Taxation of the digital economy

EU Finance Ministers will continue to discuss options for the taxation of the digital economy, including the option of a turnover tax.


For the EU Commission's proposals for two directives on the taxation of digital businesses, see "EU Commission's proposals for fair taxation of the digital economy".

EU Finance Ministers have agreed to progress proposals to address the tax treatment of companies operating in the digital economy. In particular, according to the press release, Ministers reached a broad understanding that new measures are needed to address the position of businesses that operate “virtually”, without any physical presence in a particular jurisdiction by developing the concept of a virtual permanent establishment (PE).

OECD BEPS report

The tax treatment of the digital economy was specifically addressed by the Organisation for Economic Co-operation and Development (OECD) as part of its Base Eerosion and Profit Shifting (BEPS) Project. Action 1 of the BEPS Package was directed at addressing the tax challenges of the digital economy and required the OECD to identify “the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties”.

However, in its final Report the OECD essentially concluded that, because the digital economy is increasingly becoming the economy itself, it would not be feasible to ring-fence the digital economy from the rest of the economy for tax purposes. Such a ring-fence would create arbitrary lines between the digital and non-digital sphere. The OECD agreed that the better approach was to analyse existing structures utilised by multi-national companies and the key aspects of the digital economy that exacerbate tax challenges or BEPS concerns.

Nevertheless, there was recognition that the situation should be monitored with a view to determining if further directed measures would be necessary. In particular, technical options to deal with the tax challenges raised by the digital economy, such as issues over nexus and data were discussed. There was broad agreement that the OECD and G20 countries should monitor developments to determine whether further work on the options should be carried out.

EU developments

According to the press release released by the Estonian Presidency, EU Finance Ministers at the 16 September 2017 meeting in Tallinn discussed updating international tax rules for companies with a view to addressing taxing businesses that use digital technology. The ministers agreed to move forward “swiftly” and to reach a common understanding at the ECOFIN Council in December 2017.

The broad aim is to ensure that all companies in the digital economy are subject to equal taxation regardless of their location or place of activity. This is very different to the current rules which typically depend on a business having a physical presence in a jurisdiction to be subject to tax on their business activities there. However, business models in the digital economy may differ substantially from the business models of the traditional economy, and companies often operate virtually in several countries. The current tax system bases tax liability on the place where functions, assets and risks of MNEs are located but jurisdictions with large consumer markets are increasingly voicing the case that profits should be taxable in the market country.

The international rules for taxing the profit of companies, however, still assume that in order to create a taxable profit in a jurisdiction, the company has to be physically present there. As such, the issue is not one of preventing companies from evading tax - it is one of developing an international agreement over the basis for attributing taxing rights.

For this reason, the Estonian Presidency suggests that it will be necessary to abandon the requirement that companies have to be physically present in a country or own assets there, and replace it with the concept of a virtual PE.

In particular, it is understood that EU member states discussed the idea of introducing an “equalisation tax” that would see digital multinationals taxed based on their turnovers in countries where they carry out business activities, in contrast to the traditional corporate tax approach. However, the concept of a turnover tax does not have universal support, with lower tax jurisdictions (such as Ireland, Luxembourg and Malta) in particular opposed in case it makes them less attractive to multinationals.

Also, it is unclear whether that other tax issues surrounding the taxation of the digital economy may also be considered, including the taxation of profits generated by the “advertisement business model” where profits arise from exposing users to advertising in platforms provided online companies.

There is also concern that, if the EU does not act in a concerted manner, individual Member States will introduce unilateral measures to address these issues (such as the UK’s diverted profits tax) and, therefore, the EU urgently needs to reach a common solution, both to prevent differing tax rules creating multiple taxation and also so as to ensure that the EU can influence global rules.


The digital economy has been the subject of earlier reports both by the EU Commission and also the EU Parliament. Nevertheless, agreeing far-reaching reforms relevant to the digital sector will not be in any sense easy. The issues surrounding the agreement of a definition of a virtual PE and the application of such rules globally proved a step too far for the original OECD BEPS Project and applying such rules internationally will most likely create many new issues to consider, particularly in the context of the application of existing double tax treaties.


For details of further documents published by the EU Commission and the OECD, see "Taxation of the digital economy: further developments".

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.