What does the Italian Web Tax mean for travel websites?NewsBy Daniele Beccari | December 16, 2013Share This article was originally published on European governments have been actively seeking ideas to prevent web multinationals, such as Amazon or Google, from arbitrating across fiscal systems and paying lower corporate taxes.With UK businesses paying £2.5billion to Google in 2011, only £3.4 million ended up in the tax collector's hands, for example, triggering outrage and an appearance in front of MPs earlier this year by its UK boss, Matt Brittin.Under pressure from the EU to keep the public budget under control, while not reducing public spend to avoid protests, the Italian government has proposed a surprise bill labelled the "web tax", aimed at recovering north of Euro 1 billion a year from 2014 onwards.But the details are pretty concerning, and could have absurd consequences for a global industry like the online travel industry.The problem it aims to solveUnder legal, although questionable, accounting practices, it is quite common for global corporations to establish their headquarter in low corporate tax countries, such as Ireland or Luxemburg or even fiscal havens like Jersey or Bermuda.Services provided to customers anywhere else in Europe will generate profits in the country where corporate tax is low.Local subsidiaries in each country, generally responsible for local sales and marketing, sell their services to the central HQ, roughly at cost, with only small profits being taxed in the local market.Ongoing discussions in Brussels aim at defining constraints around these schemes, with some claiming tighter fiscal obligations, and others pushing to eliminate arbitrage opportunities by harmonizing fiscal and accounting practices across member states.What the Italian "web tax" meansLet's be clear: there is no new tax created or discussed.The "web tax" rule would force Italian companies to purchase online or advertising services only from companies registered for VAT (Value Added Tax) in Italy. As a second measure, it also forces all payments to be performed through bank transfer, or other traceable methods of payments.With a local VAT registration, foreign companies will have to collect local VAT on their invoices, and pay it to the local tax office.This adds paperwork and complexity to accounting, does not add one single cent to the state coffers, has no impact whatsoever on profits, and therefore no impact on where corporate taxes are going to be paid.Why the hassle then? The result is that the local state will have full visibility on all VAT collected by the foreign company, therefore, potentially, an indication of the amount of business generated inside the market and presumably ending up in profits and tax somewhere else.The so-called tax, in reality, is a data collection tool.Parts of the regulation are a technical minefieldIf you are reading this post, you have the minimum technical level required to understand the following nonsense: "Any online advertising banner or sponsored link visible from the Italian territory through desktop or mobile networks must be purchased from entities with a valid Italian VAT number."Share this quote No comment.What does this mean for travel sites?At this stage, nothing to worry about.But further proposals to the Italian bill suggest that any company with a "regular" usage of Italian data networks, would have to open a permanent establishment in the country, and pay local corporate taxes.A range of not so distant ideas have been under discussion in France for the past two years.If this approach were to be followed across the EU, it could lead to unrealistic constraints for travel companies.A hotel based in Spain with a website selling to the rest of Europe would have to, at minimum, register for VAT in multiple countries, and - possibly - even have to establish local subsidiaries everywhere its clients are coming from.A global online travel agent, or advertising network, would need to register in all countries where it is generating business from, and presumably block access from other countries.A blogger being paid to display ads or links, would need to register for VAT, and potentially pay corporate taxes, where their advertisers (not their readers) are located.This will probably all be killed by the EU free market regulationsThe whole point of the Single European Market is to allow any EU company to operate and sell to any other EU country, and to compete internationally.Although ethically understandable, the goal of ensuring that corporate taxes end up funding services and welfare where profits are generated, must not be turned into protectionism, and must not become additional administrative burdens that would only limit international trade or increase operating costs.It is unlikely that a unilateral decision of a single member State to force local VAT registration would go ahead, given the extensive body of EU Directives and international trade agreements already enacted.But it is certain that all States are waking up to the fact that e-commerce and online transactions have moved faster than legislation, and will try to catch up. Sometimes, with absurd short cuts.NB: Disclaimer - this post is not legal advice, you certainly should seek your own before acting on it.NB2:Italy money image Shutterstock.