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Netflix under investigation for unpaid taxes in Italy

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Gian Luca Nieddu and Barbara Scampuddu of Hager & Partners look at the Italy’s investigations into alleged tax evasion by Netflix and how it may feed into the debate on approaches to digital era taxation.

Another giant of the web is being targeted by the Italian tax authorities.

As has already happened to other leading internet companies (Google, Apple, Amazon, Facebook), the prosecutor's office of Milan has opened an investigation against California-based Netflix for alleged tax evasion.

This is by now a familiar subject. As the digital economy develops, technology giants are coming under increasing scrutiny to assess whether they have paid their fair share of taxes in the countries where they do business.

The investigation was launched on the basis that Netflix distributes movies and content through Italian internet networks (servers), and in doing so collects millions of euros of profits from its online streaming and TV series services. However, it does not have a registered or representative office in Italy and therefore does not file any type of tax return in the territory.

Specifically, Netflix neither has premises nor employees in Italy and for this reason Milan’s public prosecutor has, for the moment, opened a dosser against unknown persons. Notwithstanding the lack of a staffed organisation in Italy, according to the Italian tax authorities the use of fibre optic cables and servers could generate a material presence in Italian territory.

In fact, unlike the previous investigations conducted by Italian tax authorities concerning the other web giants, in this case an undisclosed ‘agency permanent establishment’ is not being alleged. The allegation is rather that Netflix has a ‘fixed place of business’ permanent establishment, where offices, plants and equipment are in the digital age equivalent to servers, computers, cables, algorithms and optical fibres.

Hot off the press, on October 9 2019, the OECD published a public consultation document with a proposal for a ‘unified approach’ to the tax challenges raised by the digitalised of the economy. This is spelt out in the Programme of Work under Pillar One of the Inclusive Framework. This proposal was discussed by the Task Force on the Digital Economy (TFDE) at its meeting on October 1 2019 and has now been released to the public for comments. The Secretariat’s proposal highlights that the current alternatives under discussion have significant shared themes.

These commonalities include the reallocation of taxing rights in favour of the user/market jurisdiction for highly digitalised businesses that are able to operate remotely; a new nexus rule that would not depend on physical presence in the user/market jurisdiction; going beyond the arm’s-length principle to depart from the separate entity approach; and searching for a simpler and more stable tax system, with increased tax certainty in implementation.

Given the current landscape, the Italian Netflix case can really be a forerunner of the approaches tax administrations may adopt in the face of new digital era challenges. In the meanwhile, in order to limit the risk of double taxation and distortion of competition that may derive from lone initiatives by local governments, market participants have asked for a set of internationally coordinated provisions to be created soon.

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