The Italian Budget Law introduces a presumption of Permanent Establishment (according to Article 162 of the Tuir, the “Income Tax Code”) in land based betting sector. This new rule shows up six month after decision No. 26728 of 2015 of the Italian Court of Cassation which excluded the existence of an hidden permanent establishment (“PE”) of a foreign betting company which used in Italy Italian centers (so called “CTDs”) for the collection of bets.
If the foreign company makes use of one or more residents (even independent) carrying out the typical activities of the betting operator – “Gestore” (collecting bets, collecting bet sums, payment of prizes) by providing players with all the tools to make the bet (telematics and local equipment) and within six months the related cash flows exceed the threshold of 500 thousand Euro, the Italian Tax Authorities shall invite the party as regards the right to be heard, to provide evidence to the contrary of the existence of a Permanent Establishment.
Whether the evidence to the contrary is not compelling, the Tax Authorities assess taxes and penalties and the financial intermediaries involved in the betting payment flows must apply a 25% withholding to be paid by 16th of the following month. The absence of a Permanent Establishment can also be proved by filing a preventive tax ruling to be submitted within 60 days from the beginning of the fiscal year.
The new provision does not apply to online gaming activities carried out directly from abroad without the intention of individuals residing in the collection of bets, so it does not relate to merely intangible business. Furthermore, it does not introduce a new concept of “digital” Permanent Establishment for land based betting sector but is designed to exclude typical CTD’s activities from the “auxiliary and preparatory” activities that typically do not create a Permanent Establishment.
It is indeed highly unlikely that the legal presumption could be assessed by prevailing conventional rules applicable in this case, that may lead to exclude the existence of a Permanent Establishment regardless of what foreseen by domestic law.
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 Permanent Establishment aimed at reducing the circumstances in which the activity may qualify as preparatory and auxiliary hoping though for this purpose a synchronous amendment of the existing Double Tax Treaties. The OECD then does not recommend at this stage the introduction of taxation systems based on the application of a withholding tax as well as the introduction of a Permanent Establishment notion based on the concept of the so-called “significant economic presence” (notion that fails to make a minimum level of physical presence). Well then, in the absence of a synchronous amendment of the treaties the new provision it is likely to end up as web tax, crushed by incompatibilities with international provisions.
In addition, the introduction of such 25% withholding on a gross income (betting cash flows) that the new rule attributes to the alleged Permanent Establishment seems to discriminate such a case against Permanent Establishment operating in other industries where the business income is taxed on the basis of costs and revenues and there is no such incisive anticipation of taxation. However, it is true that the international orientation to intercept tax from intangible business is consistent to some extent with Italians intends, given that the trend is to shift taxation at the place where revenues are produced (where clients reside).
In the same direction goes the compliance measure of “country by country” reporting introduced by the Italian Budget Law, that aims to map the transfers of taxable among the jurisdictions in which corporations operate to counter aggressive tax planning and to get taxation closer to the place where the income is generated.