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The Italian Stability law introduced a presumptive tax permanent establishment to fight against unlicensed betting shops.
This is a guest post from my tax colleagues Giovanni Iaselli and Antonio Tomassini.
The decision of the Italian Supreme Court
The Italian Supreme Court held 6 months ago that a non-resident operator using unlicensed shops (the so called “CTDs” or “DTC” data transmission centers) to offer bets on their behalf through the connection to their foreign licensed online websites did not have a permanent establishment for tax purposes in Italy.
What changes for the betting sector with the Stability Law?
The Stability Law held that if a foreign operator
- Makes use of one or more entities located in Italy for the performance of the activities that are typical of the manager of betting shops (the so called “gestore“) i.e. the offering of bets and the relative wagers and the payment of winnings,
- Makes available tools necessary for the placing of bets and
- Within 6 months the generated financial flow exceeds EUR 500,000
then the tax authority shall set a meeting with the operator to understand its reasons as to the lack of tax permanent establishment. If the evidence provided by the operator is not deemed to be sufficient, the tax authority ascertains taxes and fines and the financial intermediaries involved in payment flows must apply a 25% withholding to be paid by 16th of the following month. The absence of a tax permanent establishment can also be proven as part of an application for a tax ruling to be submitted within 60 days from the beginning of the tax period.
What is the scope of the provision?
The new provision does not apply for online gaming activities carried out directly from abroad without the cooperation of individuals located in Italy in the offering of games. Therefore, it does not impact merely intangible businesses. Furthermore, it does not introduce a new figure of “digital” tax permanent establishment for the land based betting industry. But it is designed to exclude typical CTDs activities from the “auxiliary and preparatory” activities that typically do not create a tax permanent establishment.
And what about international tax treaties?
It is highly unlikely that the legal presumption could be deemed compliant with prevailing international tax treaties applicable in this case. Such treaties may lead to exclude the existence of a tax permanent establishment regardless of what foreseen by domestic arrangements.
What is the impact on the digital economy?
We are in the midst of an international debate on digital economy. The OECD’s BEPS project in its Action 1 suggests an amendment to the notion of tax permanent establishment aimed at reducing the circumstances in which the activity may qualify as preparatory and auxiliary hoping to obtain a consistent amendment of the tax treaties in force.
The OECD does not recommend the introduction of taxation systems based on the application of a withholding as well as the introduction of a tax permanent establishment notion based on the concept of the so-called “significant economic presence” (notion that does not require a minimum level of physical presence).
In the absence of an amendment of the tax treaties, the new provision it is likely to end up into a web tax which shall deal with potential incompatibilities with international provisions.
Additionally, the introduction of such 25% withholding on a gross wealth (betting cash flows) ascribed to an alleged permanent establishment seems to discriminate such a case against permanent establishments operating in other industries where the business income is taxed on the basis of costs and revenues and there is no such aggressive anticipation of taxation. However, it is true that the international trend is to shift taxation at the place where revenues are produced (where clients reside).
In the same direction the “country by country” reporting obligation introduced by the Italian Stability Law goes. It aims to map the transfers of taxable amount among jurisdictions in which corporations operate to challenge aggressive tax structures and to get taxation closer to the place of production of the income.
CTDs were given the possibility to “cure” their position by the Stability Law and the provision above was certainly taken into account in assessing the route to be taken especially in the light of the tender process for new betting shop licenses of mid-2016.
