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A fight is brewing in the Italian parliament and for a change Silvio Berlusconi, the former prime minister convicted of tax fraud and expelled from the senate, is not at the centre of the dustup.

This time Google gets centre stage, and the outcome could have far-reaching effects on how internet companies are taxed in Italy.

An amendment added to the budget bill, which is being discussed in the chamber of deputies and must be passed by the end of the year, could force companies that sell advertising online — or anything else from books to sweaters — to set up a taxable entity in Italy.

While supporters of the amendment say it will raise at least €1bn in new taxes for the Italian government, it has generated a storm of protest with some detractors saying that even if it passes, it would generate far less in tax and run afoul of European Union laws.

With the Italian economy showing zero growth in the third quarter of this year, which came after eight quarters in which GDP shrank, politicians are desperately seeking ways to meet budget shortfalls without having to raise taxes.

The new tax, known alternatively as the 'Google tax' or 'web tax', is an attempt to address the practice by many larger internet companies of headquartering their companies in a European country with a very low corporate tax rate, where operations in other European countries are deemed to be subsidiaries purely tasked with sales and marketing. As a result, large online companies can end up paying little or no tax in many major European markets.

Francesco Boccia, who leads the budget committee in the chamber of deputies and has been the most vocal in defending the web tax, did not respond to request for comment. In a recent interview with Panorama magazine, published before the amendment got added to the budget bill, he said the lost tax revenue was "a huge haemorrhage of financial resources that we cannot afford".

He said Italian startups were particularly damaged by the tax laws that allow large internet companies to sell goods and services in Italy while paying most of their taxes in another country with lower tax rates.

Italia Startup, a non-profit that represents Italian startups and the ecosystem that serves them, is not in agreement however, and said the tax risked backfiring by cutting Italy off from the rest of the digital world.

"If Italy acts by itself before decisions are taken on an EU level the country could be heavily penalised by pushing away many companies that serve the local startups and more generically all the companies that have understood how important it is to innovate," Riccardo Donadon, chairman of Italia Startup, said in a statement.

The result could be "to turn away important international investment right at a time with the government has just promoted the Destination Italy program that aims to attract both human and economic resources from abroad."

While Democratic Party prime minister Enrico Letta, and Matteo Renzi, the party's new leader, have both come out against the tax, the amendment was put forth by a member of their party.

"The amendment is completely illogical and against European Union law," Gianfranco Librandi, a member of the chamber of deputies' budget commission representing centrist party Civic Choice, told ZDNet.

"It's as if an Italian selling wine in New York had to first get a VAT number in the US. The Letta government is trying to make the Italian economy more international and this smells of protectionism. The supporters of the amendment speak of €1bn in new taxes raised, but I think even if it did stand up to EU scrutiny it would raise just a few dozen millions of euros."

The chamber of deputies has begun discussing the final version of the budget bill and a vote is expected late Tuesday or Wednesday after which it will pass to the senate. It is not clear how the centre-right deputies who support the Letta government plan to vote. If the web tax survives the chamber of deputies, it will still have to pass through Civic Choice and Democratic Party senators who are likely attempt to block the amendment.

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