the Web. Globally, among the first ten web companies, six are US and four are Chinese.
The market capitalization of the top four US companies that do not strictly manufacture anything is 800 billion dollars (Google, Facebook, Amazon and eBay), not counting giants such as Apple in the business of smartphones and tablets; and 450 billion dollars for the Chinese companies (Alibaba, Baidu, Tencent and JD.com). These are impressive numbers not only for the businesses involved but also for the value that they produce. What we have to consider is how and to what extent do they aspire to control the wealth of other countries? They virtually do not pay taxes; their investments are only made where their headquarters are located; and they benefit from the use of offshore accounts to hide their profits from national tax authorities.
And what is happening in Europe? In the past it has been silent; it has not placed into question the rules that have allowed multinationals engaged in the digital economy to avoid taxes and even hide their profits in tax havens. However, during the last four years this situation has begun to change owing to the shift in national approaches to the taxation of the multinational companies that we have witnessed in the UK, France and Italy. The European Commission has also moved to change the rules, and at the world level there has been a focused attempt to close down tax havens that have permitted nationals of other countries to avoid the payment of taxes.
This book sets out to contribute to the discussion that does not just affect the value of the shares that may increase or decrease in the stock exchanges of Wall Street, London or Milan, but that has a considerable impact on the deconstruction taking place between the value of the services and goods provided, produced and marketed through the digital economy. All this is taking place in a world without borders and, we would add, without rules. There is no doubt that peopleâs lives can change for the better through the use of information technology, but if that same technology alters the basic principles of fair taxation, we all risk feeling the prospect of being more modern but also more poor.
With a concentration of wealth and information never before seen in the history of world capitalism, I believe that finally putting in order a market of vast dimensions, which today contains strong elements of unfairness and injustice, must become a political priority. And there can be no negotiation; it comes down to deciding whether we are on the side of fairness or not. To the advocates of the Rome Treaty1âa Treaty that is historically definedâand the free movement of goods I would respond that the Internet and its revolution in the functioning of the economy is the successor to the same Treaty. It takes advantage of the Treaty but it does not abide by the rules of a fair return in relation to the payment of taxes on the profits generated, as is the case for every other firm doing business in Europe. Do we want to adapt to the times in terms of providing a level playing field for all of those who do business in the EU? What is at stake is not only what happens in Europe but what happens in the world. The actors involved are not only European; they span the entire spectrum of companies. Instead, what is at stake is the principle of fair competition and fair taxation. These two issues cannot be avoided. They need to be addressed in an open debate, and they need to be resolved in a manner that takes into account all of the interests involved. However, these decisions need to be taken quickly in order to avoid the negative consequences of the existing status quo.
1.2 Reflections on the Italian Experience
According to a check of the data, it is not strictly correct to say that the multinationals of the Web have not invested a euro in Italy, but in essence it is true. During the last Parliament when we had a centre-right government and were on the eve of passing the budgetary provisions (referred to in Italy as the âstability lawâ) I was the coordinator of the economic committees of the Democratic Party. On that occasion, I proposed a change in the role of SocietĂ Italiana degli Autori ed Editori (SIAE),2 the Italian copyright collection agency.
Thanks to this initial experience I began to focus on the difficulties of assessing the impact on the real economy of the distortions in the value chain introduced by the digital economy in different sectors. In some cases, through the introduction of innovations, the value chain has become shorter while in others it has completely distorted the market. In fact, the music industry has already changed radically. Out of that experience emerged the political-cultural debate that came out of the Chamber of Deputies in the subsequent legislature.3 The year and a half of the Monti government, then, was a year of turbulence. It was difficult to put on the table issues of cultural relevance when the uppermost emergency was the state of the budget. So, despite my attempt at that time and the conviction of Pierluigi Bersani (the former head of the Democratic Party) to keep trying, we did not find a particularly fertile ground in advancing our proposals on the digital economy. Meanwhile, however, in that first part of this legislature (2013âpresent), relations with individual operators have intensified and, together with the Research Department of the Chamber of Deputies, we have widened the number of managers involved, the potential markets scrutinized and the understanding of how the rules have been functioning. If today in Italy there is some information, some data and a few numbers it is thanks to the excellent work that has been carried out within this context. I find it incredible in a country like Italy that until a little while ago it was the responsibility of a single academic to study what was happening. Professor Uricchio is the rector of the University of Bari and is one of the few scholars who has dealt with the issue of taxation of the Internet in his role as professor of tax law.4 I found some of his articles in 2007 in international journals. Other articles have also appeared in scattered journals written by colleagues who had not worked together but who had brought forward similar concerns. This fact struck not only me but also other parliamentary colleagues, such as Sergio Boccadutri, who joined the parliamentary debate in 2013 for the purpose of not trying to limit the Internet but rather to ensure that the real economy and the digital economy could work together and become one.
Why such a distinction exists I do not know, but in tax terms it exists. Companies operating in the real economy pay taxes and fees in the normal way; from a tax point of view the relationship between state and the operators in the field takes place according to the different rules in each country. Take Coca-Cola for example. In Europe a multinational corporation such as Coca-Cola uses 28 different VAT numbers in order to operate within each member state. In fact, any company that operates in Europe must have a VAT number for each country in which it is present. This is the same for an Italian company with offices and operations for the production and sale of its products in different countries in Europe.
This is not the case, however, for every business operating within the digital economy. The discussion with many colleagues in the Chamber of Deputies started from this point of departure, and we arrived at the definition of a tax structure related to those areas affected by the digital economy which has been referred to in the Italian debate as the âweb tax.â I prefer the definition offered by Carlo De Benedetti that maybe we should have called it a freedom tax to demonstrate that it was actually a tax that allowed the markets to operate freely. In reality, the so-called âweb tax,â is not a new tax, has never been so, nor was it ever intended to be. Instead, it is an attempt to link it to the VAT tax and to the payment of taxes by companies that operate in contexts in which VAT is already paid by other companies that are doing the same things but are based in Italy or in other individual European countries.
A company that does the same task as Google but was started in Italy by an Italian entrepreneur uses a VAT number not only if it provides support or offers other types of service but also if it sells advertising. The Budget Committee of the Chamber of Deputies voted unanimously for this form of legislation in December 2013; no parliamentary group voted against it. It is important for public opinion to be informed on the circumstances that took place when the bill was voted on in the Committee. Even if the legislation was passed late at night this could not be considered âa night raid.â It went through on the basis of a unanimous vote. The day after, the media reacted in an exaggerated and uninformed manner. As a result, some of the parliamentary groups sought to reconsider their position. From that moment on the Five Star Movement, on the basis of the position staked out by Beppe Grillo, declared itself to be completely opposed to the web tax. There were also some problems within the Democratic Party in terms of understanding the nature of the phenomenon and explaining what needed to be done.
It is true that to say âthey havenât paid a euro in taxâ is misleading, but the amount actually paid in taxes was 6 million euros. Given the volume of the turnover in sales, 6 million euros in taxes is not much at all. With the new rule establishing the traceability of sales that was introduced with the Stability Law of 2014, those 6 million have become 137 million. It is still too little; it is much too little if we think that just one company is worth almost as much as the entire capitalization of the Milan stock exchange. Think of all of the companies that come to mind that have dominated the Italian economy in the past. Even at the time of the dominance of the âSeven Sistersâ in the petroleum industry, the oil firms never received such favourable treatment. To quote Fedele Confalonieri, the head of Fininvest, in the past it was not possible that two, three, four, five CEOs of large multinational companies could calmly declare to the media of various European countries that âmaybe next year we will invest 15, 20, 30 billion dollars off-shoreâ while at the same time not paying their fair share in taxes. Nothing like that has ever happened.
As a university professor I have to explain to my students that offshore investments do exist. I have to explain that there is money that a shareholder or a manager may invest offshore. If you say it was an Italian businessman, even someone famous, I think that you would find someone at their house the next morning asking what does it means âto invest tens of billions offshoreâ in order to a...