Italy Follows France in Levying a Digital Tax
Italy Follows France in Levying a Digital Tax
New tax threatens to deepen dispute with U.S. on how to tax big tech companies
Italy soon will join France in applying a new tax on large tech companies, a move that could deepen trans-Atlantic trade tensions and snarl up already-faltering negotiations over how best to tax companies such as Facebook Inc. and Google parent Alphabet Inc.
The new tax, passed this week by Italy’s parliament, will take effect Jan. 1. Similar to the tax implemented this year in France, Italy’s imposes a 3% levy on some digital revenue for companies with more than €750 million in global revenue, including least €5.5 million in Italy.
The Italian announcement, combined with the French tax, complicates a broader effort among more than 100 countries to overhaul corporate taxation for the digital age. Many countries say U.S. tech companies pay too little income tax in the territories where they have users. Until now, most have held off on imposing their own national taxes. That reluctance may be fading, however, with others such as the U.K. or Canada potentially ready to follow suit.
To stave off a patchwork of overlapping levies on American firms, the U.S. had been engaging more directly than in the past in negotiations to come to an international solution, under the auspices of the Organization for Economic Cooperation and Development, a think tank of rich economies. Progress had been made toward an agreement that would give countries the right to expand taxation of corporate income. OECD officials had been trying to broker a deal to determine the scope of those powers and which companies would be affected.
But this month U.S. Treasury Secretary Steven Mnuchin sent a letter raising concerns about the emerging agreement, and instead proposed a system in which companies could choose whether to operate under new OECD-brokered rules or to stick with the current system. That was a nonstarter for some European countries.
“It’s choppy waters. It’s difficult,” Pascal Saint-Amans, the senior OECD official leading the negotiations, said during a panel in Washington last week. “The first feedback we’ve had [is] that optionality may not be welcome, but it’s the U.S. position and no one can ignore the U.S. position,” Mr. Saint-Amans said.
At issue are decades-old rules that generally allocate corporate profit for tax purposes based on where value is created. But modern multinationals—particularly ones with digital offerings—can sell their products across borders in ways that leave little taxable profit in a country where those products are consumed.
Tech companies and their lobbyists have said they support the international process to update tax rules but strongly oppose unilateral digital taxes based on revenue, like Italy’s or France’s. American tech firms say that under current rules they pay the bulk of their taxes in the U.S. because that is where their products are mostly designed.
The European Union had attempted to agree on a uniform digital tax across the entire bloc as recently as spring. But it abandoned the effort, which would have required unanimity among EU nations, because of opposition from countries such as Ireland and Luxembourg that are home to the regional headquarters of several large U.S. tech companies.
That is when France applied its own version of the tax, drawing quick condemnation from Washington. In response to the French levy, the Trump administration earlier this month proposed tariffs of up to 100% on French wine, cheese and handbags. The U.S. is also threatening similar retaliation against Italy.
Representatives of the U.S. Trade Representative didn’t respond to a request for comment.
A spokeswoman for the French finance ministry said that Italy’s new digital tax will increase pressure on the U.S. to find an agreement at the OECD level. French Finance Minister Bruno Le Maire is expected to meet with U.S. Treasury Secretary Steven Mnuchin in January, the spokeswoman added.
Both France and Italy say they will repeal their taxes when a deal is reached at the OECD. To calm tensions with the U.S., France over the summer offered to repay companies the difference between the French tax, which the government in Paris expects to bring in €400 million in 2019, and the mechanism eventually agreed upon at the OECD.
The Italian tax hits only business-to-business transactions such as advertising, as well as services such as cloud computing, sparing digital content streaming services such as Netflix and Spotify.
Italy, for its part, could use the extra €700 million it has forecast the digital tax will bring in annually. The country is in a continual struggle to stay within EU fiscal rules and prevent its budget deficit growing. Italy is also planning to levy new taxes next year on sugary drinks, plastic packaging and company cars.
Italy passed a digital tax as part of its budget last year, but held off implementing it as it waited to see if there would be coordinated response from the EU or the OECD.
The Italian government didn’t respond to requests for comment.
—Richard Rubin in Washington contributed to this article.
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