Google Italy faces tax probe
The Italian subsidiary of Google is under investigation by the country’s tax police, the Guardia di Finanza, for suspected tax evasion.
In the last few years the Italian tax authorities have been scrutinising Italian companies more closely – irrespective of their size – on issues such as international tax arbitrage, transfer pricing, permanent establishment, cross-border restructuring, changes in taxable income and the creation of net operating losses.
Between 2002 and 2006, Google’s Italian subsidiary is believed to have avoided paying €96m in value-added taxes on undeclared revenues of around €240m. It has been reported that Google’s Italian revenue had grown significantly since 2006 and was estimated at €400m in 2009, €550m in 2011 and €700m in 2012.
The outcome of the Google Italy investigation is likely to give new impetus to tackling tax evasion – especially important with Italy being one of the biggest ‘tax losers’ in the world. The future developments of the Google Italy case could also affect multinational groups in Italy and not just those that operate in an e-commerce environment.
A question of ‘permanent establishment’
The focus of the investigation in Italy has been largely on the activity carried out by Google Italy and its inter-company relationship with Google Ireland. In particular, following the analysis of the ‘Marketing and Services Agreement’ signed between Google Italy and Google Ireland, the inspectors assessed the existence in Italy of a ‘permanent establishment’ of the Irish company based on the:
- presence of a fixed place of business through which Google Ireland and Google Inc. carried out their activity in Italy
- existence of a permanent place (both from a geographical and a temporal perspective)
- nature (from a qualitative standpoint) of the business of Google Italy, which cannot be considered an auxiliary and preparatory activity.
In this respect, it is important to mention that Article 4 (4) of the Double Tax Convention between Italy and Ireland states that:
“A person acting in a Contracting State on behalf of an enterprise of the other Contracting State other than an agent of an independent status (…) shall be deemed to be a permanent establishment in the first-mentioned State if he has, and habitually exercises in that State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise.”
Article 162 (6) of the Italian Income Tax Code states that a resident or non-resident person that habitually concludes contracts in Italy in the name of a non-resident enterprise, different from the purchase of goods, constitutes a permanent establishment in Italy of the foreign company.
Furthermore, in a landmark case the Corte di Cassazione or Italian Supreme Court ruled that:
- if an Italian entity is delegated to manage the business in a certain area, this activity may result in the existence of a permanent establishment
- a direct participation in contract negotiations may be assimilated to the authority to conclude contracts.
Google is facing similar probes in other countries around the world including Australia, France and the UK. In 2011, the company is reported to have avoided about US$2bn in worldwide income taxes by shifting US$9.8bn in revenues into a Bermuda shell company. It is also believed to have taken advantage of different strategies, commonly used by other major US IT companies, allowing it to mitigate its overall tax burden.
For more information:
Hager & Partners, Italy
T +39 (0471) 971197
Hager & Partners, Italy
T +39 (02) 7780711