Challenges in respect to taxation of Digital economy

Over the last few years, in-depth tax analysis and political debates were triggered by the need to maintain a balance between supporting the development of the global digital economy, while maintaining a fair and largely accepted model of allocating the taxing rights between states for the revenues that were generated worldwide by such global digital economy.

The tax debate started from the question whether the current model of taxing the revenues, derived by a business centred on the “permanent establishment” concept, is still adequate when businesses, parts of the global digital economy, accessing consumers worldwide have less or no physical presence where service consumption occurs or where the value is created.

1. Global solution approach

As the matter overpasses the national borders and the current taxing model is centred on the “permanent establishment” notion, core concept of Double Tax Treaties, OECD initiated the technical analysis, negotiations and proposals for potential upgrade of the taxation models to the nowadays reality of electronic communication centred business.

Since 2015, the OECD/G20 BEPS Project started the analysis of ways to improve the current global taxation framework to better address the particularities of the digital economy. Significant progress was made since early 2019, through the work undertaken by the OECD/G20 Inclusive Framework, which covered the results of the 137 countries' negotiations in the so-called “Two-Pillar blueprint” technical format. In October 2020, the OECD/G20 Inclusive Framework released the Blueprint of the 2 Pillars for public consultation, a broader consensus being expected to be reached mid-2021.

The negotiations to date consolidated in the 2 Pillars addressed the following:

  • Pillar One covers mainly:

- where tax should be paid (“nexus” rules);

- new way of sharing taxing rights between countries.

  • Pillar Two introduces the structure for determining a global minimum tax to be paid in more jurisdictions.

The businesses which were considered relevant and in the scope of the new OECD taxation set of rules were clustered as:

(i) Automated digital services (ADS) deemed to include

  • online advertising services;
  • the sale or other alienation of user data;
  • online search engines; social media platforms;
  • online intermediation platforms;
  • digital content services;
  • online gaming;
  • standardized online teaching services;
  • cloud computing services

(ii) Consumer-facing businesses (CFB) that were defined as “those businesses generating revenue from the sale of goods and services of a type commonly sold to consumers, including those selling indirectly through intermediaries and by way of franchising and licensing”.

Extensive details on proposals for the 2 Pillars content available on:

  • OECD (2020), Tax Challenges Arising from Digitalisation – Report on Pillar One Blueprint: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris,
  • OECD (2020), Tax Challenges Arising from Digitalisation – Report on Pillar Two Blueprint: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris,

2. EU approach

Aside from the global approach on the matter, since 2017 significant steps within the EU framework were made also to design of a set of new taxation rules more appropriate for certain digital business generating revenues from EU member states, irrespective where they are physically located or managed.

While a global solution to address the issue is preferred, via the OECD global forum, the EU authorities announced that unless a global consensus is reached by mid-2021, they are ready to take decisive measure to implement a distinct and harmonised EU framework, providing tools to EU members to actually tax the digital businesses deriving revenues from EU jurisdictions without physical presence.

The most recent actions taken in this respect refers to:

- The European Commission publishing on 14/01/2021 of  the “Inception impact assessment” for a digital levy with the purpose of establishing EU legal framework aligned with the OECD initiatives on which a consensus was already reached and with other international agreements. In addition, new initiatives are considered (a corporate income tax to be applied to all companies conducting certain digital activities in the EU, a tax on revenues created by certain digital activities conducted in the EU, a tax on digital transactions conducted business-to-business in the EU).

 A fair & competitive digital economy – digital levy (

- The European Council adoption in March 2021 of new rules to improve administrative cooperation in the field of taxation of the digital platform economy, underlining once more the aim to rebalance taxation in favour of EU countries of the global businesses that derived revenues from digital platforms without having a physical presence in EU countries and eliminate potential inequities and competition distortion for the traditional businesses. The new rules that cover digital platforms located both inside and outside the EU aim to be implemented from 1 January 2023.

Taxation: Council adopts new rules to strengthen administrative cooperation and include sales through digital platforms - Consilium (

- The European Parliament resolution of 29 April 2021 on digital taxation that is supporting preparation of legislative proposals for an EU digital levy in the context of pending consensus on OECD Pillar 1-2 proposals.

Texts adopted - Digital taxation: OECD negotiations, tax residency of digital companies and a possible European Digital Tax - Thursday, 29 April 2021 (

Prior steps undertaken in this respect exists from 2018 when EU Commission presented the proposals for EU Directives on corporate taxation of a significant digital presence and the common system of a digital services tax on revenues resulting from the provision of digital services. The discussions stirred based on these proposals indicated a potential 3%-5% digital service tax (DST) applicable on revenues (over certain thresholds) derived from

- selling online targeted advertising;

- digital intermediary activities which allow users to interact, and which facilitate the sale of goods and services between them;

- selling data generated from user information.

to be paid in the EU member states where businesses have significant interaction with users through digital channels.

While the final form of the EU digital levy/Digital service tax is still to come, another EU framework created the basis for a tax/contribution to be paid on revenues derived by media services providers, including video-sharing platform services that provide audiovisual content. The EU Directive on audio-visual media due to be implemented by member states by September 2020, is referring to the possibility (not obligation) that EU member states to require financial contribution to be paid by media service providers targeting audiences in their territories but established in other Member States, considering the revenues earned in the targeted Member States. The available mechanism for avoidances of double taxation appears to be only via credits for direct contributions to audio video content creation or via credit/offset against similar type of financial contribution imposed in the Member State where the provider is established. Not clear if Double Tax Treaties can be considered for minimising the risk of double taxation if such financial contributions would be in substance taxes on revenues.

DIRECTIVE (EU) 2018/ 1808 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL - of 14 November 2018 - amending Directive 2010/ 13/ EU on the coordination of certain provisions laid down by law, regulation or administrative action in Member States concerning the provision of audiovisual media services (Audiovisual Media Services Directive) in view of changing market realities (

3. Further challenges

While the OECD technical framework for the taxation of the digital economy is quite advanced, both regarding the type of businesses that would be covered and the mechanics of applying these rules, the political consensus appear to be the most relevant for a global solution, as budgets in discussions are more than relevant.

Even with a timeframe for a global agreement under OECD 2 pillars approach respected, a solution for actual taxation of the digital economy is still rather far, as once the OECD package would be approved, more instruments should be created and implemented by the states (i.e., updates of relevant Double Tax Convention model, and bilateral treaties).

EU separate analysis and firm intention to implement own EU framework rules are creating additional motivation for a global consensus to avoid harmful commercial retaliations or creation of double taxation situations for tax on incomes that fall outside of the Double Tax Treaties rules for double tax avoidance.

For sure, a common taxation set of instruments that ensure fairness, flexibility, and less bureaucracy should ideally be implemented and globally accepted.

Without a doubt, the digital economy is part of our lives and changed them in a way that would have been unconceivable decades ago when global taxation fundaments were designed and will continue to evolve most likely at a pace faster than the technical debates on its taxation.