The challenge of taxation in the era of digital economy: International and EU law concerns and latest developments

Dr. Vasiliki Athanasaki, ADIT, Post-doctoral researcher at the Aristotle University of Thessaloniki (AUTh), Post-doctoral Scholar[1], Scientific associate at the Jean Monnet Chair on EU Tax Policy and Administration (AUTh), Legal and tax advisor


The background

The digitalization of economy is an undeniable fact and has come to stay. Such digitalization of economy has a huge impact on the modern, evolving international tax environment. Online trade, through the digital sales of products as well as the provision of online services has become an increasingly prevailing economic reality in the international context. It has gradually led to new, completely different corporate structures, new business models which heavily rely on the contribution of central input by data and users, alternate functions, risk and capital allocation and, in other words, has totally modified the way and the methods international, cross-border business activity is carried out. Business models are rapidly evolving and new business models are emerging due to Internet of Things (IoT), Artificial Intelligence (AI), Blockchain, collaborative economy and other technological advancements. With many established digital companies having multiple business lines, the differentiation between multi-sided platforms and other digitalised businesses becomes challenging[2].

Pursuant to the current tax rules, taxation is particularly based on physical presence, whereas profit attribution is based on the analysis of traditional factors. On the contrary, the drive towards the digital economy implies increased user contribution to value creation, increased use of knowledge, data and intangible assets as well as more complex and global value chains, whereas data should be regarded as new source of revenue[3]. Consequently, a misalignment between place where value is created and place where profits are taxed is noticed.

International framework

As a result of the background described above, significant gaps and mismatches have arisen from a tax perspective that have caused phenomena of base erosion and profit shifting. These gaps and mismatches observed within the frame of the digital economy were extensively dealt with by the 2013 OECD/G20 BEPS Action Plan on base erosion and profit shifting[4], within the context of Action 1, which focuses on addressing the tax challenges of digital economy.

More specifically, Action 1 calls for the identification of the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties by taking a holistic approach and considering both direct and indirect taxation. The respective Digital Task Force has concluded that there is no separate digital economy, distinct from other more traditional areas. Accordingly, the Task Force has not recommended specific separate measures in relation to the digital economy at that time. The digital economy does not generate unique BEPS issues but its features exacerbate the existing ones[5]. Therefore, specific measures are required with regard to the determination of “nexus” for income tax purposes, the functionality of permanent establishment and transfer pricing rules as well as specific issues in relation to VAT collection and the respective determination of the place of supply for indirect tax purposes.

Within the framework described above, the propositions made to the Task Force included several tax measures, such as modifications to the exemptions from the creation of a permanent establishment as regards activities previously regarded as preparatory or auxiliary, the creation of a permanent establishment for digital services that are fully dematerialized, depending on the “significant digital presence”, the gradual replacement of the concept “permanent establishment” with the “significant presence” test to reflect the contribution  of close customer relationships, the incorporation of a new bandwidth or “bit” tax, based on the number of bytes used by a website and the imposition of a withholding tax on payments made for digital goods and services. Especially with regard to indirect taxation, the actions proposed include lower thresholds for low value imports and requiring vendors to register and account for VAT in the jurisdiction of importation, as well as requiring non-resident suppliers of remote digital business-to-customer supplies to register and account for VAT in the jurisdiction of the consumer[6]. The term of “significant digital presence” should in the first place be determined and further examined. More specifically, a digital interface, accessible by users, through which digital services are provided is required in the first place.

Digital economy and the EU

The key issue at stake relates to the inadequate tax rules for the digital economy, which give rise to difficulties to tax and, thus, create opportunities for tax avoidance and potentially lead to less public revenue for state budgets and a negative impact on social fairness and fair taxation in general. This situation entails an inherent risk of internal market fragmentation and a lack of a level playing field and distortion of competition at an EU level[7]. Whereas in 2006 tech companies enjoyed only a 7% share of market cap, in 2017 the respective percentage had reached 54%[8].

The response to the challenges of taxation of digital economy at an EU level will include the adoption of two directives, i.e. the Digital Presence Directive and the Digital Services Tax Directive and one recommendation, i.e. the Digital Presence Recommendation[9]. Both the Digital Presence Directive and the Digital Presence Recommendation will be incorporated in the amended CCCTB Directive[10] and will constitute a comprehensive solution which will entail significant amendments in corporate tax rules. Furthermore, this comprehensive package will contribute to the respective international discussions within the frame of OECD. On the other hand, the Digital Services Tax Directive is designed to adopt an interim measure, in the form of an indirect tax. The need for such an interim solution was indisputable, since an international consensus for a comprehensive solution at global level is a complex matter. In the meanwhile, the risk of tax base erosion increases. Therefore, it was stressed out that a harmonized interim measure should be adopted, in the form of a new Digital Services Tax (“DST”), instead of many diverse interim measures within the context of an uncoordinated approach which would entail the risk of fragmentation in the EU (“patchwork” of many different interim solutions). It was regarded that this decision would contribute in the protection of integrity of the Single Market and ensure a level playing field within the EU, while at the same time it would safeguard national tax bases from phenomena of erosion. From a tax policy perspective, given also the core objectives of the EU, this approach is considered to be completely accurate and correct.

With regard to the consolidated solution and, more specifically, the notion of “significant digital presence”[11], certain quantitative criteria should alternatively be met, namely, a) revenues from supplying digital services should exceed EUR 7 million or b) more than 100.000 users should exist or c) the number of business contracts should exceed 3.000. As per the allocation of profits to the said “significant digital presence”, certain qualitive criteria should be fulfilled. First of all, a functional and risk analysis should be carried out, when it comes to risks, assets and functions in terms of compliance with the arm’s length principle. Secondly, user activities should contribute to the economic ownership of intangible assets and to value creation. Last but not least, the OECD profit split method[12] could be used e.g. based on R&D expenses or user data collected.

As per the Digital Services Tax (“DST”), it will constitute a revenue tax, to the extent that the revenues are regarded as a proxy for value creation, although there is a possibility that the reporting obligations would be fulfilled through a VAT-inspired One-Stop-Shop mechanism. The DST will be imposed on gross revenues with a tax rate of 3% on activities with the highest user participation and value creation, such as advertising, intermediation and sale of user data. The thresholds that should be cumulatively met are the following[13]:

  • € 750 M total annual worldwide revenue; and
  • € 50 M total annual revenue from digital activities in the Union.

As far as the place of taxation is concerned, it should be examined where users are located.  Revenues will be allocated proportionally.

The DST is compliant with  both international obligations, as they ensue from the Double Taxation Agreements as well as the World Trade Organization (“WTO”) and the EU Law, that comprises of TFEU fundamental freedoms (e.g. freedom to provide services in Article 56 TFEU) and other legislation (VAT, data protection etc.). Moreover, it is also compliant with the work of OECD[14].

The digital economy is in a continuous state of evolution and possible future developments need to be monitored to evaluate their impact on tax systems. The rapid technological progress that has characterised the digital economy has led to a number of emerging trends and potential developments. Although this rapid change makes it difficult to predict future developments with any degree of reliability, these potential developments should be monitored closely as they may generate additional challenges for tax policy makers in the near future[15].

The major questions that arise refer to the place of taxation (where to tax?) as well as the object of taxation (what to tax?). More specifically, digital economy necessitates the update of the taxable nexus in view of the absence of physical presence and its gradual replacement by the digital presence as well as the adaptation of the existing profit allocation criteria, in order for innovative methods to be adopted for the proper allocation of profits to the  previously mentioned “significant digital presence”. It goes without saying that in order for a multinational to fall under the proposed tax provisions, it must have “systematic and significant” interaction with customers in a country’s market, regardless of whether it has a physical presence there or not.

It is worth mentioning that in 21 January 2020, the Council discussed state of play of international tax reforms and finance ministers exchanged views on tax challenges arising from digitalisation. In view of an OECD meeting held on 29-30 January 2020, they took stock of the progress achieved on the two pillars of the negotiations:

  • reallocation of profits of digitalised businesses (pillar 1)
  • general reform of international corporate taxation (pillar 2)[16].

In addition, in January 2020, the issue of the so-called “digital tax” came to the forefront of President Donald Trump’s communication with French President Emmanuel Macron. It is a fact that there is an informal diplomatic “war” between the two countries after France’s decision to impose the so-called GAFA tax (initially Google, Apple, Facebook, Amazon) on American technology giants. According to French diplomatic sources, the two Presidents agreed to seek, by the end of 2020, a common ground within the Organization for Economic Co-operation and Development (OECD).

The European Data Strategy

A new European Data Strategy will enable the EU to make the most of the enormous value of non-personal data as an ever-expanding and re-usable asset in the digital economy. A new Digital Services Act will reinforce the single market for digital services and help provide smaller businesses with the legal clarity and level playing field they need. Protecting citizens and their rights, not least the freedom of expression, will be at the core of EU’s efforts[17]. In this respect, the functional and risk analysis plays a key role in finding out the exact contribution of each counterparty in the whole value chain, according to which a proper, arm’s length remuneration should be calculated.

Latest developments and conclusive remarks

Needless to say that especially following the COVID-19 disease outbreak, e-commerce has rapidly increased and will increase even more in the future, tending to be the prevailing distribution channel in the international market. Therefore, it ensues that this peak of digital economic activity will entail even huger amounts of public revenues for the various states that would go untaxed in the state of the significant digital presence, in case no respective tailor-made measures are taken. This finding highlights the importance of fairly taxing the business activity carried out in a digital environment and necessitates drastic and unified tax measures, in view of an inevitable Europe fit for the digital age.


[1] This research is co-financed by Greece and the European Union (European Social Fund- ESF) through the Operational Programme «Human Resources Development, Education and Lifelong Learning» in the context of the project “Reinforcement of Postdoctoral Researchers – 2nd Cycle” (MIS-5033021), implemented by the State Scholarships Foundation (ΙΚΥ).

[2] European Parliament, Impact of Digitalisation on International Tax Matters, Challenges and Remedies, Study Requested by the TAX3 Committee, Policy Department for Economic, Scientific and Quality of Life Policies Directorate-General for Internal Policies Author: Eli Hadzhieva PE 626.078 – February 2019. pg. 10.

[3] European Commission, DG TAXUD, Fair taxation of the digital economy.

[4] See also OECD/G20 BEPS Action 1 report (2015).

[5] Deloitte, BEPS Module 1, Introduction to BEPS and Action 1, Global Tax & Legal Talent and Learning, August 2015.

[6] Deloitte, BEPS Module 1, Introduction to BEPS and Action 1, Global Tax & Legal Talent and Learning, August 2015.

[7] European Commission, DG TAXUD, Fair taxation of the digital economy. See also, September 2017, Communication: A Fair and Efficient Tax System in the European Union for the Digital Single Market, European Council conclusions of 19 October 2017, ECOFIN Council conclusions of 5 December 2017, Public consultation (October 2017 – January 2018), OECD Interim report / G20 Finance Ministers meeting, Digital taxation package (21 March 2018).

[8] Source: Global Top 100 Companies by market capitalisation’ PWC, 2017; Financial Times Global 500 database, 2006.

[9] More specifically, in March 2018, the European Commission (EC) issued two proposals that would have delivered new ways to tax a closely targeted set of digitalized business activities. They proposed an interim measure focused on a 3% gross revenues tax that would be followed by a longer-term approach addressing the taxation of profits even when a company has no physical presence in a country. A year of intense debate later, however, and the EC has not been able to get the necessary unanimous agreement from the member states, and on 12 March 2019, the effort stalled. But a number of individual European countries, including Austria, Belgium, France, Italy, Spain and the UK, have already moved forward with their own DSTs. See EY India, How taxing the digital economy debate impacts all global businesses, 23 September 2019, (visited 30/4/2020).

[10] The Common Consolidated Corporate Tax Base (CCCTB) is a single set of rules to calculate companies’ taxable profits in the EU. With the CCCTB, cross-border companies will only have to comply with one, single EU system for computing their taxable income, rather than many different national rulebooks. Companies can file one tax return for all of their EU activities, and offset losses in one Member State against profits in another. The consolidated taxable profits will be shared between the Member States in which the group is active, using an apportionment formula. Each Member State will then tax its share of the profits at its own national tax rate. The CCCTB is a modern, fair and competitive corporate tax framework for the EU. In October 2016, the Commission proposed to re-launch the Common Consolidated Corporate Tax Base. The re-launched CCCTB will be implemented through a two-step process and will be mandatory for the largest groups in the EU. The Commission had originally proposed the CCCTB in 2011, but that proposal proved too ambitious for Member States to agree in one go. However, there was still strong demand for the benefits that the CCCTB could offer to Member States and businesses in the EU. Therefore, the Commission re-enforced the original CCCTB proposal and re-launched it through a more manageable process. For more information see European Commission, Taxation and Customs Union, Business, Company Tax, Common Consolidated Corporate Tax Base (CCCTB), (visited 01/05/2020).

[11] It was assessed that no new tax should be provided for, but instead respective changes should be effected in the existing corporate tax systems of member states within the framework of a global solution, applied even to entities in a 3rd country (where no Double Tax Convention exists).

[12] 4. The transactional profit split method seeks to establish arm’s length outcomes or test reported outcomes for controlled transactions in order to approximate the results that would have been achieved between independent enterprises engaging in a comparable transaction or transactions. The method first identifies the profits to be split from the controlled transactions—the relevant profits—and then splits them between the associated enterprises on an economically valid basis that approximates the division of profits that would have been agreed at arm’s length. As is the case with all transfer pricing methods, the aim is to ensure that profits of the associated enterprises are aligned with the value of their contributions and the compensation which would have been agreed in comparable transactions between independent enterprises for those contributions. The transactional profit split method is particularly useful when the compensation to the associated enterprises can be more reliably valued by reference to the relative shares of their contributions to the profits arising in relation to the transaction(s) than by a more direct estimation of the value of those contributions. See OECD/G20 Base Erosion and Profit Shifting Project Revised Guidance on the Application of the Transactional Profit Split Method INCLUSIVE FRAMEWORK ON BEPS: ACTION 10, 2018.

[13] Small and medium-sized Enterprises (“SMEs”) and start-ups, however, are being protected.

[14] OECD Interim report (chapter 6) does not endorse the introduction of interim measures, but outlines design elements to be taken into account. See European Commission, DG TAXUD, Fair taxation of the digital economy.

[15] OECD, OECD/G20 Base Erosion and Profit shifting Project Addressing the Tax Challenges of the Digital Economy Action 1: 2014 Deliverable, pg. 12.

[16] See European Council, Council of the European Union, Digital taxation, (visited 30/04/2020), Economic and Financial Affairs Council, 21 January 2020, (visited 30/04/2020), International community renews commitment to multilateral efforts to address tax challenges from digitalisation of the economy (OECD, press release, 31 January 2020), (visited 30/04/2020).

[17] European Commission, Commission Work 2020 Programme, A Union that strives for more, Brussels, 29.1.2020  COM(2020) 37 final, pg. 4.