Italy Taking Leadership Role in Tax Cases Against Big Internet Companies

ROME – Italy’s recent tax related crackdowns on Internet giants Google and Facebook are just the first in what promises to be a series of tax probes by tax officials toward multinational Internet firms they believe could be declaring revenue generated in Italy and declaring it in countries with lower tax rates.

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The issue is coming to the surface in several European countries, due to the growth of big multinational Internet companies that can make it difficult to determine which part of their organization their revenue originates from. But Italy has been on the vanguard of the trend.

For the last three years, the country has been focused on driving up government revenue by focusing on curbing tax evasion: the new emphasis on transfer pricing issues is an extension of that. Counting new probes opened to look into the possible underpayment of taxes in Italy involving Apple and Amazon, Italy now has four such cases open against multinational technology companies based in the U.S.

So far the case against Google is the best defined. Tax authorities say Google under-declared $314 million in income generated in Italy over the 2002-2006 period, resulting in a reduced tax bill of $123 million. The company did so by splitting that income between Italy, the U.S., its European base in Ireland, with some royalties reportedly declared in The Netherlands and Bermuda. From their end, Google officials deny wrongdoing and have vowed to cooperate with Italian authorities.

Facebook made similar statements when they were named in a probe two weeks ago; Apple and Amazon have not made official comments since there have been no official government statements about those investigations.

“The truth is, it’s really hard to prove wrongdoing in these cases because it’s so hard to prove where the product that generated some specific income was created or based, especially with these high tech companies,” said Marco Anselmo, a tax consultant with Hildebrandt and Ferrar in Milan. “The strongest case comes from advertising because you can show who bought the ads.”

That appears to be where Italian tax authorities are starting out, alleging that Google had earned at least €500 million ($655 million) from ad sales in Italy. “From that, not even one euro was added to the Italian treasury,” said a spokesman for Italy’s tax police.

The cases will likely be decided n court starting next year.